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, 2015

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 October 31, 2015 was:

 

 

 

 

Series A common stock

 

26,142,026

Series B common stock

 

2,467,547

Series C common stock

 

74,600,657

 

 

 

 


 

Table of Contents

 Table of Contents

 

 

 

 

 

 

 

 

 

    

Page No

 

    

LIBERTY BROADBAND CORPORATION Condensed Consolidated Balance Sheets (unaudited)

 

I-2

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements Of Operations (unaudited) 

 

I-3

 

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

 

I-4

 

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

 

I-5

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statement of Equity (unaudited) 

 

I-6

 

LIBERTY BROADBAND CORPORATION Notes to Condensed Consolidated Financial Statements 

 

I-7

 

 

 

 

 

 

 

 

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Item 4.  Controls and Procedures.

 

I-25

 

 

 

I-33

 

 

 

I-34

 

 

 

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1.  Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.  Exhibits

 

II-1

 

 

 

II-2

 

 

 

II-3

 

 

 

 

 

 

 

SIGNATURE 

 

II-4

 

EXHIBIT INDEX 

 

II-5

 

 

 

 

 

 

 

 

 

I-1


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Assets

    

 

    

    

    

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

643,384

 

44,809

 

Trade and other receivables, net

 

 

919

 

617

 

Short-term marketable securities

 

 

9,011

 

9,001

 

Deferred income tax assets

 

 

9,868

 

11,282

 

Other current assets

 

 

2,284

 

14,721

 

Total current assets

 

 

665,466

 

80,430

 

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

 

 

424,570

 

360,762

 

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

 

 

2,432,487

 

2,498,804

 

Property and equipment, net

 

 

1,421

 

3,590

 

Goodwill (note 6)

 

 

27,166

 

27,166

 

Intangible assets subject to amortization, net (note 6)

 

 

12,744

 

12,915

 

Deferred income tax assets

 

 

47,093

 

19,540

 

Other assets, at cost, net of accumulated amortization

 

 

570

 

725

 

Total assets

 

$

3,611,517

 

3,003,932

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,912

 

15,953

 

Deferred revenue

 

 

13,431

 

5,947

 

Derivative instruments (note 3)

 

 

 —

 

75,356

 

Other current liabilities

 

 

1,981

 

2,340

 

Total current liabilities

 

 

26,324

 

99,596

 

Debt (note 7)

 

 

372,000

 

372,000

 

Deferred revenue

 

 

38,381

 

37,567

 

Total liabilities

 

 

436,705

 

509,163

 

Equity

 

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 26,141,744 shares at September 30, 2015 and 26,126,459 shares at December 31, 2014

 

 

261

 

261

 

Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,467,547 shares at September 30, 2015 and December 31, 2014

 

 

25

 

25

 

Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 74,599,785 shares at September 30, 2015 and 57,189,897 shares at December 31, 2014

 

 

746

 

572

 

Additional paid-in capital

 

 

3,536,532

 

2,835,373

 

Accumulated other comprehensive earnings, net of taxes

 

 

8,414

 

7,918

 

Retained earnings (accumulated deficit)

 

 

(371,166)

 

(349,380)

 

Total equity

 

 

3,174,812

 

2,494,769

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

Total liabilities and equity

 

$

3,611,517

 

3,003,932

 

See accompanying notes to the condensed consolidated financial statements.

 

I-2


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

    

2014

    

2015

 

2014

 

 

 

(amounts in thousands, except per share amounts)

 

Revenue:

    

 

 

 

 

 

    

    

    

 

Service

 

$

10,173

 

14,589

 

30,512

 

43,840

 

Product and technology

 

 

5,052

 

2,856

 

10,674

 

7,672

 

Total revenue

 

 

15,225

 

17,445

 

41,186

 

51,512

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

Operating, including stock-based compensation (note 8)

 

 

1,090

 

1,908

 

4,447

 

5,683

 

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

 

 

9,515

 

8,006

 

32,091

 

37,932

 

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

 

 

3,512

 

4,688

 

12,888

 

13,884

 

Net gain on legal settlement (note 10)

 

 

 —

 

(6,000)

 

(60,505)

 

(6,000)

 

Depreciation and amortization

 

 

820

 

2,479

 

4,920

 

6,583

 

 

 

 

14,937

 

11,081

 

(6,159)

 

58,082

 

Operating income (loss)

 

 

288

 

6,364

 

47,345

 

(6,570)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,816)

 

 —

 

(5,496)

 

 —

 

Dividend and interest income

 

 

605

 

1,228

 

1,871

 

4,231

 

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

 

 

(3,999)

 

(34,542)

 

