10-Q 1 lbrd-20150331x10q.htm 10-Q lbrda_Current folio_10Q

 

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 March 31, 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 April 30, 2015 was:

 

 

 

 

Series A common stock

 

26,131,122 

Series B common stock

 

2,467,547 

Series C common stock

 

74,577,775 

 

 

 

 


 

Table of Contents

 

 

 

 

 

 

 

 

 

    

Page No

 

    

LIBERTY BROADBAND CORPORATION Condensed Consolidated Balance Sheets (unaudited)

 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements Of Operations (unaudited) 

 

 

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

 

 

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

 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statement of Equity (unaudited) 

 

 

LIBERTY BROADBAND CORPORATION Notes to Condensed Consolidated Financial Statements 

 

 

 

 

 

 

 

 

 

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Item 4.  Controls and Procedures.

 

24 

 

 

 

31 

 

 

 

32 

 

 

 

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1.  Legal Proceedings

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

Item 6.  Exhibits

 

33 

 

 

 

33 

 

 

 

33 

 

 

 

 

 

 

 

SIGNATURE 

 

34 

 

EXHIBIT INDEX 

 

35 

 

 

 

 

 

 

 

 

 

I-1


 

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Assets

    

 

    

    

    

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

763,127 

 

44,809 

 

Trade and other receivables, net

 

 

90,455 

 

617 

 

Short-term marketable securities

 

 

9,004 

 

9,001 

 

Deferred income tax assets

 

 

20,592 

 

11,282 

 

Other current assets

 

 

1,877 

 

14,721 

 

Total current assets

 

 

885,055 

 

80,430 

 

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

 

 

355,202 

 

360,762 

 

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

 

 

2,455,859 

 

2,498,804 

 

Property and equipment, net

 

 

1,254 

 

3,590 

 

Goodwill (note 6)

 

 

27,166 

 

27,166 

 

Intangible assets subject to amortization, net (note 6)

 

 

12,081 

 

12,915 

 

Deferred income tax assets

 

 

32,918 

 

19,540 

 

Other assets, at cost, net of accumulated amortization

 

 

676 

 

725 

 

Total assets

 

$

3,770,211 

 

3,003,932 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

36,931 

 

15,953 

 

Deferred revenue

 

 

34,575 

 

5,947 

 

Derivative instruments (note 3)

 

 

67,773 

 

75,356 

 

Other current liabilities

 

 

16,654 

 

2,340 

 

Total current liabilities

 

 

155,933 

 

99,596 

 

Debt (note 7)

 

 

372,000 

 

372,000 

 

Deferred revenue

 

 

37,659 

 

37,567 

 

Other liabilities

 

 

3,757 

 

 —

 

Total liabilities

 

 

569,349 

 

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 26,130,763 shares at March 31, 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 March 31, 2015 and 2,467,547 shares at December 31, 2014

 

 

25 

 

25 

 

Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 74,568,442 shares at March 31, 2015 and 57,189,897 shares at December 31, 2014

 

 

746 

 

572 

 

Additional paid-in capital

 

 

3,535,899 

 

2,835,373 

 

Accumulated other comprehensive earnings, net of taxes

 

 

7,993 

 

7,918 

 

Retained earnings (accumulated deficit)

 

 

(344,062)

 

(349,380)

 

Total equity

 

 

3,200,862 

 

2,494,769 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

Total liabilities and equity

 

$

3,770,211 

 

3,003,932 

 

See accompanying notes to the condensed consolidated financial statements.

