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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, 2020

OR

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

For the transition period from                to

Commission File No. 001-38385

GCI LIBERTY, INC.

(Exact name of Registrant as specified in its charter)

Delaware

92-0072737

(State or other jurisdiction of

(I.R.S Employer

incorporation or organization)

Identification No.)

12300 Liberty Boulevard

Englewood,

Colorado

80112

(Address of principal executive offices)

(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of exchange on which registered

Series A Common Stock

GLIBA

The Nasdaq Stock Market LLC

Series A Cumulative Redeemable preferred stock

GLIBP

The Nasdaq Stock Market LLC

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

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

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:

Large Accelerated Filer

   

Accelerated Filer

   

Non-
accelerated Filer

   

Smaller Reporting Company

   

Emerging Growth
Company

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

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

The number of shares outstanding of the registrant’s classes of common stock as of October 31, 2020 was:

101,351,276 shares of Series A common stock; and

4,488,568 shares of Series B common stock

Table of Contents

TABLE OF CONTENTS

Part I. Financial Information

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets (unaudited)

I-3

Condensed Consolidated Statements of Operations (unaudited)

I-5

Condensed Consolidated Statements of Comprehensive Earnings (Loss) (unaudited)

I-6

Condensed Consolidated Statements of Cash Flows (unaudited)

I-7

Condensed Consolidated Statements of Equity (unaudited)

I-8

Notes to Condensed Consolidated Financial Statements (unaudited)

I-10

Item 2.

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

I-25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

I-37

Item 4.

Controls and Procedures

I-38

Part II. Other Information

Item 1.

Legal Proceedings

II-1

Item 1A.

Risk Factors

II-1

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

II-3

Item 6.

Exhibits

II-4

SIGNATURES

II-6

I-2

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

    

September 30, 

    

December 31, 

    

2020

    

2019

amounts in thousands

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

552,604

 

569,520

Trade and other receivables, net of allowance for doubtful accounts of $6,916 and $7,516, respectively

 

283,687

 

114,435

Other current assets

 

61,593

 

43,868

Total current assets

 

897,884

 

727,823

Investments in equity securities (note 4)

 

3,350,749

 

2,605,293

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

 

157,484

 

167,643

Investment in Liberty Broadband measured at fair value (note 5)

 

6,097,955

 

5,367,242

Property and equipment, net

 

1,045,585

 

1,090,901

Intangible assets not subject to amortization (note 6)

 

 

  

Goodwill

 

830,268

 

855,837

Cable certificates

 

305,000

 

305,000

Other

 

37,500

 

41,500

 

1,172,768

 

1,202,337

Intangible assets subject to amortization, net (note 6)

 

356,327

 

391,979

Tax sharing receivable

 

88,349

 

84,534

Other assets, net

 

192,741

 

295,693

Total assets

$

13,359,842

 

11,933,445

See accompanying notes to interim condensed consolidated financial statements.

I-3

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

    

September 30, 

    

December 31, 

    

2020

    

2019

amounts in thousands,

except share amounts

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued liabilities

$

117,728

 

92,893

Deferred revenue

 

26,748

 

27,886

Current portion of debt, including $820,035 and $0 measured at fair value, respectively (note 7)

 

823,166

 

3,008

Indemnification obligation (note 3)

 

309,541

 

202,086

Other current liabilities

 

84,161

 

69,149

Total current liabilities

 

1,361,344

 

395,022

Long-term debt, net, including $0 and $658,839 measured at fair value, respectively (note 7)

 

2,599,521

 

3,263,210

Obligations under finance leases and tower obligations, excluding current portion

 

93,742

 

97,507

Long-term deferred revenue

 

48,724

 

57,986

Deferred income tax liabilities

 

1,865,998

 

1,527,109

Preferred stock (note 8)

 

178,066

 

178,002

Derivative instrument (note 3)

 

63,456

 

71,305

Other liabilities

 

116,301

 

133,020

Total liabilities

 

6,327,152

 

5,723,161

Equity

 

  

 

  

Stockholders’ equity:

 

  

 

  

Series A common stock, $0.01 par value. Authorized 500,000,000 shares; issued and outstanding 101,350,710 shares at September 30, 2020 and 101,306,716 shares at December 31, 2019

 

1,014

 

1,013

Series B common stock, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,488,568 shares at September 30, 2020 and 4,437,593 shares at December 31,2019

 

45

 

44

Series C common stock, $0.01 par value. Authorized 1,040,000,000 shares; no issued and outstanding at September 30, 2020 and December 31, 2019

 

 

Additional paid-in capital

 

3,231,926

 

3,221,885

Accumulated other comprehensive earnings (loss), net of taxes

 

8,148

 

(4,084)

Retained earnings

 

3,782,834

 

2,982,626

Total stockholders' equity

 

7,023,967

 

6,201,484

Non-controlling interests

 

8,723

 

8,800

Total equity

 

7,032,690

 

6,210,284

Commitments and contingencies (note 10)

 

 

  

Total liabilities and equity

$

13,359,842

 

11,933,445

See accompanying notes to interim condensed consolidated financial statements.