(65,747)

 

(95,968)

 

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

 

 

(23,116)

 

(12,532)

 

(12,091)

 

23,745

 

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

 

 

(851)

 

(10,953)

 

(2,113)

 

(61,162)

 

Other, net

 

 

10

 

8

 

34

 

(60)

 

Net earnings (loss) before income taxes

 

 

(28,879)

 

(50,427)

 

(36,197)

 

(135,784)

 

Income tax benefit (expense)

 

 

9,584

 

18,437

 

14,411

 

47,983

 

Net earnings (loss) attributable to Liberty Broadband shareholders

 

$

(19,295)

 

(31,990)

 

(21,786)

 

(87,801)

 

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

 

$

(0.19)

 

(0.36)

 

(0.21)

 

(0.99)

 

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

 

$

(0.19)

 

(0.36)

 

(0.21)

 

(0.99)

 

 

See accompanying notes to the condensed consolidated financial statements.

I-3


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

    

2014

    

2015

 

2014

 

 

 

(amounts in thousands)

 

Net earnings (loss)

    

$

(19,295)

 

(31,990)

 

(21,786)

    

(87,801)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(114)

 

(307)

 

(484)

 

(2,909)

 

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

 

 

327

 

806

 

980

 

2,693

 

Other comprehensive earnings (loss), net of taxes

 

 

213

 

499

 

496

 

(216)

 

Comprehensive earnings (loss) attributable to Liberty Broadband shareholders

 

$

(19,082)

 

(31,491)

 

(21,290)

 

(88,017)

 

 

See accompanying notes to the condensed consolidated financial statements.

I-4


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Cash flows from operating activities:

    

 

    

    

    

 

Net earnings (loss)

 

$

(21,786)

 

(87,801)

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

4,920

 

6,583

 

Stock-based compensation

 

 

4,782

 

735

 

Excess tax benefit from stock-based compensation

 

 

(1,217)

 

 —

 

Share of (earnings) losses of affiliates

 

 

65,747

 

95,968

 

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

 

 

12,091

 

(23,745)

 

(Gain) loss on dilution of investment in affiliate

 

 

2,113

 

61,162

 

Deferred income tax expense (benefit)

 

 

(26,406)

 

(54,427)

 

Other, net

 

 

(2,565)

 

(716)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Current and other assets

 

 

904

 

1,623

 

Payables and other liabilities

 

 

11,826

 

23,106

 

Net cash provided by operating activities

 

 

50,409

 

22,488

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(2,616)

 

(1,117)

 

Cash paid for acquisitions, net of cash acquired

 

 

 —

 

(48,088)

 

Investments in equity method affiliates

 

 

 —

 

(124,492)

 

Amounts loaned to former parent

 

 

 —

 

(60,952)

 

Repayments by former parent on loan receivable

 

 

 —

 

80,012

 

Other investing activities, net

 

 

112

 

(6)

 

Net cash used in investing activities

 

 

(2,504)

 

(154,643)

 

Cash flows from financing activities:

 

 

 

 

 

 

Cash received from rights offering

 

 

697,309

 

 —

 

Borrowings of debt

 

 

40,000

 

 —

 

Repayments of debt

 

 

(40,000)

 

 —

 

Proceeds from issuances of financial instruments

 

 

30,158

 

68,019

 

Payments from settlements of financial instruments

 

 

(182,192)

 

(68,019)

 

Excess tax benefit from stock-based compensation

 

 

1,217

 

 —

 

Contribution from (distribution to) former parent, net

 

 

 —

 

170,315

 

Other financing activities, net

 

 

4,178

 

 —

 

Net cash provided by financing activities

 

 

550,670

 

170,315

 

Net increase in cash

 

 

598,575

 

38,160

 

Cash and cash equivalents, beginning of period

 

 

44,809

 

9,251

 

Cash and cash equivalents, end of period

 

$

643,384

 

47,411

 

 

See accompanying notes to the condensed consolidated financial statements.

 

I-5


 

Table of Contents

 

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statement of Equity

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

earnings

 

 

 

 

 

Preferred

 

Common stock

 

paid-in

 

comprehensive

 

(accumulated)

 

 

 

 

 

Stock

 

Series A

  

Series B

  

Series C

  

capital

 

earnings

 

deficit

 

Total equity

 

 

 

(amounts in thousands)

 

Balance at January 1, 2015

    

$

 —

 

261

 

25

 

572

 

2,835,373

    

7,918

    

(349,380)

    

2,494,769

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(21,786)

 

(21,786)

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

496

 

 —

 

496

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

3,893

 

 —

 

 —

 

3,893

 

Issuance of common stock upon exercise of stock options

 

 

 —

 

 —

 

 —

 

1

 

127

 

 —

 

 —

 

128

 

Excess tax benefits from stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

1,217

 

 —

 

 —

 

1,217

 

Common stock issued pursuant to the rights offering

 

 

 —

 

 —

 

 —

 

173

 

697,136

 

 —

 

 —

 

697,309

 

Other

 

 

 —

 

 —

 

 —

 

 —

 

(1,214)

 

 —

 

 —

 

(1,214)

 

Balance at September 30, 2015

 

$

 —

 

261

 

25

 

746

 

3,536,532

 

8,414

 

(371,166)

 

3,174,812

 

 

See accompanying notes to the condensed consolidated financial statements.

 

I-6


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated 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, Inc. (“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 Cable”), (iv) certain deferred tax liabilities, as well as liabilities related to Time Warner Cable written call options and (v) initial indebtedness, pursuant to margin loans entered into prior to the completion of the Broadband Spin-Off. 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 condensed consolidated financial statements.

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 5:00 p.m., New York City time, on October 29, 2014 (the record date), with cash paid in lieu of fractional shares. This resulted in the issuance of an aggregate 85,761,332 shares of Series A, Series B and Series C Liberty Broadband common stock. In addition, following the completion of the Broadband Spin-Off, on December 10, 2014, stockholders received a subscription right to acquire one share of Series C Liberty Broadband common stock for every five shares of Liberty Broadband common stock they held as of 5:00 p.m., New York City time, on December 4, 2014 (the rights record date) at a per share subscription price of $40.36, which was 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 rights offering was fully subscribed on January 9, 2015, with 17,277,224 shares of Series C common stock issued to those rightsholders exercising basic and, as applicable, oversubscription privileges for total proceeds of $697.3 million. The subscription rights were issued to raise capital for general corporate purposes of Liberty Broadband. The Broadband Spin-Off and rights offering were intended to be tax-free to stockholders of Liberty and Liberty Broadband, respectively. During September 2015, Liberty entered into a closing agreement with the IRS which provided that the Broadband Spin-Off qualified for tax-free treatment. The Broadband Spin-Off was accounted for at historical cost due to the pro rata nature of the distribution to holders of Liberty common stock.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2014, which has been derived from audited financial statements, and (b) interim unaudited 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 such periods 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. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Liberty Broadband's Annual Report on Form 10-K for the year ended December 31, 2014. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

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. Actual results could differ from those estimates. The

I-7


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Company considers (i) the application of the equity method of accounting for investments in affiliates, (ii) the fair value of non-financial instruments, (iii) the fair value of financial instruments, (iv) revenue recognition and (v) accounting for income taxes to be its most significant estimates.

In May 2014, the Financial Accounting Standards Board 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, 2017. The Company is currently evaluating the effect that the updated standard will have on its revenue recognition and has not yet selected a transition method but does not believe that the standard will significantly impact its financial statements and related disclosures.

Liberty Broadband holds an investment that is accounted for using the equity method. Liberty Broadband does not control the decision making process or business management practices of this affiliate. Accordingly, Liberty Broadband relies on the management of this affiliate 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, Liberty Broadband relies on audit reports that are provided by the affiliate's independent auditor on the financial statements of such affiliate. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliate that would have a material effect on Liberty Broadband's condensed consolidated financial statements.

During the nine months ended September 30, 2015, Liberty Broadband entered into certain agreements with Charter, Liberty Interactive Corporation (“Liberty Interactive”) and Time Warner Cable in connection with certain proposed transactions among these companies. See note 5 for additional detail regarding these transactions and corresponding agreements.

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

I-8


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services and for costs that will be negotiated semi-annually. Under these various agreements, approximately $656 thousand and $1.8 million was reimbursable to Liberty for the three and nine months ended September 30, 2015, respectively

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. Upon the acquisition of Skyhook, TruePosition 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. There were no claims made against the escrow account, and the full amount was released to the selling parties during February 2015. In mid November 2014, Skyhook was notified that one of its significant customers was not expected to renew its contract for 2015. Due to the anticipated decline in Skyhook's operations as a result of the loss of this customer, the Company recorded a $35.2 million impairment loss related to TruePosition’s goodwill and intangible assets related to Skyhook during December 2014.

 

(2) Earnings (Loss) per Share

Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) attributable to Liberty Broadband shareholders by the weighted average number of common shares outstanding 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.