I-2


 

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2015

    

2014

 

 

 

 

(amounts in thousands,

 

 

 

 

except per share amounts)

 

Revenue:

    

 

 

 

 

 

Service

 

$

10,213 

 

14,600 

 

Product and technology

 

 

3,103 

 

2,321 

 

Total revenue

 

 

13,316 

 

16,921 

 

Operating costs and expenses

 

 

 

 

 

 

Operating, including stock-based compensation (note 8)

 

 

2,489 

 

2,061 

 

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

 

 

11,916 

 

13,361 

 

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

 

 

5,701 

 

4,412 

 

Gain on legal settlement (note 10)

 

 

(60,505)

 

 —

 

Depreciation and amortization

 

 

3,244 

 

1,623 

 

 

 

 

(37,155)

 

21,457 

 

Operating income (loss)

 

 

50,471 

 

(4,536)

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(1,761)

 

 —

 

Dividend and interest income

 

 

1,036 

 

1,423 

 

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

 

 

(43,050)

 

(29,650)

 

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

 

 

(1,329)

 

(12,702)

 

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

 

 

(410)

 

(45,838)

 

Other, net

 

 

(24)

 

(45)

 

Net earnings (loss) before income taxes

 

 

4,933 

 

(91,348)

 

Income tax benefit (expense)

 

 

385 

 

33,633 

 

Net earnings (loss) attributable to Liberty Broadband shareholders

 

$

5,318 

 

(57,715)

 

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

 

$

0.05 

 

(0.65)

 

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

 

 

0.05 

 

(0.65)

 

 

See accompanying notes to the condensed consolidated financial statements.

I-3


 

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2015

    

2014

 

 

 

(amounts in thousands)

 

Net earnings (loss)

    

$

5,318 

 

(57,715)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(251)

 

(2,417)

 

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

 

 

326 

 

1,102 

 

Other comprehensive earnings (loss), net of taxes

 

 

75 

 

(1,315)

 

Comprehensive earnings (loss) attributable to Liberty Broadband shareholders

 

$

5,393 

 

(59,030)

 

 

See accompanying notes to the condensed consolidated financial statements.

I-4


 

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Cash flows from operating activities:

    

 

    

    

    

 

Net earnings (loss)

 

$

5,318 

 

(57,715)

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

3,244 

 

1,623 

 

Stock-based compensation

 

 

1,355 

 

456 

 

Excess tax benefit from stock-based compensation

 

 

(2,001)

 

 —

 

Share of (earnings) losses of affiliates

 

 

43,050 

 

29,650 

 

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

 

 

1,329 

 

12,702 

 

(Gain) loss on dilution of investment in affiliate

 

 

410 

 

45,838 

 

Deferred income tax expense (benefit)

 

 

(22,721)

 

(45,416)

 

Other, net

 

 

(586)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Current and other assets

 

 

(89,602)

 

240 

 

Payables and other liabilities

 

 

75,126 

 

57,881 

 

Net cash provided by operating activities

 

 

14,922 

 

45,261 

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(75)

 

(139)

 

Cash paid for acquisitions, net of cash acquired

 

 

 —

 

(48,088)

 

Amounts loaned to former parent

 

 

 —

 

(60,306)

 

Repayments by former parent on loan receivable

 

 

 —

 

18,980 

 

Other investing activities, net

 

 

(3)

 

(2)

 

Net cash used in investing activities

 

 

(78)

 

(89,555)

 

Cash flows from financing activities:

 

 

 

 

 

 

Cash received from rights offering

 

 

697,309 

 

 —

 

Proceeds from issuances of financial instruments

 

 

30,158 

 

32,415 

 

Payments from settlements of financial instruments

 

 

(30,158)

 

(32,415)

 

Excess tax benefit from stock-based compensation

 

 

2,001 

 

 —

 

Contribution from (distribution to) former parent, net

 

 

 —

 

48,100 

 

Other financing activities, net

 

 

4,164 

 

 —

 

Net cash provided by financing activities

 

 

703,474 

 

48,100 

 

Net increase in cash

 

 

718,318 

 

3,806 

 

Cash and cash equivalents, beginning of period

 

 

44,809 

 

9,251 

 

Cash and cash equivalents, end of period

 

$

763,127 

 

13,057 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

I-5


 

 

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)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

5,318 

 

5,318 

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

75 

 

 —

 

75 

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

1,283 

 

 —

 

 —

 

1,283 

 

Issuance of common stock upon exercise of stock options

 

 