I-4

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands, except per share amounts

Revenue

$

246,892

 

227,044

707,511

 

662,346

Operating costs and expenses:

 

  

 

  

 

  

 

  

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

 

69,561

 

72,637

 

210,062

 

209,962

Selling, general and administrative, including stock-based compensation (note 9)

 

106,571

 

93,597

 

289,278

 

305,184

Depreciation and amortization expense

 

60,688

 

66,466

 

184,856

 

200,035

Insurance proceeds and restructuring, net

 

 

(1,482)

 

 

236

 

236,820

 

231,218

 

684,196

 

715,417

Operating income (loss)

 

10,072

 

(4,174)

 

23,315

 

(53,071)

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense (including amortization of deferred loan fees)

 

(29,722)

 

(38,353)

 

(100,364)

 

(116,357)

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

 

(9,035)

 

1,921

 

(7,504)

 

(2,443)

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

 

1,172,685

 

156,165

 

1,199,560

 

1,844,863

Tax sharing agreement

 

26,146

 

2,362

 

30,057

 

18,895

Other, net

 

(7,314)

 

(540)

 

(5,176)

 

13,824

 

1,152,760

 

121,555

 

1,116,573

 

1,758,782

Earnings (loss) before income taxes

 

1,162,832

 

117,381

 

1,139,888

 

1,705,711

Income tax (expense) benefit

 

(338,446)

 

(28,087)

 

(336,776)

 

(478,887)

Net earnings (loss)

 

824,386

 

89,294

 

803,112

 

1,226,824

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

 

(26)

 

(28)

 

(77)

 

(85)

Net earnings (loss) attributable to GCI Liberty, Inc. shareholders

$

824,412

 

89,322

803,189

 

1,226,909

Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 2)

$

7.81

 

0.85

7.61

 

11.71

Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 2)

$

7.74

 

0.84

7.55

 

11.60

See accompanying notes to interim condensed consolidated financial statements.

I-5

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(Unaudited)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Net earnings (loss)

$

824,386

 

89,294

803,112

 

1,226,824

Other comprehensive earnings (loss), net of taxes:

 

 

  

 

  

 

  

Comprehensive earnings (loss) attributable to debt credit risk adjustments

 

(6,619)

 

(5,477)

 

12,232

 

(657)

Comprehensive earnings (loss)

 

817,767

 

83,817

 

815,344

 

1,226,167

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

 

(26)

 

(28)

 

(77)

 

(85)

Comprehensive earnings (loss) attributable to GCI Liberty, Inc. shareholders

$

817,793

 

83,845

815,421

 

1,226,252

See accompanying notes to interim condensed consolidated financial statements.

I-6

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended

September 30, 

    

2020

    

2019

amounts in thousands

Cash flows from operating activities:

 

  

 

  

Net earnings (loss)

$

803,112

 

1,226,824

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

 

  

 

  

Depreciation and amortization

 

184,856

 

200,035

Stock-based compensation expense

 

11,389

 

18,153

Share of (earnings) losses of affiliates, net

 

7,504

 

2,443

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

 

(1,199,560)

 

(1,844,863)

Deferred income tax expense (benefit)

 

336,874

 

478,850

Other, net

 

9,232

 

(2,843)

Change in operating assets and liabilities:

 

  

 

  

Current and other assets

 

(81,460)

 

39,289

Payables and other liabilities

 

(4,048)

 

(35,774)

Net cash provided (used) by operating activities

 

67,899

 

82,114

Cash flows from investing activities:

 

  

 

  

Capital expended for property and equipment

 

(107,247)

 

(108,633)

Proceeds from derivative instrument

 

 

105,866

Settlement of derivative instrument

 

 

(105,866)

Other investing activities, net

 

25,634

 

6,340

Net cash provided (used) by investing activities

 

(81,613)

 

(102,293)

Cash flows from financing activities:

 

  

 

  

Borrowings of debt

 

 

325,000

Repayment of debt, finance leases and tower obligations

 

(6,596)

 

(334,275)