The Company issued 85,761,332 common shares, which is the aggregate number of shares of Series A, Series B and Series C common stock outstanding upon the completion of the Broadband Spin-Off on November 4, 2014. Additionally, as part of the rights offering, Liberty Broadband distributed subscription rights, which were priced at a discount to the market value, to all holders of Liberty Broadband common stock (see further discussion in note 1).  The rights offering, because of the discount, is considered a stock dividend which requires retroactive treatment for prior periods for the weighted average shares outstanding based on a factor applied determined by the fair value per share immediately prior to the rights exercise and the theoretical fair value after the rights exercise. The number of shares issued upon completion of the Broadband Spin-Off, adjusted for the rights factor, was used to determine both basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2014, as no Company equity awards were outstanding prior to the Broadband Spin-Off. Basic earnings (loss) per share subsequent to the completion of the Broadband Spin-Off is computed using the weighted average number of shares outstanding (“WASO”) during the period. Diluted earnings (loss) per share subsequent to the Broadband Spin-Off is computed using the WASO during the period, adjusted for potentially dilutive equity awards outstanding during the same period.

Excluded from diluted EPS for the three and nine months ended September 30, 2015 are 3 thousand potential common shares because their inclusion would be antidilutive.

I-9


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Broadband Common Stock

 

 

 

Three months

 

Three months

 

Nine months

 

Nine months

 

 

 

ended

 

ended

 

ended

 

ended

 

 

    

September 30, 2015

    

September 30, 2014

    

September 30, 2015

    

September 30, 2014

 

 

 

(numbers of shares in thousands)

 

Basic EPS

 

103,024

 

88,343

 

102,140

 

88,343

 

Potentially dilutive shares

 

662

 

NA

 

630

 

NA

 

Diluted EPS

 

103,686

 

88,343

 

102,770

 

88,343

 

 

 

 

 

 

 

 

(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, 2015

 

December 31, 2014

 

 

 

 

 

 

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)

 

Cash equivalents

 

$

626,312

 

626,312

 

 —

 

36,002

 

36,002

 

 —

 

Short-term marketable securities

 

$

9,011

 

9,011

 

 —

 

9,001

 

9,001

 

 —

 

Available-for-sale securities

    

$

424,570

    

424,570

    

 —

    

360,762

    

360,762

    

 —

 

Time Warner Cable financial instruments (1) (2)

 

$

 —

 

 —

 

 —

 

(75,356)

 

 —

 

(75,356)

 


(1)

As of December 31, 2014, the Company had an outstanding written call option on 625,000 Time Warner Cable shares with a strike price of $92.02 per share which expired in February 2015. Upon expiration, this written call option was rolled into a new written call option on 625,000 Time Warner Cable shares with a strike price of $100.39 per share which the Company cash settled during June 2015 for $48.3 million. Additionally, as of December 31, 2014, the Company had another outstanding written call option on 625,000 Time Warner Cable shares with a strike price of $90.84 per share which the Company cash settled during April 2015 for $36.7 million. No written call options on Time Warner Cable shares are outstanding as of September 30, 2015.

(2)

On March 27, 2015, Liberty Broadband entered into a cashless collar agreement with a financial institution on 1.7 million Time Warner Cable shares held by the Company with a put option strike price of $136.80 per share and a call

I-10


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

option strike price of $161.62 per share. The collar was originally scheduled to expire during March 2017. The Company unwound the agreement during July 2015 for $67.1 million cash paid to the counterparty. In connection with this collar agreement, the Company also entered into a revolving loan agreement with an availability of $234 million, which was terminated upon unwinding of the collar agreement during July 2015 (note 7). 

The fair value of Level 2 derivative liabilities were derived from a Black-Scholes Model using observable market data as the significant inputs. The inputs used in the model during the period (exclusive of the applicable trading price of Time Warner Cable stock and the strike prices associated with the call options and collar agreement) were as follows:

 

 

 

 

 

 

 

 

 

    

Range

 

Volatility

 

17.4

%

 —

25.2

%

 

Interest rate

 

0.41

%

 —

0.99

%

 

Dividend yield

 

0

%

 —

0.24

%

 

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 condensed consolidated balance sheets.

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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Charter warrants (1)

    

$

NA

    

(7,976)

    

 

NA

    

15,233

 

Time Warner Cable investment and financial instruments

 

 

(23,116)

 

(4,556)

 

 

(12,091)

 

8,512

 

 

 

$

(23,116)

 

(12,532)

 

 

(12,091)

 

23,745

 


(1)

As discussed in note 5, Liberty Broadband exercised all of the Company’s outstanding warrants to purchase shares of Charter common stock during November 2014, subsequent to the completion of the Broadband Spin-Off. 

 

 

(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 consolidated statements of operations.

I-11


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Time Warner Cable

 

$

424,202

 

359,615

 

Other equity securities

 

 

368

 

1,147

 

Total investments in available-for-sale securities

 

$

424,570

 

360,762

 

Unrealized Holding Gains and Losses

As of September 30, 2015 and December 31, 2014, the gross unrealized holding gains related to investments in AFS securities were $41 thousand and $820 thousand, 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 acquired approximately 26.9 million shares of common stock and approximately 1.1 million warrants to purchase shares of Charter common stock for approximately $2.6 billion, which represented an 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 on hand of approximately $1.2 billion and new margin loan arrangements (note 7). 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 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.

During May 2014, Liberty purchased 897 thousand Charter shares for approximately $124.5 million. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband exercised all of the Company’s outstanding warrants to purchase shares of Charter common stock for approximately $52 million.

As of September 30, 2015, the carrying value of Liberty Broadband’s ownership in Charter was approximately $2,432 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2015 was approximately $5,071 million, which represented an approximate ownership of 26% of the outstanding equity of Charter as of that date.

I-12


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Due to the amortization of amortizable assets and debt 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 $2,417 million as of September 30, 2015 and has been allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

Property and equipment

    

$

375

 

Customer relationships

 

 

591

 

Franchise fees

 

 

1,451

 

Trademarks

 

 

36

 

Goodwill

 

 

944

 

Debt

 

 

(133)

 

Deferred income tax liability

 

 

(847)

 

 

 

$

2,417

 

 

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. The excess basis of outstanding debt is amortized over the contractual period using the effective interest rate method.  The Company’s share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $17.8 million and $21.1 million, net of related taxes, for the three months ended September 30, 2015 and 2014, respectively, and expenses of $27.6 million and $62.0 million, net of related taxes, for the nine months ended September 30, 2015 and 2014, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt. The excess basis amortization during the nine months ended September 30, 2015 was offset by the write-off of the excess basis related to debt instruments which Charter repaid during the second quarter of 2015 prior to their contractual maturity.

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 $851 thousand and $11.0 million during the three months ended September 30, 2015 and 2014, respectively, and $2.1 million and $61.2 million during the nine months ended September 30, 2015 and 2014, respectively.

On March 31, 2015, Liberty Broadband announced its entry into a new stockholders agreement with Charter, a subsidiary of Charter (“New Charter”) and Advance/Newhouse Partnership (“A/N”) (the “Bright House Stockholders Agreement”), which would have replaced the Company’s existing stockholders agreement with Charter, as amended October 14, 2014. Liberty Broadband’s entry into the Bright House Stockholders Agreement came as the result of Charter’s announcement of a proposed transaction with A/N, pursuant to which New Charter would acquire Bright House Networks (“Bright House”) from A/N for $10.4 billion (the “Bright House Transaction”). The closing of the Bright House Transaction was subject to several conditions, including Charter’s receipt of stockholder approval, the expiration of Time Warner Cable’s right of first offer for Bright House, the closing of a binding definitive agreement between Charter and Comcast Corporation (the Comcast Transactions Agreement”) and regulatory approval.

As announced by Charter on April 24, 2015, the Comcast Transactions Agreement was terminated by Comcast Corporation. As the closing of the Comcast Transactions Agreement had been a condition to the Bright House Transaction, the parties to the Bright House Stockholders Agreement were to consider, and negotiate for a period of 30 days in good faith, amendments to the terms of the Bright House Stockholders Agreement that would be desirable to consummate the Bright House Transaction.

I-13


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

On May 26, 2015, Liberty Broadband announced its entry into an agreement with Charter to invest $4.3 billion at a price of $176.95 per share in connection with (and contingent upon) the closing of the proposed merger of Time Warner Cable and Charter  (the “Time Warner Cable Merger”),  which was also announced on May 26, 2015. Additionally, Liberty Broadband agreed to purchase an additional $700 million at a price of $173.00 per share (adjusted by the applicable exchange rates in the Time Warner Cable Merger) in connection with Charter’s proposed acquisition of Bright House from A/N, which is generally conditioned on the closing of the Time Warner Cable Merger. In connection with these transactions, it is expected that Charter will undergo a corporate reorganization, resulting in New Charter, a current subsidiary of Charter, becoming the new publicly traded parent company.

As discussed previously, in support of the Time Warner Cable Merger, Liberty Broadband will purchase shares of stock in New Charter (the “Charter Shares”) using proceeds of $4.4 billion related to subscriptions for newly issued shares of Liberty Broadband’s Series C common stock (the “Series C Shares”), at a price per share of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum-of-the parts basis at the time the investment agreements were executed.  The purchasers of the Series C Shares are Liberty Interactive through its Liberty Ventures Group and certain third party investors, which will all invest on substantially similar terms. One of the third party investors also holds a position in Time Warner Cable and has agreed to vote its Time Warner Cable shares in favor of the Time Warner Cable Merger. The Series C Share subscriptions are subject to customary closing conditions and funding will only occur in connection with the completion of the Time Warner Cable Merger. Each of Charter and Liberty Broadband obtained stockholder approval during September 2015 for the issuance of the Charter Shares and the Series C Shares, respectively, in accordance with the rules and requirements of the Nasdaq Stock Market. Liberty Broadband has the right, and may determine, to incur debt financing (subject to certain conditions) to fund a portion of the purchase price for its investment in New Charter, in which case Liberty Broadband may reduce the aggregate subscription for Series C Shares by up to 25%, with such reduction applied pro rata to all investors, including Liberty Interactive.

In connection with the Time Warner Cable Merger, Liberty Broadband has also entered into an agreement with Charter pursuant to which it has agreed to vote all of its shares of Charter’s Class A common stock in favor of the Time Warner Cable Merger, the issuance of the Charter Shares and any related proposals. Liberty Broadband and Liberty Interactive have also entered into an agreement with Charter which provides that Liberty Broadband and Liberty Interactive will exchange, in a tax-free transaction, the shares of Time Warner Cable common stock held by each company for shares of New Charter Class A common stock (subject to certain limitations). In addition, Liberty Interactive has also agreed to grant Liberty Broadband a proxy over the shares of New Charter it receives in the exchange, along with a right of first refusal with respect to the underlying New Charter shares.

Liberty Broadband intends to fund its commitment to purchase up to $700 million in shares of New Charter at a per share price of $173.00 (as adjusted) in connection with the Bright House acquisition through cash on hand or other financing.  As previously announced, A/N and Liberty Broadband will enter into a proxy agreement, pursuant to which A/N will grant Liberty Broadband a five-year proxy to vote shares of New Charter held by A/N, capped at 7% of New Charter’s outstanding shares.  Liberty Broadband is expected to control approximately 25.01% of the aggregate voting power of New Charter following the completion of the Time Warner Cable Merger and the Bright House Transaction and is expected to be New Charter’s largest stockholder.

The terms of a new stockholders agreement among Charter, New Charter, Liberty Broadband and A/N (which will become effective upon the closing of the Bright House Transaction) remain substantially similar to the Bright House Stockholders Agreement, except that the restrictions on Liberty Broadband’s ability to utilize its shares of New Charter in connection with financing transactions have been eliminated and A/N will be entitled to designate two (instead of three) director nominees, among other things.

I-14


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

The Time Warner Cable Merger was approved by stockholders of both Charter and Time Warner Cable during September 2015 and is subject to regulatory approval and other customary conditions to closing. The Bright House acquisition is subject to several conditions, including the completion of the Time Warner Cable Merger (subject to certain exceptions if Time Warner Cable enters into another sale transaction) and regulatory approval. Therefore, as these transactions are subject to certain contingencies, we have not reflected any financial impacts in the condensed consolidated financial statements related to the respective agreements as of September 30, 2015.

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

Charter condensed consolidated balance sheet

 

 

 

 

 

 

 

 

 

    

September 30, 2015

 

December 31, 2014

 

Current assets

 

$

406

 

371

 

Property and equipment, net

 

 

8,281

 

8,373

 

Goodwill

 

 

1,168

 

1,168

 

Intangible assets, net

 

 

6,922

 

7,111

 

Restricted cash and cash equivalents

 

 

19,626

 

7,111

 

Other assets

 

 

470

 

416

 

Total assets

 

$

36,873

 

24,550

 

Current liabilities

 

$

1,829

 

1,635

 

Deferred income taxes

 

 

1,616

 

1,674

 

Long-term debt

 

 

33,281

 

21,023

 

Other liabilities

 

 

87

 

72

 

Equity

 

 

60

 

146

 

Total liabilities and shareholders’ equity

 

$

36,873

 

24,550

 

 

Charter condensed consolidated statement of operations

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

    

Nine months ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

Revenue

$

2,450

 

2,287

 

7,242

 

6,748

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

Operating costs and expenses (excluding depreciation and amortization)

 

(1,620)

 

(1,518)

 

(4,802)

 

(4,444)

 

Depreciation and amortization

 

(538)

 

(535)

 

(1,580)

 

(1,568)

 

Other operating expenses, net

 

(19)

 

(16)

 

(69)

 

(42)

 

 

 

(2,177)

 

(2,069)

 

(6,451)

 

(6,054)

 

Operating income

 

273

 

218

 

791

 

694

 

Interest expense

 

(353)

 

(217)

 

(871)

 

(638)

 

Other income (expense), net

 

(8)

 

5

 

(141)

 

(3)

 

Income tax benefit (expense)

 

142

 

(59)

 

72

 

(188)

 

Net income (loss)

$

54

 

(53)

 

(149)

 

(135)

 

 

 

 

 

 

 

 

 

I-15


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

(6) Goodwill and Other Intangible Assets

There were no changes in the carrying amount of goodwill during the nine months ended September 30, 2015.

As discussed in note 10, during September 2015, TruePosition’s largest customer gave notice that it does not intend to renew its contract, which expires on December 31, 2015. The Company believes that the receipt of the notification represents a significant change in circumstances since we last performed our annual goodwill impairment test. Accordingly, we performed a goodwill impairment test upon receipt of the notification from TruePosition. At September 30, 2015, the carrying value of goodwill for TruePosition was $20.7 million. The estimated fair value of the reporting unit was primarily determined based on the cash and cash equivalents held by the reporting unit, and when compared to its carrying value, it was concluded that a goodwill impairment did not exist.

The carrying value of TruePosition includes a deferred revenue liability related to the contract with the largest customer. Upon expiration of the contract in the fourth quarter of 2015, the deferred revenue will be recognized, as all contractual obligations will have been satisfied.  The recognition of this deferred revenue liability will likely increase the reporting unit carrying value, and it is anticipated that the carrying value will exceed the fair value. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Acquired patents

    

$

10,822

    

(6,477)

    

4,345

    

8,822

    

(5,801)

    

3,021

 

Customer relationships

 

 

10,212

 

(3,735)

 

6,477

 

10,212

 

(2,712)

 

7,500

 

Tradename

 

 

2,838

 

(1,061)

 

1,777

 

2,788

 

(788)

 

2,000

 

Capitalized software

 

 

10,984

 

(10,839)

 

145

 

10,991

 

(10,597)

 

394

 

 

 

$

34,856

 

(22,112)

 

12,744

 

32,813

 

(19,898)

 

12,915

 

 

Upon acquisition of Skyhook, TruePosition assigned remaining useful lives to each of Skyhook’s intangible assets acquired. Patents, tradename and customer relationship intangible assets were amortized straight-line over five years and capitalized software intangible assets were amortized straight-line over three to five years. In connection with the intangible impairment recorded on Skyhook’s intangible assets during the fourth quarter of 2014, TruePosition re-evaluated the remaining useful lives of Skyhook’s amortizable intangible assets. As a result, as of January 1, 2015, TruePosition determined the remaining useful life of Skyhook’s patents to be three and a half years and Skyhook’s tradename and customer relationship to be five and a half years. On January 1, 2015, TruePosition began amortizing Skyhook’s intangible assets straight-line prospectively over these revised periods. Capitalized software intangible assets continue to be amortized over three to five years. Amortization expense was $707 thousand and $2.0 million for the three months ended September 30, 2015 and 2014, respectively and $2.2 million and $4.7 million for the nine months ended September 30, 2015 and 2014, respectively.

I-16


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

The estimated future amortization expense for the next five years related to intangible assets with definite lives as of September 30, 2015 is as follows (amounts in thousands):

 

 

 

 

 

Remainder of 2015

    

$

870

 

2016

 

$

3,400

 

2017

 

$

3,335

 

2018

 

$

2,529

 

2019

 

$

1,742

 

 

 

 

 

 

(7) Debt

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. Approximately $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 $52 million to fund the exercise of the warrants to purchase shares of Charter common stock. As of September 30, 2015, Liberty Broadband had $372.0 million outstanding under the Margin Loan Agreements, with an additional $28.0 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. As of September 30, 2015,  7.0 million shares of Charter with a value of $1.2 billion were pledged as collateral pursuant to the Margin Loans.

 

In connection with the collar agreement on shares of Time Warner Cable entered into on March 27, 2015, as discussed in note 3, the Company also entered into a $234 million revolving loan agreement. On April 7, 2015, Liberty Broadband drew $40 million on this loan, which was the amount used to match the outstanding call liability. The shares of Time Warner Cable underlying the collar served as collateral for borrowings under the revolving loan agreement. Borrowings outstanding under the revolving loan agreement bore interest at the three-month LIBOR rate plus 0.64%, payable quarterly in arrears beginning on March 31, 2015. The interest rate on the unused portion of the revolving loan agreement was  0.12% per annum. The Company repaid the $40 million drawn on the loan during July 2015 and the agreement was terminated upon unwinding of the Time Warner Cable collar agreement.  

I-17


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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 and outstanding letters of credit remained in effect through the remainder of their respective terms, the last of which expired during the first quarter of 2015. Accordingly, there were no letters of credit outstanding at September 30, 2015.  $634 thousand in letters of credit were outstanding as of December 31, 2014. Letters of credit issued under the line of credit bore interest at an annual rate of 1.75%, payable quarterly. Interest expense related to the line of credit was not significant for the three or nine months ended September 30, 2015 or 2014. Letters of credit issued under the line of credit prior to its expiration remained collateralized by a cash deposit maintained by the bank, which was cancelled upon the expiration of the last letter of credit during the first quarter of 2015.

(8) Stock-Based Compensation

Liberty Broadband grants, to certain of its directors, employees and employees of its subsidiaries, restricted stock, stock options and stock appreciation rights ("SARs") to purchase shares of its common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock) based on the grant-date fair value of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award (such as SARs that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation for the three and nine months ended September 30, 2015 and 2014 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Operating expense

    

$

(12)

    

 —

    

4

    

10

 

Selling, general and administrative

 

 

1,292

 

126

 

4,534

 

494

 

Research and development

 

 

171

 

64

 

244

 

231

 

 

 

$

1,451

 

190

 

4,782

 

735

 

 

Liberty Broadband – Grants of Stock Options

During the nine months ended September 30, 2015 Liberty Broadband granted 3 thousand options to purchase shares of Series C common stock, with a weighted average grant-date fair value of $15.03 per share. These options cliff vest over a 2 year vesting period. There were no options to purchase shares of Series A common stock granted during the period.

The Company calculates the grant-date fair value for all of its equity classified awards and any subsequent remeasurement of its liability classified awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. Since Liberty Broadband common stock has not traded on the stock market for a significant length of time, the volatility used in the calculation for Awards is based on the historical volatility of Charter common stock and the implied volatility of publicly traded Charter options; as the most significant asset within Liberty Broadband, the volatility of Charter served as a proxy for the expected volatility of Liberty Broadband.  The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject option.

I-18


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Liberty Broadband – Outstanding Awards

The following table presents the number and weighted average exercise price (“WAEP”) of Awards to purchase Liberty Broadband common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

remaining

 

Aggregate

 

 

 

 

 

 

 

contractual

 

intrinsic

 

 

Series A

 

WAEP

 

life

 

value

 

 

(in thousands)

 

 

 

 

(in years)

 

(in millions)

Outstanding at January 1, 2015

 

807

 

$

32.21

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

Exercised

 

(61)

 

$

30.40

 

 

 

 

 

Forfeited/Cancelled

 

(1)

 

$

37.19

 

 

 

 

 

Outstanding at September 30, 2015

 

745

 

$

32.36

 

3.5

 

$

14

Exercisable at September 30, 2015

 

631

 

$

32.10

 

3.3

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

remaining

 

Aggregate

 

 

 

 

 

 

 

contractual

 

intrinsic

 

 

Series C

 

WAEP

 

life

 

value

 

 

(in thousands)

 

 

 

 

(in years)

 

(in millions)

Outstanding at January 1, 2015

 

3,137

 

$

39.85

 

 

 

 

 

Granted

 

3

 

$

53.86

 

 

 

 

 

Exercised

 

(161)

 

$

31.10

 

 

 

 

 

Forfeited/cancelled

 

(2)

 

$

37.19

 

 

 

 

 

Outstanding at September 30, 2015

 

2,977

 

$

40.34

 

6.4

 

$

32

Exercisable at September 30, 2015

 

1,236

 

$

32.06

 

3.3

 

$

24

 

As of September 30, 2015, the total unrecognized compensation cost related to unvested Awards was approximately $21 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 3.3 years.

As of September 30, 2015, Liberty Broadband reserved 3.7 million shares of Series A and Series C common stock for issuance under exercise privileges of outstanding stock Awards.

TruePosition Equity Incentive Plans

During the nine months ended September 30, 2015, TruePosition issued 120 thousand stand-alone phantom stock appreciation rights (“PARs”),  23 thousand stand-alone phantom stock units (“PSUs”) and 4.0 million Skyhook PARs.  As of September 30, 2015, the fair value of outstanding PARs and PSUs was approximately $3.9 million. As of September 30, 2015,  $1.7 million is included in Other current liabilities in the accompanying condensed consolidated balance sheet for the fair value of TruePosition’s vested long-term incentive plan obligations.

I-19


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

(9) Related Party Transactions

During the nine months ended September 30, 2014, 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 receiv