 —

 

 —

 

 —

 

 

106 

 

 —

 

 —

 

107 

 

Excess tax benefits from stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

2,001 

 

 —

 

 —

 

2,001 

 

Common stock issued pursuant to the rights offering

 

 

 —

 

 —

 

 —

 

173 

 

697,136 

 

 —

 

 —

 

697,309 

 

Balance at March 31, 2015

 

$

 —

 

261 

 

25 

 

746 

 

3,535,899 

 

7,993 

 

(344,062)

 

3,200,862 

 

 

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 (“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 million. The subscription rights were issued to raise capital for general corporate purposes of Liberty Broadband. The Broadband Spin-Off and rights offering are intended to be tax-free to stockholders of Liberty and Liberty Broadband, respectively. 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 Company considers (i) the application of the equity method of accounting for investments in affiliates, (ii) the fair value

I-7


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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 (“FASB”) issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 but a proposal has been issued to extend the effective date to those fiscal years beginning after December 31, 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 investments that are accounted for using the equity method. Liberty Broadband does not control the decision making process or business management practices of these affiliates. Accordingly, Liberty Broadband 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, Liberty Broadband 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 Liberty Broadband's condensed consolidated financial statements.

 

 

Spin-Off of Liberty Broadband from Liberty Media Corporation

Following the Broadband Spin-Off, Liberty and Liberty Broadband operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Broadband Spin-Off, Liberty and Liberty Broadband entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Broadband Spin-Off and to provide for an orderly transition. These agreements include a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Broadband Spin-Off, certain conditions to the Broadband Spin-Off and provisions governing the relationship between Liberty Broadband and Liberty with respect to and resulting from the Broadband Spin-Off. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and Liberty Broadband and other agreements related to tax matters. Among other things, pursuant to the tax sharing agreement, Liberty Broadband has agreed to indemnify Liberty, subject to certain limited exceptions, for losses and taxes resulting from the Broadband Spin-Off to the extent such losses or taxes result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by Liberty Broadband (applicable to actions or failures to act by Liberty Broadband and its subsidiaries following the completion of the Broadband Spin-Off). Pursuant to the services agreement, Liberty provides Liberty Broadband with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, Liberty Broadband shares office space with Liberty and related amenities at Liberty’s corporate headquarters. Liberty Broadband will reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services and for costs that will be negotiated semi-annually. Under these various agreements, approximately $891 thousand was reimbursable to Liberty for the three months ended March 31, 2015. 

I-8


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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 $890 thousand are included in selling, general and administrative expenses for the three months ended March 31, 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) 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 months ended March 31, 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.

 

 

 

 

 

 

 

 

Liberty Broadband Common Stock

 

 

 

Three months

 

Three months

 

 

 

ended

 

ended

 

 

    

March 31, 2015

    

March 31, 2014

 

 

 

numbers of shares in thousands

 

Basic EPS

 

100,359 

 

88,343 

 

Potentially dilutive shares

 

584 

 

NA

 

Diluted EPS

 

100,943 

 

88,343 

 

 

 

 

I-9


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

(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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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 and cash equivalents

 

$

754,467 

 

754,467 

 

 —

 

36,002 

 

36,002 

 

 —

 

Short-term marketable securities

 

$

9,004 

 

9,004 

 

 —

 

9,001 

 

9,001 

 

 —

 

Available-for-sale securities

    

$

355,202 

    

355,202 

    

 —

    

360,762 

    

360,762 

    

 —

 

Time Warner Cable financial instruments (1) (2)

 

$

(71,530)

 

 —

 

(71,530)

 

(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 expires during February 2016. Additionally, as of December 31, 2014 and March 31, 2015, 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 was scheduled to expire in May 2015. The Company cash settled this contract on April 1, 2015 for $36.7 million.

(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 option strike price of $161.62 per share. The liability associated with this instrument is included in the Other liabilities line item on the face of the condensed consolidated balance sheet as of March 31, 2015. In connection with this collar agreement, the Company also entered into a revolving loan agreement with an availability of $234 million (see 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

 

21.4 

%

 —

26.48 

%

 

Interest rate

 

0.41 

%

 —

0.56 

%

 

Dividend yield

 

%

 —

0.24 

%

 

 

I-10


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Charter warrants (1)

    

$

 —

    

(15,212)

 

Time Warner Cable investment and financial instruments

 

 

(1,329)

 

2,510 

 

 

 

$

(1,329)

 

(12,702)

 


(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:

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(amounts in thousands)

 

Time Warner Cable

 

$

354,460 

 

359,615 

 

Other equity securities

 

 

742 

 

1,147 

 

Total investments in available-for-sale securities

 

$

355,202 

 

360,762 

 

Unrealized Holding Gains and Losses

As of March 31, 2015 and December 31, 2014, the gross unrealized holding gains related to investment in AFS securities were $415 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 of approximately $1.2 billion on hand and new margin loan arrangements. Liberty allocated the purchase price between the shares of common stock and the warrants acquired in the transaction by determining the fair value of the publicly traded warrants and allocating the remaining balance to the shares acquired, which resulted in an excess basis in the investment of $2,532.3 million. The investment in Charter is accounted for as an equity method affiliate based on the ownership interest obtained and the board seats held by individuals appointed by Liberty.

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 March 31, 2015, the carrying value of Liberty Broadband’s ownership in Charter was approximately $2,456 million. The market value of Liberty Broadband’s ownership in Charter as of March 31, 2015 was approximately $5,569 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 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 $2,436 million as of March 31, 2015 and has been allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

Property and equipment

    

$

414 

 

Customer relationships

 

 

640 

 

Franchise fees

 

 

1,451 

 

Trademarks

 

 

36 

 

Goodwill

 

 

958 

 

Debt

 

 

(213)

 

Deferred income tax liability

 

 

(850)

 

 

 

$

2,436 

 

 

Upon acquisition, Liberty ascribed remaining useful lives of 7 years and 13 years to property and equipment and customer relationships, respectively, and indefinite lives to franchise fees, trademarks and goodwill. Outstanding debt is amortized over the contractual period using the effective interest rate method. Amortization related to debt and intangible assets with identifiable useful lives is included in the Company’s share of earnings (losses) from affiliates line item in the accompanying condensed consolidated statements of operations and aggregated $22.5 million and $20.2 million, net of related taxes, for the three months ended March 31, 2015 and 2014, respectively.

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 $410 thousand and $45.8 million during the three months ended March 31, 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 replace 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 are to consider and negotiate for a period of 30 days in good faith, amendments to the terms of the Bright House Stockholders Agreement that may be desirable to consummate the Bright House Transaction. No party is under any obligation to reach such an agreement and the Bright House Stockholders Agreement may be terminated by any party at any time within a 30 day period immediately following the expiration of the 30 day negotiation period.

I-13


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

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

Charter condensed consolidated balance sheet

 

 

 

 

 

 

 

 

 

    

March 31, 2015

 

December 31, 2014

 

Current assets

 

$

7,502 

 

371 

 

Property and equipment, net

 

 

8,275 

 

8,373 

 

Goodwill

 

 

1,168 

 

1,168 

 

Intangible assets, net

 

 

7,048 

 

7,111 

 

Other assets

 

 

417 

 

7,527 

 

Total assets

 

$

24,410 

 

24,550 

 

Current liabilities

 

$

8,569 

 

1,635 

 

Deferred income taxes

 

 

1,706 

 

1,674 

 

Long-term debt

 

 

13,981 

 

21,023 

 

Other liabilities

 

 

77 

 

72 

 

Equity

 

 

77 

 

146 

 

Total liabilities and shareholders’ equity

 

$

24,410 

 

24,550 

 

 

Charter condensed consolidated statement of operations

 

 

 

 

 

 

 

 

    

Three months

 

Three months

 

 

 

ended

 

ended

 

 

 

March 31, 2015

 

March 31, 2014

 

Revenue

$

2,362 

 

2,202 

 

Cost and expenses:

 

 

 

 

 

Operating costs and expenses (excluding depreciation and amortization)

 

(1,581)

 

(1,447)

 

Depreciation and amortization

 

(514)

 

(505)

 

Other operating expenses, net

 

(18)

 

(10)

 

 

 

(2,113)

 

(1,962)

 

Operating income

 

249 

 

240 

 

Interest expense

 

(289)

 

(211)

 

Other income (expense), net

 

(6)

 

(2)

 

Income tax expense (benefit)

 

(35)

 

(64)

 

Net loss

$

(81)

 

(37)

 

 

 

 

 

 

 

 

 

 

I-14


 

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 three months ended March 31, 2015.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Acquired patents

    

$

8,822 

    

(5,986)

    

2,836 

    

8,822 

    

(5,801)

    

3,021 

 

Customer relationships

 

 

10,212 

 

(3,053)

 

7,159 

 

10,212 

 

(2,712)

 

7,500 

 

Tradename

 

 

2,788 

 

(909)

 

1,879 

 

2,788 

 

(788)

 

2,000 

 

Capitalized software

 

 

10,991 

 

(10,784)

 

207 

 

10,991 

 

(10,597)

 

394 

 

 

 

$

32,813 

 

(20,732)

 

12,081 

 

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. Beginning January 1, 2015, TruePosition will amortize 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 $834 thousand and $962 thousand for the three months ended March 31, 2015 and 2014, respectively.

The estimated future amortization expense for the next five years related to intangible assets with definite lives as of March 31, 2015 is as follows (amounts in thousands):

 

 

 

 

 

Remainder of 2015

    

$

2,044 

 

2016

 

$

2,674 

 

2017

 

$

2,608 

 

2018

 

$

2,160 

 

2019

 

$

1,731 

 

 

 

 

 

 

 

(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

I-15


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

purchase shares of Charter common stock. As of March 31, 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 March 31, 2015, 7.0 million shares of Charter with a value of $1.4 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. No amounts were drawn on this loan prior to March 31, 2015. The shares of Time Warner Cable underlying the collar serve as collateral for borrowings under the revolving loan agreement. 1.7 million shares of Time Warner Cable with a market value of $149.88 per share were pledged as collateral for this arrangement as of March 31, 2015. On April 7, 2015, Liberty Broadband drew $40 million on this loan, which is the amount used to match the outstanding call liability. Borrowings outstanding under the revolving loan agreement bear 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 is 0.12% per annum. This agreement expires during March 2017.

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 March 31, 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 months ended March 31, 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.

I-16


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation for the three months ended March 31, 2015 and 2014 (amounts in thousands):

 

 

 

 

 

 

 

 

 

Three months

 

 

 

ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Operating expense

    

$

 —

    

32 

 

Selling, general and administrative

 

 

1,331 

 

332 

 

Research and development

 

 

24 

 

92 

 

 

 

$

1,355 

 

456 

 

 

Liberty Broadband – Grants of Stock Options

During the three months ended March 31, 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-17


 

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

 

(16)

 

$

30.58 

 

 

 

 

 

Forfeited/Cancelled

 

(1)

 

 

34.24 

 

 

 

 

 

Outstanding at March 31, 2015

 

790 

 

$

32.25 

 

4.0 

 

$

19 

Exercisable at March 31, 2015

 

674 

 

$

31.98 

 

3.8 

 

$

17 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

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

 

 

$

53.86 

 

 

 

 

 

Exercised

 

(69)

 

$

31.96 

 

 

 

 

 

Forfeited/cancelled

 

(1)

 

 

34.22 

 

 

 

 

 

Outstanding at March 31, 2015

 

3,070 

 

$

40.04 

 

5.3 

 

$

51 

Exercisable at March 31, 2015

 

1,326 

 

$

31.94 

 

3.8 

 

$

33 

 

As of March 31, 2015, the total unrecognized compensation cost related to unvested Awards was approximately $24 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 3.1 years.

As of March 31, 2015, Liberty reserved 3.9 million shares of Series A and Series C common stock for issuance under exercise privileges of outstanding stock Awards.

TruePosition Equity Incentive Plans

There were no phantom stock appreciation rights or phantom stock units granted during the three months ended March 31, 2015. As of March 31, 2015, the fair value of outstanding PARs and PSUs was approximately $2.6 million. As of March 31, 2015, $1.6 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-18


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

(9) Related Party Transactions

During the three months ended March 31, 2014, certain of TruePosition’s costs and expenses were charged to TruePosition by Liberty. The amounts due to Liberty and the activities for the three months ended March 31, 2014 is summarized as follows (amounts in thousands):

 

 

 

 

 

 

    

2014

 

Receivable at beginning of year

 

$

(5,953)

 

Cost and expenses charged by Liberty

 

 

1,252 

 

Amounts due under the tax-sharing arrangement

 

 

10,159 

 

Transfer of related party receivable to (from) note receivable

 

 

5,306 

 

Payments to Liberty

 

 

(893)

 

Payable at end of period

 

$

9,871 

 

 

Historically, TruePosition also had an intercompany note arrangement with Liberty under which funds could be advanced to Liberty and remitted back to TruePosition as needed. The note bore interest at the three-month LIBOR plus 2%. During September 2014, prior to the completion of the Broadband Spin-Off, Liberty remitted back to TruePosition all principal and accrued interest related to this note and this arrangement was extinguished. Accordingly, no amounts are outstanding pursuant to this arrangement at March 31, 2015 or December 31, 2014.

Prior to the completion of the Broadband Spin-Off, TruePosition was party to certain tax sharing arrangements with Liberty (or its former affiliate). Under these tax-sharing arrangements, TruePosition had been obligated to make cash payments to Liberty (or its former affiliate) in each year TruePosition generated positive taxable income, determined as if TruePosition filed a separate tax return. The amount of such payment had been equal to the amount of TruePosition’s taxable income (as so determined) multiplied by the highest corporate tax rate in effect for the applicable tax jurisdiction. If on a separate return basis, TruePosition would have a net operating loss or net tax credit for a particular year, and such loss or credit could be utilized on the actual tax returns filed by Liberty (or its former affiliate), then TruePosition would be entitled to reduce current and future payments to Liberty (or its former affiliate) by the amount of such tax benefit. During the three months ended March 31, 2014, $5.3 million due to TruePosition from Liberty was transferred to the note receivable from Liberty under this arrangement. During October 2014, prior to the Broadband Spin-Off, TruePosition’s income tax receivable from Liberty was transferred to Liberty Broadband and the tax sharing arrangement between Liberty and TruePosition was extinguished.

 

(10) Commitments and Contingencies

Leases

TruePosition leases various properties under operating leases expiring at various times through 2018. TruePosition’s principal facility is under lease through December 2017. Total rental expense was $692 thousand and $798 thousand for each of the three months ended March 31, 2015 and 2014, respectively.

General Litigation

In the ordinary course of business, the Company and its consolidated companies are parties to legal proceedings and claims involving alleged infringement of third-party intellectual property rights, defamation, and other claims. Although it is reasonably possible that the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.

Litigation

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

On September 10, 2010, Skyhook Wireless, Inc. filed a patent infringement lawsuit in the U.S. District Court for the District of Massachusetts against Google, Inc. In March 2013, Skyhook amended its lawsuit to add additional claims. In total, at the time the case was to be tried, Skyhook alleged that Google infringed on eight Skyhook patents involving location technology and sought an injunction and/or award of damages in an amount to be determined at trial. The case had been scheduled to be tried before a jury commencing March 9, 2015. However, on March 5, 2015, the parties advised the District Court that the case had been settled and thereby dismissed the action without costs and without prejudice to the right, upon good cause shown within 45 days, to reopen the action if the settlement was not consummated. On March 27, 2015, the parties consummated a final settlement agreement and on April 24, 2015, Google paid Skyhook settlement consideration of $90 million. In return for payment of the settlement consideration, Google received dismissal of the action with prejudice, a license to the existing Skyhook patents and patent applications (and their continuations, divisionals, continuations-in-part), a three-year covenant not to sue (subject to limited exceptions) and a mutual release of claims. All terms of the settlement were known and agreed to prior to March 31, 2015, therefore the settlement was recorded during the first quarter of 2015. The settlement amount of $90 million is included in Trade and other receivables, net and approximately $29.5 million for legal fees is included in Accounts payable and accrued liabilities at March 31, 2015. The net impact from the settlement on the statement of operations for the three months ended March 31, 2015, after legal fees, is $60.5 million.  

Indemnification Claims

In the normal course of business, TruePosition provides indemnification to certain customers against specified claims that might arise against those customers from the use of TruePosition’s products. To date, TruePosition has not had to reimburse any of its customers for any losses related to these indemnification provisions. However, six such claims are currently pending and are described below. TruePosition is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations, although TruePosition’s liabilities in certain of those arrangements are customarily limited in various respects, including monetarily.

TruePosition’s former customer, T-Mobile, has made two indemnification claims against TruePosition. In September, 2008, T-Mobile requested that TruePosition indemnify it for damages (including defense costs) that it may incur in a patent infringement action that Emsat Advanced Geolocation, LLC (“Emsat”) filed against T-Mobile. TruePosition is not a party to the suit. TruePosition has denied that it is obligated to indemnify T-Mobile and believes that the equipment that it has supplied to T-Mobile is not covered by the patent claims that Emsat is asserting against T-Mobile. T-Mobile has not yet formally pursued its indemnification claims in a civil court action, but has indicated its intention to do so after the infringement action is resolved. In March 2014, T-Mobile requested that TruePosition indemnify it for

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

damages (including defense costs) that it may incur in a patent infringement action that Guidance IP LLC (“Guidance”) filed against T-Mobile. TruePosition is not a party to the suit. TruePosition has indicated a willingness to participate in the defense of the action, but has not yet received a response from T-Mobile.

TruePosition’s customer, AT&T, has made four indemnification claims against TruePosition. In October 2008, AT&T requested TruePosition to indemnify it for damages (including defense costs) that it may incur relating to the Emsat litigation described in the preceding paragraph (to which AT&T is a party). In June 2009, AT&T requested TruePosition to indemnify it for damages (including defense costs) that it may incur relating to a lawsuit filed against AT&T by Tendler Cellular of Texas, LLC (“Tendler”) (to which the Company is not a party). This action relates to TruePosition’s subsidiary, Useful Networks, Inc., whose operations were discontinued in 2010. In June 2011, AT&T requested TruePosition to indemnify it for damages (including defense costs) that it may incur relating to a lawsuit filed against AT&T by Tracbeam, LLC (to which Company is not a party). In April 2014, AT&T requested TruePosition to indemnify it for damages (including defense costs) that it may incur relating to a lawsuit filed against AT&T by Guidance (to which Company is not a party). TruePosition has denied that it is obligated to indemnify AT&T with respect to the Emsat, Tendler and Guidance cases. AT&T has not yet formally pursued its indemnification claims in a civil court action and it is unclear at this time whether or not it will do so. With respect to Tracbeam, AT&T has determined that TruePosition’s total allocated contribution is $132 thousand and has invoiced TruePosition accordingly. TruePosition has informed AT&T that TruePosition believes that the allocation method employed by AT&T is flawed and that the actual amount owed is less than $132 thousand.

Certain Risks and Concentrations

The TruePosition business is subject to certain risks and concentrations including dependence on relationships with its customers. TruePosition has one significant customer, the loss of which would have a material adverse effect on the Company’s business. For the three months ended March 31, 2015 and 2014, this customer accounted for 74% and 84%, respectively, of the Company’s total revenue.

Off-Balance Sheet Arrangements

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

(11) Segment Information

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

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

Liberty Broadband defines Adjusted OIBDA as revenue less operating expenses and selling, general and administrative expenses (excluding stock-based compensation). Liberty Broadband believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform

I-21


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net earnings, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty Broadband generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

For the three months ended March 31, 2015, Liberty Broadband has identified the following consolidated company and equity method investment as its reportable segments:

·

TruePosition—a wholly-owned subsidiary of the Company that develops and markets technology for locating wireless phones and other wireless devices on a cellular network, enabling wireless carriers and government agencies to provide public safety E-9-1-1 services domestically and services in support of national security and law enforcement worldwide. In addition, TruePosition acquired Skyhook in 2014, which operates a global location network providing hybrid wireless positioning technology and contextual location intelligence solutions worldwide.

·

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

Liberty Broadband’s operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments that are also consolidated companies are the same as those described in the Company’s summary of significant accounting policies in the Company’s annual financial statements. We have included amounts attributable to Charter in the tables below. Although Liberty Broadband owns less than 100% of the outstanding shares of Charter, 100% of the Charter amounts are included in the schedule below and subsequently eliminated in order to reconcile the account totals to the Liberty Broadband condensed consolidated financial statements.

Performance Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31,

 

 

 

 

2015

 

2014

 

 

 

 

 

 

Adjusted

 

 

 

Adjusted

 

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

 

(amounts in thousands)

 

TruePosition

    

$

13,316 

    

(2,519)

    

16,921 

    

(2,457)

 

Charter

 

 

2,362,000 

 

782,000 

 

2,202,000 

 

757,000 

 

Corporate and other

 

 

 —

 

(2,916)

 

 —

 

 —

 

 

 

 

2,375,316 

 

776,565 

 

2,218,921 

 

754,543 

 

Eliminate equity method affiliate

 

 

(2,362,000)

 

(782,000)

 

(2,202,000)

 

(757,000)

 

Consolidated Liberty Broadband

 

$

13,316 

 

(5,435)

 

16,921 

 

(2,457)

 

 

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

Total

 

Investments

 

Capital

 

 

 

assets

 

in affiliates

 

expenditures

 

 

 

(amounts in thousands)

 

TruePosition

    

$

235,432 

    

    

75 

 

Charter

 

 

24,410,000 

 

 

351,000 

 

Corporate and other

 

 

3,534,779 

 

2,455,859 

 

 

 

 

 

28,180,211 

 

2,455,859 

 

351,075 

 

Eliminate equity method affiliate

 

 

(24,410,000)

 

 —

 

(351,000)

 

Consolidated Liberty Broadband

 

$

3,770,211 

 

2,455,859 

 

75 

 

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

 

 

 

 

 

 

 

 

 

 

Three months

 

 

 

ended March 31,

 

 

 

2015

 

2014

 

 

 

 

(amounts in thousands)

 

Consolidated segment Adjusted OIBDA

    

$

(5,435)

    

(2,457)

 

Stock-based compensation

 

 

(1,355)

 

(456)

 

Depreciation and amortization

 

 

(3,244)

 

(1,623)

 

Gain on legal settlement

 

 

60,505 

 

 —

 

Interest expense

 

 

(1,761)

 

 —

 

Dividend and interest income

 

 

1,036 

 

1,423 

 

Share of earnings (loss) of affiliates

 

 

(43,050)

 

(29,650)

 

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

 

 

(1,329)

 

(12,702)

 

Gain (loss) on dilution of investment in affiliate

 

 

(410)

 

(45,838)

 

Other, net

 

 

(24)

 

(45)

 

Earnings (loss) before income taxes

 

$

4,933 

 

(91,348)

 

 

 

 

 

 

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

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

·

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

 

·

the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, video provided over the Internet and providers of advertising over the Internet;

 

·

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

 

·

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

 

·

the development and deployment of new products and technologies, including cloud-based user interface, Spectrum Guide®, downloadable security for set top boxes;

 

·

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

 

·

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

 

·

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