Repurchases of GCI Liberty common stock

 

 

(43,910)

Other financing activities, net

 

(3,060)

 

(7,802)

Net cash provided (used) by financing activities

 

(9,656)

 

(60,987)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(23,370)

 

(81,166)

Cash, cash equivalents and restricted cash at beginning of period

 

576,150

 

492,032

Cash, cash equivalents and restricted cash at end of period

$

552,780

 

410,866

The following table reconciles cash and cash equivalents and restricted cash reported in the accompanying condensed consolidated balance sheets to the total amount presented in the accompanying condensed consolidated statement of cash flows:

    

September 30, 

December 31, 

2020

2019

amounts in thousands

Cash and cash equivalents

$

552,604

 

569,520

Restricted cash included in other current assets

 

176

 

6,630

Total cash and cash equivalents and restricted cash at end of period

$

552,780

 

576,150

See accompanying notes to condensed consolidated financial statements.

I-7

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(Unaudited)

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at January 1, 2020

$

1,013

 

44

 

3,221,885

 

(4,084)

 

2,982,626

 

8,800

 

6,210,284

Net earnings (loss)

 

 

 

 

803,189

 

(77)

 

803,112

Other comprehensive earnings (loss), net of taxes

 

 

 

12,232

 

 

 

12,232

Stock-based compensation

 

 

11,477

 

 

 

 

11,477

Issuance of common stock upon exercise of stock options

1

 

1

 

427

 

 

 

 

429

Withholding taxes on net share settlements of stock-based compensation

 

 

(1,811)

 

 

 

 

(1,811)

Other

 

 

(52)

 

 

(2,981)

 

 

(3,033)

Balances at September 30, 2020

$

1,014

 

45

 

3,231,926

 

8,148

 

3,782,834

 

8,723

 

7,032,690

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at July 1, 2020

$

1,013

 

45

 

3,227,258

 

14,767

 

2,958,423

 

8,749

 

6,210,255

Net earnings (loss)

 

 

 

 

 

824,412

 

(26)

 

824,386

Other comprehensive earnings (loss), net of taxes

 

 

 

 

(6,619)

 

 

 

(6,619)

Stock-based compensation

 

 

 

4,822

 

 

 

 

4,822

Issuance of common stock upon exercise of stock options

 

1

 

 

400

 

 

 

 

401

Withholding taxes on net share settlements of stock-based compensation

 

 

 

(555)

 

 

 

 

(555)

Other

 

 

 

1

 

 

(1)

 

 

Balances at September 30, 2020

$

1,014

45

3,231,926

8,148

3,782,834

8,723

7,032,690

See accompanying notes to interim condensed consolidated financial statements.

I-8

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity (continued)

(Unaudited)

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at January 1, 2019

$

1,021

 

44

 

3,251,957

 

168

 

1,043,933

 

9,567

 

4,306,690

Net earnings (loss)

 

 

 

 

1,226,909

 

(85)

 

1,226,824

Other comprehensive earnings (loss), net of taxes

 

 

 

(657)

 

 

 

(657)

Stock-based compensation

 

 

19,539

 

 

 

 

19,539

Repurchases of GCI Liberty common stock

(10)

 

 

(43,900)

 

 

 

 

(43,910)

Issuance of common stock upon exercise of stock options

1

 

 

1,696

 

 

 

 

1,697

Withholding taxes on net share settlements of stock-based compensation

 

 

(3,501)

 

 

 

 

(3,501)

Other

 

 

92

 

 

(5)

 

 

87

Balances at September 30, 2019

$

1,012

 

44

 

3,225,883

 

(489)

 

2,270,837

 

9,482

 

5,506,769

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at July 1, 2019

$

1,012

 

44

 

3,219,710

 

4,988

 

2,181,515

 

9,510

 

5,416,779

Net earnings (loss)

 

 

 

 

 

89,322

 

(28)

 

89,294

Other comprehensive earnings (loss), net of taxes

 

 

 

 

(5,477)

 

 

 

(5,477)

Stock-based compensation

 

 

 

5,775

 

 

 

 

5,775

Issuance of common stock upon exercise of stock options

 

 

 

391

 

 

 

 

391

Withholding taxes on net share settlements of stock-based compensation

 

 

 

(70)

 

 

 

 

(70)

Other

 

 

 

77

 

 

 

 

77

Balances at September 30, 2019

$

1,012

 

44

 

3,225,883

 

(489)

 

2,270,837

 

9,482

 

5,506,769

See accompanying notes to interim condensed consolidated financial statements.

I-9

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)  Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of GCI Liberty, Inc. and its controlled subsidiaries, as well as other equity securities and equity method investments (collectively, “GCI Liberty”, the “Company”, “us”, “we” and “our”). All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. GCI Liberty is made up of its wholly-owned subsidiary, GCI Holdings, LLC (“GCI Holdings”), a controlling interest in Evite, Inc. (“Evite”) until Evite was sold on September 14, 2020 and non-controlling interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"). The sale of Evite did not have a material impact to the Company’s financial results.  These assets (other than GCI Holdings) were contributed by Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), in exchange for, among other things, a controlling interest in GCI Liberty, which was subsequently split-off (the "Holdco Split-Off").

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

In December 2019, Chinese officials reported a novel coronavirus outbreak (“COVID-19”). COVID-19 has since spread through China and internationally. On March 11, 2020, the World Health Organization assessed COVID-19 as a global pandemic, causing many countries throughout the world to take aggressive actions, including imposing travel restrictions and stay-at-home orders, closing public attractions and restaurants, and mandating social distancing practices, which has caused a significant disruption to most sectors of the economy.

COVID-19 has not had a material impact on GCI Liberty’s operating results for the three and nine months ended September 30, 2020, however, management has increased certain estimates, including but not limited to, allowance for doubtful accounts. Other than these changes, the Company is not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update the Company’s estimates or judgments or revise the carrying value of its assets or liabilities. The Company’s estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to the Company’s financial statements.

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

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

I-10

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On August 6, 2020, GCI Liberty and Liberty Broadband entered into a definitive merger agreement under which Liberty Broadband agreed to acquire all of the outstanding shares of GCI Liberty in a stock-for-stock merger (the “Combination”).  Under the terms of the merger agreement each holder of Series A and B common stock of GCI Liberty will receive 0.58 of a share of Series C common stock and Series B common stock, respectively, of Liberty Broadband.  Additionally, holders of a share of Series A Cumulative Redeemable Preferred Stock of GCI Liberty will receive one share of Series A Cumulative Redeemable Preferred Stock with mirror terms to be issued by Liberty Broadband.  The Combination was recommended to the Company’s Board of Directors for approval by a special committee composed solely of independent, disinterested directors and advised by independent financial and legal advisors.  The closing of the Combination is subject to certain customary conditions, including: (i) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (ii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (iii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon, (iv) approval of the Liberty Broadband stock issuance by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock present in person or by proxy at the stockholder meeting and entitled to vote thereon and (v) the receipt of any applicable regulatory approvals.  GCI Liberty and Liberty Broadband expect the Combination to close no later than the first quarter of 2021, subject to potential COVID-19 related delays.

GCI Liberty has entered into certain agreements with Qurate Retail and Liberty Media Corporation ("Liberty Media") (or its subsidiary), all of which are separate, publicly traded companies, in order to govern certain relationships between the companies. None of these entities have any stock ownership, beneficial or otherwise, in the other. 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, provisions governing the relationship between GCI Liberty and Qurate Retail (for accounting purposes a related party of GCI Liberty). 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 tax sharing agreement, GCI Liberty has agreed to indemnify Qurate Retail for taxes and tax-related losses resulting from the Holdco Split-Off to the extent such taxes or tax-related losses (i) result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by GCI Liberty (applicable to actions or failures to act by GCI Liberty and its subsidiaries following the completion of the Holdco Split-Off), or (ii) result from Section 355(e) of the Internal Revenue Code applying to the Holdco Split-Off as a result of the Holdco Split-Off being part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent or greater interest (measured by vote or value) in the stock of GCI Liberty (or any successor corporation). Pursuant to the services agreement, Liberty Media provides GCI Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations support. See below for a description of an amendment to the services agreement entered into in December 2019. 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 negotiated semi-annually.

Liberty Media is a related party of GCI Liberty for accounting purposes as a result of the services agreement. Under these agreements, approximately $2.0 million and $2.3 million was reimbursable to Liberty Media for the three months ended September 30, 2020 and 2019, respectively, and $6.1 million and $6.8 million was reimbursable to Liberty Media for the nine months ended September 30, 2020 and 2019, respectively.

In addition, Qurate Retail and GCI Liberty have agreed to indemnify each other with respect to certain potential losses in respect of the HoldCo Split-Off. See note 3 for information related to the indemnification agreement.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In December 2019, the Company entered into an amendment to the services agreement with Liberty Media in connection with Liberty Media’s entry into a new employment arrangement with Gregory B. Maffei, the Company’s President and Chief Executive Officer ("CEO"). Under the amended services agreement, components of his compensation will either be paid directly to him by each of the Company, Liberty TripAdvisor Holdings, Inc., Liberty Broadband, and Qurate Retail (collectively, the “Service Companies”) or reimbursed to Liberty Media, in each case, based on allocations among Liberty Media and the Service Companies set forth in the amended services agreement, currently set at 14% for the Company.

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

Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Excluded from diluted EPS for the three months ended September 30, 2020 and 2019 are 15 thousand and zero potential common shares, respectively, because their inclusion would have been antidilutive.  Excluded from diluted EPS for the nine months ended September 30, 2020 and 2019 are 15 thousand and zero potential common shares, respectively, because their inclusion would have been antidilutive.

Series A and Series B Common Stock

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

    

number of shares in thousands

Basic WASO

105,564

 

104,819

105,536

 

104,800

Potentially dilutive shares (a)

993

 

1,031

797

 

998

Diluted WASO (a)

106,557

 

105,850

106,333

 

105,798

(a)Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.

(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, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

    

September 30, 2020

    

December 31, 2019

    

    

Quoted

    

    

    

Quoted

    

prices

prices

in active

Significant

in active

Significant

markets

other

markets

other

for identical

observable

for identical

observable

assets

inputs

assets

inputs

Description

Total

(Level 1)

(Level 2)

Total

(Level 1)

(Level 2)

amounts in thousands

Cash equivalents

$

438,545

438,545

533,484

533,484

Equity securities

$

3,345,464

3,345,464

2,600,008

2,600,008

Investment in Liberty Broadband

$

6,097,955

6,097,955

5,367,242

5,367,242

Derivative instrument liability

$

63,456

63,456

71,305

71,305

Indemnification obligation

$

309,541

309,541

202,086

202,086

Exchangeable senior debentures

$

820,035

820,035

658,839

658,839

On April 29, 2019, the Company terminated its previous variable forward and entered into a new 3-year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on April 29, 2019 of $376.35 per share and has a floor price of zero and has a cap price of $254.00 per share. The fair value of the variable forward was derived from a Black-Scholes-Merton model using observable market data as the significant inputs.

The indemnification liability is due to Liberty Interactive LLC ("LI LLC") and pertains to the ability of holders of LI LLC’s 1.75% exchangeable debentures due 2046 (the "1.75% Exchangeable Debentures") to exercise their exchange right according to the terms of the 1.75% Exchangeable Debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification obligation recorded in the accompanying condensed consolidated balance sheets as of September 30, 2020 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of September 30, 2020, a holder of the 1.75% Exchangeable Debentures has the ability to exchange and, accordingly, such indemnification obligation is included as a current liability in the accompanying condensed consolidated balance sheets.

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

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

    

Three months ended

Nine months ended

    

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Equity securities

$

612,465

90,770

746,406

683,808

Investment in Liberty Broadband

 

807,114

19,207

730,713

1,393,135

Derivative instruments

 

(2,019)

60,640

7,849

(57,721)

Indemnification obligation

 

(94,871)

(3,485)

(107,456)

(58,311)

Exchangeable senior debentures

 

(150,004)

(10,967)

(177,952)

(116,048)

$

1,172,685

156,165

1,199,560

1,844,863

The Company has elected to account for its exchangeable senior debentures using the fair value option. Changes in the fair value of the exchangeable senior debentures recognized in the condensed consolidated statements of operations are primarily due to market factors primarily driven by changes in the fair value of the underlying shares into which the

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

debt is exchangeable. The Company isolates the portion of the unrealized gain (loss) attributable to the change in the instrument specific credit risk and recognizes such amount in other comprehensive income. The change in the fair value of the exchangeable senior debentures attributable to changes in the instrument specific credit risk were losses of $9.0 million and $7.5 million for the three months ended September 30, 2020 and 2019, respectively, and a gain of $16.8 million and a loss of $0.9 million for the nine months ended September 30, 2020 and 2019, respectively. The cumulative change was a gain of $11.2 million as of September 30, 2020.

(4) Investments in Equity Securities

Investments in equity securities, the majority of which are carried at fair value, are summarized as follows:

    

September 30, 

December 31, 

    

2020

    

2019

amounts in thousands

Charter (a)

$

3,345,464

2,599,253

Other investments (b)

 

5,285

6,040

$

3,350,749

2,605,293

(a)A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement. See note 3 for additional discussion of the indemnification agreement.
(b)The Company has elected the measurement alternative for a portion of these securities where the fair value is not readily determinable.

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

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 September 30, 2020 and the carrying amount at December 31, 2019: