Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

For the quarterly period ended September 30, 20192020

OR

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

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

For the transition period from                to

Commission File No. 001-38385

GCI LIBERTY, INC.

(Exact name of Registrant as specified in its charter)

Delaware

92-0072737

Delaware92-0072737

(State or other jurisdiction of

(I.R.S Employer

incorporation or organization)

Identification No.)


12300 Liberty Boulevard

Englewood,

Englewood,

Colorado

Colorado

80112

(Address of principal executive offices)

(Zip Code)


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


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

Title of each class

Trading Symbols

Name of exchange on which registered

Series A Common Stock par value $0.01 per share

GLIBA

GLIBA

The Nasdaq Stock Market LLC

Series A Cumulative Redeemable preferred stock par value $0.01 per share

GLIBP

GLIBP

The Nasdaq Stock Market LLC

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


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


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

Large Accelerated Filer

Accelerated Filer

Large

Non-
accelerated filerFiler

Smaller Reporting Company

Accelerated filer

Non-accelerated filerSmaller reporting company

Emerging growth company

Growth
Company


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


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


The number of shares outstanding of the registrant'sregistrant’s classes of common stock as of October 31, 20192020 was:


101,211,995

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

4,439,093

4,488,568 shares of Series B common stock

Table of Contents



TABLE OF CONTENTS


Item 1.

I-3

I-5

I-6

I-7

I-8

I-10

Item 2.

I-25

Item 3.

I-37

Item 4.

I-38

Item 1.

II-1

Item 1A.

Risk Factors

II-1

Item 2.

II-3

Item 6.

II-4

II-6


I-2



GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

    

September 30, 

    

December 31, 

    

2020

    

2019

amounts in thousands

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

552,604

 

569,520

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

 

283,687

 

114,435

Other current assets

 

61,593

 

43,868

Total current assets

 

897,884

 

727,823

Investments in equity securities (note 4)

 

3,350,749

 

2,605,293

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

 

157,484

 

167,643

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

 

6,097,955

 

5,367,242

Property and equipment, net

 

1,045,585

 

1,090,901

Intangible assets not subject to amortization (note 6)

 

 

  

Goodwill

 

830,268

 

855,837

Cable certificates

 

305,000

 

305,000

Other

 

37,500

 

41,500

 

1,172,768

 

1,202,337

Intangible assets subject to amortization, net (note 6)

 

356,327

 

391,979

Tax sharing receivable

 

88,349

 

84,534

Other assets, net

 

192,741

 

295,693

Total assets

$

13,359,842

 

11,933,445

See accompanying notes to interim condensed consolidated financial statements.

I-3

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

    

September 30, 

    

December 31, 

    

2020

    

2019

amounts in thousands,

except share amounts

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued liabilities

$

117,728

 

92,893

Deferred revenue

 

26,748

 

27,886

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

 

823,166

 

3,008

Indemnification obligation (note 3)

 

309,541

 

202,086

Other current liabilities

 

84,161

 

69,149

Total current liabilities

 

1,361,344

 

395,022

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

 

2,599,521

 

3,263,210

Obligations under finance leases and tower obligations, excluding current portion

 

93,742

 

97,507

Long-term deferred revenue

 

48,724

 

57,986

Deferred income tax liabilities

 

1,865,998

 

1,527,109

Preferred stock (note 8)

 

178,066

 

178,002

Derivative instrument (note 3)

 

63,456

 

71,305

Other liabilities

 

116,301

 

133,020

Total liabilities

 

6,327,152

 

5,723,161

Equity

 

  

 

  

Stockholders’ equity:

 

  

 

  

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

 

1,014

 

1,013

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

 

45

 

44

Series C common stock, $0.01 par value. Authorized 1,040,000,000 shares; 0 issued and outstanding at September 30, 2020 and December 31, 2019

 

0

 

0

Additional paid-in capital

 

3,231,926

 

3,221,885

Accumulated other comprehensive earnings (loss), net of taxes

 

8,148

 

(4,084)

Retained earnings

 

3,782,834

 

2,982,626

Total stockholders' equity

 

7,023,967

 

6,201,484

Non-controlling interests

 

8,723

 

8,800

Total equity

 

7,032,690

 

6,210,284

Commitments and contingencies (note 10)

 

 

  

Total liabilities and equity

$

13,359,842

 

11,933,445

See accompanying notes to interim condensed consolidated financial statements.

I-4

GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
    
 September 30, December 31,

2019 2018

amounts in thousands
Assets
 
Current assets:   
Cash and cash equivalents$410,130
 491,257
Trade and other receivables, net of allowance for doubtful accounts of $18,248 and $7,555, respectively190,779
 182,600
Current portion of tax sharing receivable7,813
 36,781
Other current assets43,222
 40,100
Total current assets651,944
 750,738
Investments in equity securities (note 5)2,213,589
 1,533,517
Investments in affiliates, accounted for using the equity method (note 6)168,839
 177,030
Investment in Liberty Broadband measured at fair value (note 6)4,467,508
 3,074,373
Property and equipment, net1,110,080
 1,184,606
Intangible assets not subject to amortization:

 

Goodwill855,837
 855,837
Cable certificates305,000
 305,000
Wireless licenses191,697
 190,000
Other16,500
 16,500

1,369,034
 1,367,337
Intangible assets subject to amortization, net (note 7)399,043
 436,006
Tax sharing receivable76,812
 65,701
Other assets, net188,454
 71,514
Total assets$10,645,303
 8,660,822
    
   (Continued)
 See accompanying notes to interim condensed consolidated financial statements.

GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 September 30, December 31,
 2019 2018
 amounts in thousands, except share amounts
Liabilities and Equity
 
Current liabilities:
 
Accounts payable and accrued liabilities$83,959
 100,334
Deferred revenue28,520
 31,743
Current portion of debt, net of deferred financing costs (note 8)902,368
 900,759
Other current liabilities71,679
 47,958
Total current liabilities1,086,526
 1,080,794
Long-term debt, net, including $579,291 and $462,336 measured at fair value, respectively (note 8)2,088,015
 1,985,275
Obligations under finance leases and tower obligations, excluding current portion (note 9)99,158
 122,245
Long-term deferred revenue59,136
 65,954
Deferred income tax liabilities1,272,302
 793,696
Preferred stock (note 10)177,532
 177,103
Derivative instrument78,061
 
Indemnification obligation (note 4)136,833
 78,522
Other liabilities140,971
 50,543
Total liabilities5,138,534
 4,354,132
Equity

 

Stockholders’ equity:

 

Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 101,211,071 shares at September 30, 2019 and 102,058,816 shares at December 31, 20181,012
 1,021
Series B common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,439,460 shares at September 30, 2019 and 4,441,609 shares at December 31, 201844
 44
Series C common stock, $.01 par value. Authorized 1,040,000,000 shares; no shares issued
 
Additional paid-in capital3,225,883
 3,251,957
Accumulated other comprehensive earnings (loss), net of taxes(489) 168
Retained earnings2,270,837
 1,043,933
Total stockholders' equity5,497,287
 4,297,123
Non-controlling interests9,482
 9,567
Total equity5,506,769
 4,306,690
Commitments and contingencies (note 13)

 


Total liabilities and equity$10,645,303
 8,660,822
    
 See accompanying notes to interim condensed consolidated financial statements.

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands, except per share amounts

Revenue

$

246,892

 

227,044

707,511

 

662,346

Operating costs and expenses:

 

  

 

  

 

  

 

  

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

 

69,561

 

72,637

 

210,062

 

209,962

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

 

106,571

 

93,597

 

289,278

 

305,184

Depreciation and amortization expense

 

60,688

 

66,466

 

184,856

 

200,035

Insurance proceeds and restructuring, net

 

 

(1,482)

 

 

236

 

236,820

 

231,218

 

684,196

 

715,417

Operating income (loss)

 

10,072

 

(4,174)

 

23,315

 

(53,071)

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense (including amortization of deferred loan fees)

 

(29,722)

 

(38,353)

 

(100,364)

 

(116,357)

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

 

(9,035)

 

1,921

 

(7,504)

 

(2,443)

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

 

1,172,685

 

156,165

 

1,199,560

 

1,844,863

Tax sharing agreement

 

26,146

 

2,362

 

30,057

 

18,895

Other, net

 

(7,314)

 

(540)

 

(5,176)

 

13,824

 

1,152,760

 

121,555

 

1,116,573

 

1,758,782

Earnings (loss) before income taxes

 

1,162,832

 

117,381

 

1,139,888

 

1,705,711

Income tax (expense) benefit

 

(338,446)

 

(28,087)

 

(336,776)

 

(478,887)

Net earnings (loss)

 

824,386

 

89,294

 

803,112

 

1,226,824

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

 

(26)

 

(28)

 

(77)

 

(85)

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

$

824,412

 

89,322

803,189

 

1,226,909

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

$

7.81

 

0.85

7.61

 

11.71

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

$

7.74

 

0.84

7.55

 

11.60

See accompanying notes to interim condensed consolidated financial statements.


I-5


GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
        
 Three months ended Nine months ended
 September 30, September 30,

2019 2018 2019 2018

amounts in thousands, except per share amounts
Revenue$227,044
 210,146
 662,346
 504,840
Operating costs and expenses:    

 

Operating expense (exclusive of depreciation and amortization shown separately below)72,637
 64,684
 209,962
 153,797
Selling, general and administrative, including stock-based compensation (note 12)93,597
 102,483
 305,184
 235,617
Insurance proceeds and restructuring, net(1,482) 
 236
 
Depreciation and amortization expense66,466
 62,848
 200,035
 143,257

231,218
 230,015
 715,417
 532,671
Operating income (loss)(4,174) (19,869) (53,071) (27,831)
Other income (expense):    

 

Interest expense (including amortization of deferred loan fees)(38,353) (37,614) (116,357) (81,304)
Share of earnings (losses) of affiliates, net (note 6)1,921
 10,856
 (2,443) 18,714
Realized and unrealized gains (losses) on financial instruments, net (note 4)156,165
 495,509
 1,844,863
 (4,328)
Tax sharing agreement2,362
 2,492
 18,895
 (25,456)
Other, net(540) (834) 13,824
 (982)

121,555
 470,409
 1,758,782
 (93,356)
Earnings (loss) before income taxes117,381
 450,540
 1,705,711
 (121,187)
Income tax (expense) benefit(28,087) (133,284) (478,887) (35,768)
Net earnings (loss)89,294
 317,256
 1,226,824
 (156,955)
Less net earnings (loss) attributable to the non-controlling interests(28) (127) (85) (320)
Net earnings (loss) attributable to GCI Liberty, Inc. shareholders$89,322
 317,383
 1,226,909
 (156,635)
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 3)$0.85
 2.95
 11.71
 (1.45)
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 3)$0.84
 2.91
 11.60
 (1.45)
        
 See accompanying notes to interim condensed consolidated financial statements.

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(Unaudited)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Net earnings (loss)

$

824,386

 

89,294

803,112

 

1,226,824

Other comprehensive earnings (loss), net of taxes:

 

 

  

 

  

 

  

Comprehensive earnings (loss) attributable to debt credit risk adjustments

 

(6,619)

 

(5,477)

 

12,232

 

(657)

Comprehensive earnings (loss)

 

817,767

 

83,817

 

815,344

 

1,226,167

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

 

(26)

 

(28)

 

(77)

 

(85)

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

$

817,793

 

83,845

815,421

 

1,226,252

See accompanying notes to interim condensed consolidated financial statements.


I-6


GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(Unaudited)
        
 Three months ended Nine months ended
 September 30, September 30,
 2019 2018 2019 2018
 amounts in thousands
Net earnings (loss)$89,294
 317,256
 1,226,824
 (156,955)
Other comprehensive earnings (loss), net of taxes:       
Comprehensive earnings (loss) attributable to debt credit risk adjustments(5,477) (5,419) (657) (18,537)
Comprehensive earnings (loss)83,817
 311,837
 1,226,167
 (175,492)
Less comprehensive earnings (loss) attributable to the non-controlling interests(28) (127) (85) (320)
Comprehensive earnings (loss) attributable to GCI Liberty, Inc. shareholders$83,845
 311,964
 1,226,252
 (175,172)
        
 See accompanying notes to interim condensed consolidated financial statements.

GCI LIBERTY, INC. AND SUBSIDIARIES



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 Nine months ended
 September 30,
 2019
2018
 amounts in thousands
Cash flows from operating activities:   
Net earnings (loss)$1,226,824
 (156,955)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:

 

Depreciation and amortization200,035
 143,257
Stock-based compensation expense18,153
 20,926
Share of (earnings) losses of affiliates, net2,443
 (18,714)
Realized and unrealized (gains) losses on financial instruments, net(1,844,863) 4,328
(Gain) loss on lease modification(6,468) 
Deferred income tax expense (benefit)478,850
 36,347
Other, net3,625
 10,121
Change in operating assets and liabilities:

 

Current and other assets39,289
 (73,601)
Payables and other liabilities(35,774) 72,854
Net cash provided (used) by operating activities82,114
 38,563
Cash flows from investing activities:

 

Cash and restricted cash from acquisition of GCI Holdings
 147,958
Capital expended for property and equipment(108,633) (89,376)
Purchase of investments

(48,581)
Proceeds from derivative instrument105,866
 
Settlement of derivative instrument(105,866) 
Other, net6,340

2,699
Net cash provided (used) by investing activities(102,293) 12,700
Cash flows from financing activities:

 

Borrowings of debt325,000
 1,527,250
Repayment of debt, finance lease, and tower obligations(334,275) (88,543)
Repurchases of GCI Liberty common stock(43,910)
(23,893)
Contributions from (distributions to) parent, net
 (1,122,189)
Indemnification payment to Qurate Retail
 (132,725)
Derivative payments
 (80,001)
Other financing activities, net(7,802) (14,957)
Net cash provided (used) by financing activities(60,987) 64,942
Net increase (decrease) in cash, cash equivalents and restricted cash(81,166) 116,205
Cash, cash equivalents and restricted cash at beginning of period492,032
 574,148
Cash, cash equivalents and restricted cash at end of period$410,866
 690,353

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended

September 30, 

    

2020

    

2019

amounts in thousands

Cash flows from operating activities:

 

  

 

  

Net earnings (loss)

$

803,112

 

1,226,824

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

 

  

 

  

Depreciation and amortization

 

184,856

 

200,035

Stock-based compensation expense

 

11,389

 

18,153

Share of (earnings) losses of affiliates, net

 

7,504

 

2,443

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

 

(1,199,560)

 

(1,844,863)

Deferred income tax expense (benefit)

 

336,874

 

478,850

Other, net

 

9,232

 

(2,843)

Change in operating assets and liabilities:

 

  

 

  

Current and other assets

 

(81,460)

 

39,289

Payables and other liabilities

 

(4,048)

 

(35,774)

Net cash provided (used) by operating activities

 

67,899

 

82,114

Cash flows from investing activities:

 

  

 

  

Capital expended for property and equipment

 

(107,247)

 

(108,633)

Proceeds from derivative instrument

 

 

105,866

Settlement of derivative instrument

 

 

(105,866)

Other investing activities, net

 

25,634

 

6,340

Net cash provided (used) by investing activities

 

(81,613)

 

(102,293)

Cash flows from financing activities:

 

  

 

  

Borrowings of debt

 

 

325,000

Repayment of debt, finance leases and tower obligations

 

(6,596)

 

(334,275)

Repurchases of GCI Liberty common stock

 

 

(43,910)

Other financing activities, net

 

(3,060)

 

(7,802)

Net cash provided (used) by financing activities

 

(9,656)

 

(60,987)

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

 

(23,370)

 

(81,166)

Cash, cash equivalents and restricted cash at beginning of period

 

576,150

 

492,032

Cash, cash equivalents and restricted cash at end of period

$

552,780

 

410,866

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

 September 30, December 31,
 2019 2018
 amounts in thousands
Cash and cash equivalents$410,130
 491,257
Restricted cash included in other current assets736
 775
Total cash and cash equivalents and restricted cash at end of period$410,866
 492,032
    
See accompanying notes to condensed consolidated financial statements.

    

September 30, 

December 31, 

2020

2019

amounts in thousands

Cash and cash equivalents

$

552,604

 

569,520

Restricted cash included in other current assets

 

176

 

6,630

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

$

552,780

 

576,150

See accompanying notes to condensed consolidated financial statements.


I-7


GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(Unaudited)
 Series A common stock Series B common stock Parent's Investment Additional paid-in capital Accumulated other comprehensive earnings (loss) Retained earnings Non-controlling interest in equity of subsidiaries Total equity
 amounts in thousands
Balances at January 1, 2019$1,021
 44
 
 3,251,957
 168
 1,043,933
 9,567
 4,306,690
Net earnings (loss)
 
 
 
 
 1,226,909
 (85) 1,226,824
Other comprehensive earnings (loss)
 
 
 
 (657) 
 
 (657)
Stock-based compensation
 
 
 19,539
 
 
 
 19,539
Repurchases of GCI Liberty common stock(10) 
 
 (43,900) 
 
 
 (43,910)
Issuance of common stock upon exercise of stock options1
 
 
 1,696
 
 
 
 1,697
Withholding taxes on net share settlements of stock-based compensation
 
 
 (3,501) 
 
 
 (3,501)
Other
 
 
 92
 
 (5) 
 87
Balances at September 30, 2019$1,012
 44
 
 3,225,883
 (489) 2,270,837
 9,482
 5,506,769
                
Balances at July 1, 2019$1,012
 44
 
 3,219,710
 4,988
 2,181,515
 9,510
 5,416,779
Net earnings (loss)
 
 
 
 
 89,322
 (28) 89,294
Other comprehensive earnings (loss)
 
 
 
 (5,477) 
 
 (5,477)
Stock-based compensation
 
 
 5,775
 
 
 
 5,775
Issuance of common stock upon exercise of stock options
 
 
 391
 
 
 
 391
Withholding taxes on net share settlements of stock-based compensation
 
 
 (70) 
 
 
 (70)
Other
 
 
 77
 
 
 
 77
Balances at September 30, 2019$1,012
 44
 
 3,225,883
 (489) 2,270,837
 9,482
 5,506,769
                
Balances at January 1, 2018$
 
 2,305,440
 
 
 1,914,963
 3,633
 4,224,036
Net earnings (loss)
 
 
 
 
 (156,635) (320) (156,955)
Other comprehensive earnings (loss)
 
 
 
 (18,537) 
 
 (18,537)
Stock-based compensation
 
 
 18,766
 
 
 
 18,766
Series A GCI Liberty stock repurchases
 
 
 (23,893) 
 
 
 (23,893)
Contribution of taxes in connection with HoldCo Split-Off
 
 1,343,834
 
 
 
 
 1,343,834
Contributions from (distributions to) former parent, net
 
 (1,122,189) (2,014) 
 2,014
 
 (1,122,189)
Change in Capitalization in connection with HoldCo Split-Off1,041
 44
 (2,527,085) 2,526,000
 
 
 7,000
 7,000
Issuance of GCI Liberty Stock in connection with the Transactions
 
 
 1,111,206
 
 
 
 1,111,206
Issuance of Indemnification Agreement
 
 
 (281,255) 
 
 
 (281,255)
Distribution to non-controlling interests
 
 
 
 
 
 (3,273) (3,273)
Other
 
 
 (2,830) 
 254
 2,910
 334
Balances at September 30, 2018$1,041
 44
 
 3,345,980
 (18,537) 1,760,596
 9,950
 5,099,074
                
Balances at July 1, 2018$1,046
 44
 
 3,367,534
 (13,118) 1,441,199
 7,167
 4,803,872
Net earnings (loss)
 
 
 
 
 317,383
 (127) 317,256
Other comprehensive earnings (loss)
 
 
 
 (5,419) 
 
 (5,419)
Stock-based compensation
 
 
 6,881
 
 
 
 6,881
Series A GCI Liberty stock repurchases
 
 
 (23,893) 
 
 
 (23,893)
Contribution of taxes in connection with HoldCo Split-Off
 
 (2,383) 
 
 
 
 (2,383)
Contributions from (distributions to) former parent, net
 
 2,471
 (2,014) 
 2,014
 
 2,471
Change in Capitalization in connection with HoldCo Split-Off(5) 
 (88) 93
 
 
 
 
Other
 
 
 (2,621) 
 
 2,910
 289
Balances at September 30, 2018$1,041
 44
 
 3,345,980
 (18,537) 1,760,596
 9,950
 5,099,074
                
                
 See accompanying notes to interim condensed consolidated financial statements.


GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(Unaudited)

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at January 1, 2020

$

1,013

 

44

 

3,221,885

 

(4,084)

 

2,982,626

 

8,800

 

6,210,284

Net earnings (loss)

 

 

 

 

803,189

 

(77)

 

803,112

Other comprehensive earnings (loss), net of taxes

 

 

 

12,232

 

 

 

12,232

Stock-based compensation

 

 

11,477

 

 

 

 

11,477

Issuance of common stock upon exercise of stock options

1

 

1

 

427

 

 

 

 

429

Withholding taxes on net share settlements of stock-based compensation

 

 

(1,811)

 

 

 

 

(1,811)

Other

 

 

(52)

 

 

(2,981)

 

 

(3,033)

Balances at September 30, 2020

$

1,014

 

45

 

3,231,926

 

8,148

 

3,782,834

 

8,723

 

7,032,690

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at July 1, 2020

$

1,013

 

45

 

3,227,258

 

14,767

 

2,958,423

 

8,749

 

6,210,255

Net earnings (loss)

 

 

 

 

 

824,412

 

(26)

 

824,386

Other comprehensive earnings (loss), net of taxes

 

 

 

 

(6,619)

 

 

 

(6,619)

Stock-based compensation

 

 

 

4,822

 

 

 

 

4,822

Issuance of common stock upon exercise of stock options

 

1

 

 

400

 

 

 

 

401

Withholding taxes on net share settlements of stock-based compensation

 

 

 

(555)

 

 

 

 

(555)

Other

 

 

 

1

 

 

(1)

 

 

Balances at September 30, 2020

$

1,014

45

3,231,926

8,148

3,782,834

8,723

7,032,690

See accompanying notes to interim condensed consolidated financial statements.

I-8

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity (continued)

(Unaudited)

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at January 1, 2019

$

1,021

 

44

 

3,251,957

 

168

 

1,043,933

 

9,567

 

4,306,690

Net earnings (loss)

 

 

 

 

1,226,909

 

(85)

 

1,226,824

Other comprehensive earnings (loss), net of taxes

 

 

 

(657)

 

 

 

(657)

Stock-based compensation

 

 

19,539

 

 

 

 

19,539

Repurchases of GCI Liberty common stock

(10)

 

 

(43,900)

 

 

 

 

(43,910)

Issuance of common stock upon exercise of stock options

1

 

 

1,696

 

 

 

 

1,697

Withholding taxes on net share settlements of stock-based compensation

 

 

(3,501)

 

 

 

 

(3,501)

Other

 

 

92

 

 

(5)

 

 

87

Balances at September 30, 2019

$

1,012

 

44

 

3,225,883

 

(489)

 

2,270,837

 

9,482

 

5,506,769

    

    

    

Accumulated

    

    

    

Series A

Series B

Additional

other

Non-controlling

common

common

paid-in

comprehensive

Retained

interest in equity

Total

stock

stock

capital

earnings (loss)

earnings

of subsidiaries

equity

amounts in thousands

Balances at July 1, 2019

$

1,012

 

44

 

3,219,710

 

4,988

 

2,181,515

 

9,510

 

5,416,779

Net earnings (loss)

 

 

 

 

 

89,322

 

(28)

 

89,294

Other comprehensive earnings (loss), net of taxes

 

 

 

 

(5,477)

 

 

 

(5,477)

Stock-based compensation

 

 

 

5,775

 

 

 

 

5,775

Issuance of common stock upon exercise of stock options

 

 

 

391

 

 

 

 

391

Withholding taxes on net share settlements of stock-based compensation

 

 

 

(70)

 

 

 

 

(70)

Other

 

 

 

77

 

 

 

 

77

Balances at September 30, 2019

$

1,012

 

44

 

3,225,883

 

(489)

 

2,270,837

 

9,482

 

5,506,769

See accompanying notes to interim condensed consolidated financial statements.

I-9

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)




(1)  Basis of Presentation


On April 4, 2017,

The accompanying condensed consolidated financial statements include the accounts of GCI Liberty, Interactive Corporation, now knownInc. and its controlled subsidiaries, as Qurate Retail, Inc. ("Qurate Retail")well as other equity securities and equity method investments (collectively, “GCI Liberty”, entered into an Agreementthe “Company”, “us”, “we” and Plan“our”). All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. GCI Liberty is made up of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation and parent company ofits wholly-owned subsidiary, GCI Holdings, LLC ("(“GCI Holdings"Holdings”), and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly‑owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group), were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"Evite, Inc. (“Evite”). Qurate Retail until Evite was sold on September 14, 2020 and LI LLC contributed to GCI Liberty their entire equitynon-controlling interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"),. The sale of Evite did not have a material impact to the Evite,Company’s financial results.  These assets (other than GCI Holdings) were contributed by Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"Qurate Retail"), in exchange for, (a) the issuance to LI LLC ofamong other things, a number of shares ofcontrolling interest in GCI Liberty, Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.


which was subsequently split-off (the "Holdco Split-Off").

The contribution was treated as a reverse acquisition under the acquisition method of accountingaccompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.


Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax‑free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split‑Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty or the Company prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.

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

These notes

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

COVID-19 has not had a material impact on GCI Liberty’s operating results for the three and nine months ended September 30, 2020, however, management has increased certain estimates, including but not limited to, allowance for doubtful accounts. Other than these changes, the Company is not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update the Company’s estimates or judgments or revise the carrying value of its assets or liabilities. The Company’s estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to the condensed consolidatedCompany’s financial statements refer to the combination of GCI Holdings, non‑controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as "GCI Liberty", the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, these financial statements present all periods as consolidated by the Company. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.




GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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


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


I-10

Split‑Off from Qurate Retail

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Following

On August 6, 2020, GCI Liberty and Liberty Broadband entered into a definitive merger agreement under which Liberty Broadband agreed to acquire all of the HoldCo Split‑Off,outstanding shares of GCI Liberty in a stock-for-stock merger (the “Combination”).  Under the terms of the merger agreement each holder of Series A and B common stock of GCI Liberty will receive 0.58 of a share of Series C common stock and Series B common stock, respectively, of Liberty Broadband.  Additionally, holders of a share of Series A Cumulative Redeemable Preferred Stock of GCI Liberty will receive 1 share of Series A Cumulative Redeemable Preferred Stock with mirror terms to be issued by Liberty Broadband.  The Combination was recommended to the Company’s Board of Directors for approval by a special committee composed solely of independent, disinterested directors and advised by independent financial and legal advisors.  The closing of the Combination is subject to certain customary conditions, including: (i) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (ii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (iii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon, (iv) approval of the Liberty Broadband stock issuance by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock present in person or by proxy at the stockholder meeting and entitled to vote thereon and (v) the receipt of any applicable regulatory approvals.  GCI Liberty and Liberty Broadband expect the Combination to close no later than the first quarter of 2021, subject to potential COVID-19 related delays.

GCI Liberty has entered into certain agreements with Qurate Retail and GCI Liberty operate asMedia Corporation ("Liberty Media") (or its subsidiary), all of which are separate, publicly traded companies, and neitherin order to govern certain relationships between the companies. None of these entities have any stock ownership, beneficial or otherwise, in the other. In connection with the HoldCo Split‑Off, Qurate Retail, Liberty Media Corporation ("Liberty Media") (or its subsidiary) and GCI Liberty entered into certain agreements in order to govern certain of the ongoing relationships among the companies after the HoldCo Split‑Off and to provide for an orderly transition. These agreements include an indemnification agreement, a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.


The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Transactions and certain conditions to and provisions governing the relationship between GCI Liberty and Qurate Retail (for accounting purposes a related party of GCI Liberty) with respect to and resulting from the Transactions.. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and GCI Liberty and other agreements related to tax matters. Pursuant to the tax sharing agreement, GCI Liberty has agreed to indemnify Qurate Retail for taxes and tax-related losses resulting from the Holdco Split-Off to the extent such taxes or tax-related losses (i) result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by GCI Liberty (applicable to actions or failures to act by GCI Liberty and its subsidiaries following the completion of the Holdco Split-Off), or (ii) result from Section 355(e) of the Internal Revenue Code applying to the Holdco Split-Off as a result of the Holdco Split-Off being part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent or greater interest (measured by vote or value) in the stock of GCI Liberty (or any successor corporation). Pursuant to the services agreement, Liberty Media provides GCI Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations support. See below for a description of an amendment to the services agreement entered into in December 2019. Under the facilities sharing agreement, GCI Liberty shares office space with Liberty Media and related amenities at its corporate headquarters. GCI Liberty reimburses Liberty Media for direct, out‑of‑pocketout-of-pocket expenses incurred by Liberty Media in providing these services and for costs negotiated semi‑annually. semi-annually.

Liberty Media is a related party of GCI Liberty for accounting purposes as a result of the services agreement. Under these agreements, amountsapproximately $2.0 million and $2.3 million was reimbursable to Liberty Media were approximately $2.3 million and $2.1 million for the three months ended September 30, 2020 and 2019, respectively, and 2018,$6.1 million and $6.8 million and $6.0 millionwas reimbursable to Liberty Media for the nine months ended September 30, 2020 and 2019, and 2018, respectively.


In addition, Qurate Retail and GCI Liberty have agreed to indemnify each other with respect to certain potential losses in respect of the HoldCo Split‑Off.Split-Off. See note 43 for information related to the indemnification agreement.


I-11

Recent Accounting Pronouncements

New Accounting Pronouncements Not Yet Adopted

In August 2018, the Financial Accounting Standards Board ("FASB") issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for the Company in the first quarter of 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.



Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Unaudited)


(2) Acquisition

The

In December 2019, the Company accountedentered into an amendment to the services agreement with Liberty Media in connection with Liberty Media’s entry into a new employment arrangement with Gregory B. Maffei, the Company’s President and Chief Executive Officer ("CEO"). Under the amended services agreement, components of his compensation will either be paid directly to him by each of the Company, Liberty TripAdvisor Holdings, Inc., Liberty Broadband, and Qurate Retail (collectively, the “Service Companies”) or reimbursed to Liberty Media, in each case, based on allocations among Liberty Media and the Service Companies set forth in the amended services agreement, currently set at 14% for the Transactions contemplated under the reorganization agreement using the acquisition method of accounting. Under this method, HoldCo is the acquirer of GCI Liberty. The acquisition price was $1.1 billion (level 1). The application of the acquisition method resulted in the assignment of purchase price to the GCI Liberty assets acquired and liabilities assumed based on our estimates of their acquisition date fair values (primarily level 3). The assets acquired and liabilities assumed, and as discussed within this note, are those assets and liabilities of GCI Liberty prior to the completion of the Transactions. The determination of the fair values of the acquired assets and liabilities (and the determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.

The acquisition price allocation for GCI Liberty is as follows (amounts in thousands):
   
Cash and cash equivalents including restricted cash $147,957
Receivables 171,014
Property and equipment 1,211,392
Goodwill 966,044
Intangible assets not subject to amortization 572,500
Intangible assets subject to amortization 468,737
Other assets 83,422
Deferred revenue (92,561)
Debt, including capital leases (1,707,002)
Other liabilities (251,692)
Deferred income tax liabilities (276,683)
Preferred stock (174,922)
Non-controlling interest (7,000)
  $1,111,206
Company.



Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and non-contractual relationships. Amortizable intangible assets of $468.7 million were acquired and are comprised of a tradename with an estimated useful life of approximately 10 years, customer relationships with a weighted average useful life of approximately 16 years and right-to-use assets with a weighted average useful life of 8 years. Approximately $170.0 million of the acquired goodwill will be deductible for income tax purposes. The determination of the acquisition date fair value of the acquired assets and assumed liabilities is final.

Since the date of the acquisition, included in net earnings (loss) attributable to GCI Liberty shareholders for the three and nine months ended September 30, 2018 is $40.4 million and $35.9 million in losses related to GCI Holdings, respectively. The unaudited pro forma revenue, net earnings and basic and diluted net earnings per common share of GCI Liberty, prepared utilizing the historical financial statements of HoldCo, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the acquisition discussed above occurred on January 1, 2017, are as follows:
  Three months ended Nine months ended
  September 30, 2018
  amounts in thousands, except per share amounts
Revenue $220,737
 664,287
Net earnings (loss) $327,046
 (157,678)
Net earnings (loss) attributable to GCI Liberty shareholders $327,173
 (157,242)
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share $3.04
 (1.46)
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share $3.00
 (1.46)



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



The pro forma results include adjustments directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, revenue, interest expense, stock-based compensation, and the exclusion of transaction related costs. These results also include the impact of the Federal Communications Commission's decision to reduce rates paid to us under the Rural Health Care Program and the new revenue standard. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the acquisition had occurred previously and the Company consolidated the results of GCI Liberty during the periods presented.

(3)

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


Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potentially dilutive shares are excludedExcluded from the computation of diluted EPS during periods in which lossesfor the three months ended September 30, 2020 and 2019 are reported since15 thousand and 0 potential common shares, respectively, because their inclusion would have been antidilutive.  Excluded from diluted EPS for the resultnine months ended September 30, 2020 and 2019 are 15 thousand and 0 potential common shares, respectively, because their inclusion would behave been antidilutive.


Series A and Series B Common Stock

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

    

number of shares in thousands

Basic WASO

105,564

 

104,819

105,536

 

104,800

Potentially dilutive shares (a)

993

 

1,031

797

 

998

Diluted WASO (a)

106,557

 

105,850

106,333

 

105,798

 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 number of shares in thousands
Basic WASO104,819
 107,631
 104,800
 107,693
Diluted WASO105,850
 109,061
 105,798
 107,693
Antidilutive shares excluded from diluted WASO
 
 
 1,499
(a)Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.



(4)

(3) Assets and Liabilities Measured at Fair Value


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


I-12

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

  September 30, 2019 December 31, 2018
Description Total 
Quoted prices
in active
markets
for identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 Total 
Quoted prices
in active
markets
for identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
  amounts in thousands
Cash equivalents $363,026
 363,026
 
 384,071
 384,071
 
Equity securities $2,208,304
 2,208,304
 
 1,529,901
 1,529,901
 
Investment in Liberty Broadband $4,467,508
 4,467,508
 
 3,074,373
 3,074,373
 
Derivative instrument $78,061
 
 78,061
 20,340
 
 20,340
Indemnification obligation $136,833
 
 136,833
 78,522
 
 78,522
Exchangeable senior debentures $579,291
 
 579,291
 462,336
 
 462,336

    

September 30, 2020

    

December 31, 2019

    

    

Quoted

    

    

    

Quoted

    

prices

prices

in active

Significant

in active

Significant

markets

other

markets

other

for identical

observable

for identical

observable

assets

inputs

assets

inputs

Description

Total

(Level 1)

(Level 2)

Total

(Level 1)

(Level 2)

amounts in thousands

Cash equivalents

$

438,545

438,545

533,484

533,484

Equity securities

$

3,345,464

3,345,464

2,600,008

2,600,008

Investment in Liberty Broadband

$

6,097,955

6,097,955

5,367,242

5,367,242

Derivative instrument liability

$

63,456

63,456

71,305

71,305

Indemnification obligation

$

309,541

309,541

202,086

202,086

Exchangeable senior debentures

$

820,035

820,035

658,839

658,839




GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


On June 6, 2017, Qurate Retail purchased 450,000 LendingTree shares and executed a 2‑year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on June 6, 2017 of $170.70 per share and had a floor price of $128.03 per share and a cap price of $211.67 per share. The fair value of the variable forward was derived from a Black‑Scholes‑Merton model using observable market data as the significant inputs.

On April 29, 2019, the Company terminated its previous variable forward and entered into a new 3-year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on April 29, 2019 of $376.35 per share and has a floor price of 0 and has a cap price of $254.00 per share. The fair value of the variable forward was derived from a Black-Scholes-Merton model using observable market data as the significant inputs.


Pursuant

The indemnification liability is due to an indemnification agreement, GCI Liberty has agreedInteractive LLC ("LI LLC") and pertains to indemnify LI LLC for certain payments made to a holderthe ability of holders of LI LLC'sLLC’s 1.75% exchangeable debentures due 2046 (the "1.75% Exchangeable Debentures"). An indemnity obligation in the amount of $281.3 million was recorded upon completion of the HoldCo Split-Off. In June 2018, Qurate Retail repurchased 417,759 bonds of the 1.75% Exchangeable Debentures for approximately $457 million, including accrued interest, and the Company made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million. The remaining indemnification liability due to LI LLC pertains to the holder’s ability to exercise itstheir exchange right according to the terms of the 1.75% Exchangeable Debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification obligation recorded in the accompanying condensed consolidated balance sheets as of September 30, 20192020 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of September 30, 2019,2020, a holder of the 1.75% Exchangeable Debentures does not havehas the ability to exchange and, accordingly, such indemnification obligation is included as a long-termcurrent liability in the accompanying condensed consolidated balance sheets. Additionally, as of September 30, 2019, 332,241 bonds of the 1.75% Exchangeable Debentures remain outstanding.


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


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

  Three months ended Nine months ended
  September 30, September 30,
  2019 2018 2019 2018
  amounts in thousands
Equity securities $90,770
 175,359
 683,808
 (53,681)
Investment in Liberty Broadband 19,207
 366,211
 1,393,135
 (36,706)
Derivative instruments 60,640
 (3,223) (57,721) 69,329
Indemnification obligation (3,485) (14,937) (58,311) 48,671
Exchangeable senior debentures (10,967) (27,901) (116,048) (31,941)
  $156,165
 495,509
 1,844,863
 (4,328)



    

Three months ended

Nine months ended

    

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Equity securities

$

612,465

90,770

746,406

683,808

Investment in Liberty Broadband

 

807,114

19,207

730,713

1,393,135

Derivative instruments

 

(2,019)

60,640

7,849

(57,721)

Indemnification obligation

 

(94,871)

(3,485)

(107,456)

(58,311)

Exchangeable senior debentures

 

(150,004)

(10,967)

(177,952)

(116,048)

$

1,172,685

156,165

1,199,560

1,844,863

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

I-13

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

debt is exchangeable. The Company isolates the portion of the unrealized gain (loss) recognized onattributable to the Company’s exchangeable debt is presentedchange in other comprehensive income as it relates tothe instrument specific credit risk and anyrecognizes such amount in other comprehensive income. The change in the fair value of the exchangeable senior debentures attributable to changes in fair value are presented in the accompanying condensed consolidated statementsinstrument specific credit risk were losses of operations.


$9.0 million and $7.5 million for the three months ended September 30, 2020 and 2019, respectively, and a gain of $16.8 million and a loss of $0.9 million for the nine months ended September 30, 2020 and 2019, respectively. The cumulative change was a gain of $11.2 million as of September 30, 2020.

(5)

(4) Investments in Equity Securities


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



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


    

September 30, 

December 31, 

    

2020

    

2019

amounts in thousands

Charter (a)

$

3,345,464

2,599,253

Other investments (b)

 

5,285

6,040

$

3,350,749

2,605,293

   September 30, December 31,
   2019 2018
   amounts in thousands
Charter (a)  $2,208,304
 1,526,984
Other investments (b)  5,285
 6,533
   $2,213,589
 1,533,517
(a) A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement. See note 4 for additional discussion of the indemnification agreement.
(b) The Company has elected the measurement alternative for a portion of these securities.

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

(6)

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


Investment in LendingTree

The Company has various investments accounted for using the equity method. The following table includes the Company’s carrying amount and percentage ownership of the more significant investments in affiliates at September 30, 20192020 and the carrying amount at December 31, 2018:

2019:

    

September 30, 2020

December 31, 2019

    

Percentage 

    

Market 

    

Carrying 

    

Carrying 

ownership

value

amount

amount

dollars in thousands

LendingTree (a)

26.3

%  

$

1,056,926

$

156,627

166,465

Other

various

 

NA

 

857

1,178

 

$

157,484

167,643

 September 30, 2019 December 31, 2018
 
Percentage
ownership
 
Market
value
 
Carrying
amount
 
Carrying
amount
   dollars in thousands
LendingTree (a)26.6% $1,069,118
 $166,819
 174,002
Othervarious
 NA
 2,020
 3,028
     $168,839
 177,030
        
(a) Both the Company's ownership interest in LendingTree and the Company's share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of September 30, 2019.

(a)Both the Company's ownership interest in LendingTree and the Company's share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of September 30, 2020.

The Company’s share of LendingTree’s earnings (losses) was $2.0were losses of $9.1 million and $10.2earnings of $2.0 million for the three months ended September 30, 2020 and 2019, and 2018, respectively.The Company's share of LendingTree's earnings (losses) was $(1.4)were losses of $7.3 million and $15.5$1.4 million for the nine months ended September 30, 2020 and 2019, and 2018, respectively.


Investment in Liberty Broadband


On May 18, 2016, Qurate Retail completed a $2.4 billion investment in Liberty Broadband Series C non-voting shares (for accounting purposes a related party of the Company) in connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company, Charter, of the combined enterprises. Qurate Retail, along with third party investors, all of whom invested on the same terms as Qurate Retail, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum‑of‑the parts basis at the time the investment agreements were executed (May 2015). Qurate Retail, as part of the merger described above, exchanged, in a tax‑free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a 1‑for‑one basis, and Qurate Retail granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Qurate Retail following the exchange, which proxy and right of first refusal was assigned to GCI Liberty in connection with the completion of the Transactions.

As of September 30, 2019,2020, the Company has a 23.5%23.7% economic ownership interest in Liberty Broadband. Due to overlapping boards of directors and management, the Company has been deemed to have significant influence over Liberty Broadband for accounting purposes, even though the Company does not have any voting rights. The Company has elected to apply the fair value option for its investment in Liberty Broadband (Level 1) as it is believed that investors value this

I-14



Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Unaudited)


investment based on the trading price of Liberty Broadband. The Company recognizes changes in the fair value of its investment in Liberty Broadband in realized and unrealized gains (losses) on financial instruments, net in the accompanying condensed consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:

    

September 30, 

December 31, 

    

2020

    

2019

amounts in thousands

Current assets

$

402,492

52,133

Investment in Charter, accounted for using the equity method

 

12,450,425

12,194,674

Other assets

 

8,772

9,535

Total assets

 

12,861,689

12,256,342

Long-term debt

 

1,318,664

572,944

Deferred income tax liabilities

 

1,036,672

999,757

Other liabilities

 

19,103

15,695

Equity

 

10,487,250

10,667,946

Total liabilities and shareholders' equity

$

12,861,689

12,256,342

    

Three months ended

Nine months ended

    

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Revenue

$

4,219

3,713

12,437

10,918

Operating expenses, net

 

(20,547)

(11,301)

 

(45,872)

(31,873)

Operating income (loss)

 

(16,328)

(7,588)

 

(33,435)

(20,955)

Share of earnings (losses) of affiliates

 

188,586

61,633

 

408,396

141,882

Gain (loss) on dilution of investment in affiliate

 

(35,284)

(11,219)

 

(140,610)

(68,944)

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

(39,324)

(433)

(39,324)

(433)

Other income (expense), net

 

(3,711)

(5,773)

 

(14,512)

(17,829)

Income tax benefit (expense)

 

(24,979)

(9,124)

 

(47,183)

(8,474)

Net earnings (loss)

$

68,960

27,496

133,332

25,247

(1)
(2)
  September 30, December 31,
  2019 2018
  amounts in thousands
Current assets $94,951
 84,574
Investment in Charter, accounted for using the equity method 12,067,329
 12,004,376
Other assets 9,767
 9,487
Total assets 12,172,047
 12,098,437
Long-term debt 572,619
 522,928
Deferred income tax liabilities 972,005
 965,829
Other liabilities 15,251
 11,062
Equity 10,612,172
 10,598,618
Total liabilities and shareholders' equity $12,172,047
 12,098,437
  Three months ended Nine months ended
  September 30, September 30,
  2019 2018 2019 2018
  amounts in thousands
Revenue $3,713
 3,518
 10,918
 18,680
Operating expenses, net (11,301) (7,614) (31,873) (25,601)
Operating income (loss) (7,588) (4,096) (20,955) (6,921)
Share of earnings (losses) of affiliates 61,633
 84,739
 141,882
 126,952
Gain (loss) on dilution of investment in affiliate (11,219) (3,203) (68,944) (35,165)
Realized and unrealized gains (losses) on financial instruments, net (433) 5,678
 (433) 3,659
Other income (expense), net (5,773) (5,717) (17,829) (16,371)
Income tax benefit (expense) (9,124) (17,762) (8,474) (17,005)
Net earnings (loss) $27,496
 59,639
 25,247
 55,149



(7)

(6) Intangible Assets


Intangible Assets Not Subject to Amortization

The sale of Evite, as discussed in note 1 of the accompanying condensed consolidated financial statements, resulted in a reduction to Goodwill of $25.6 million and a reduction in Other intangible assets not subject to amortization related to tradenames of $4.0 million.

I-15

 September 30, 2019 December 31, 2018
 Gross         Net    Gross         Net
 carrying Accumulated carrying carrying Accumulated carrying
 amount amortization amount amount amortization amount
 amounts in thousands
Customer relationships$408,267
 (85,229) 323,038
 408,267
 (55,417) 352,850
Other amortizable intangibles131,830
 (55,825) 76,005
 122,759
 (39,603) 83,156
Total$540,097
 (141,054) 399,043
 531,026
 (95,020) 436,006


Table of Contents




GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Unaudited)


Intangible Assets Subject to Amortization

    

September 30, 2020

    

December 31, 2019

Gross

Net

Gross

Net

carrying

Accumulated

carrying

carrying

Accumulated

carrying

    

amount

    

amortization

    

amount

    

amount

    

amortization

    

amount

amounts in thousands

Customer relationships

$

385,000

 

(97,438)

 

287,562

408,267

 

(95,167)

 

313,100

Other amortizable intangibles

 

119,707

 

(50,942)

 

68,765

 

139,721

 

(60,842)

 

78,879

Total

$

504,707

 

(148,380)

 

356,327

547,988

 

(156,009)

 

391,979

Amortization expense for intangible assets with finite useful lives was $15.2$13.9 million and $17.1$15.2 million for the three months ended September 30, 20192020 and 2018,2019, respectively. Amortization expense for intangible assets with finite useful lives was $46.5$41.9 million and $38.7$46.5 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):

Remainder of 2019$15,448
2020$52,633
2021$42,250
2022$36,496
2023$33,603



Remainder of 2020

$

12,155

2021

$

45,714

2022

$

40,508

2023

$

36,079

2024

$

31,691

(3)

(8)

(7) Debt


Debt is summarized as follows:

  Outstanding  
     principal Carrying value
  September 30, September 30, December 31,
  2019 2019 2018
  amounts in thousands
Margin Loan Facility $900,000
 900,000
 900,000
Exchangeable senior debentures 477,250
 579,291
 462,336
Senior notes 775,000
 796,985
 803,287
Senior credit facility 713,280
 713,280
 715,124
Wells Fargo note payable 7,197
 7,197
 7,554
Deferred financing costs 
 (6,370) (2,267)
Total debt $2,872,727
 2,990,383
 2,886,034
Debt classified as current (included in other current liabilities)   (902,368) (900,759)
Total long-term debt   $2,088,015
 1,985,275



    

Outstanding

    

    

    

    

principal

Carrying value

September 30, 

September 30, 

December 31, 

        

2020

    

2020

        

2019

 

amounts in thousands

Margin Loan Facility

$

1,300,000

 

1,300,000

 

1,300,000

Exchangeable senior debentures

 

477,250

 

820,035

 

658,839

Senior notes

 

775,000

 

793,524

 

796,138

Senior credit facility

 

510,822

 

510,822

 

512,666

Wells Fargo note payable

 

6,608

 

6,608

 

7,066

Deferred financing costs

 

 

(8,302)

 

(8,491)

Total debt

$

3,069,680

 

3,422,687

 

3,266,218

Debt classified as current

 

 

(823,166)

 

(3,008)

Total long-term debt

$

2,599,521

 

3,263,210

Margin Loan


On December 29, 2017,August 12, 2020, Broadband Holdco, LLC ("Broadband Holdco"), a wholly owned subsidiary of, at such time, Qurate Retail, and now the Company, entered into a margin loan agreement with various lender parties consisting of a term loan in an aggregate principal amount of $1 billion (the “Margin Loan”). 42,681,842 shares of Liberty Broadband Series C common stock with a value of $4.5 billion were pledged by Broadband Holdco, LLC as collateral for the loan as of September 30, 2019. This Margin Loan has a term of two years with an interest rate of LIBOR plus 1.85% and contains an undrawn commitment fee of up to 0.75% per annum. Deferred financing costs incurred on the Margin Loan are reflected in current portion of debt, net in the accompanying condensed consolidated balance sheet. In connection with the completion of the Transactions, Broadband Holdco borrowed the full principal amount of the Margin Loan. A portion of the proceeds of the Margin Loan was used to make a distribution to Qurate Retail of $1.1 billion to be used within one year for the repurchase of QVC Group stock (now the Qurate Retail common stock) or to pay down certain debt at Qurate Retail, and for the payment of fees and other costs and expenses, in each case, pursuant to the terms of the reorganization agreement. The distributed loan proceeds constituted a portion of the cash reattributed to the QVC Group.


On October 5, 2018 (the “Closing Date”), Broadband Holdco entered into Amendment No. 1 (the “Amendment”)3 to the Margin Loan (theAgreement, which amends the original margin loan agreement, dated December 29, 2017 (as amended by that certain Amendment No. 1 to Margin Loan Agreement, dated as of October 5, 2018, and as further amended by that certain Amendment No. 2 to Margin Loan Agreement and Amendment No. 1 to Collateral Account Control Agreement, dated as of November 25, 2019, the “Existing Margin Loan Agreement”, and the Existing Margin Loan Agreement as amended by the Third Amendment, the “Margin Loan Agreement”). Pursuant to the Amendment No. 3, lenders under the Margin Loan have agreed to, among other things, provide commitments (the “Revolving Commitments”) forextend the maturity date of the Margin Loan Agreement to August 24, 2022. This facility provides a newdelayed draw term loan facility of $300.0 million (“Delayed Draw Term Loan Facility”), a revolving credit facility in an

I-16

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

aggregate principal amount of up to $200.0 million (the “Revolving Credit Facility”) and the loans thereunder, the “Revolving Loans”). The Revolving Credit Facility established under the Margin Loan Agreement is in addition to the existinga separate term loan credit facility under the Margin Loan Agreementin an aggregate amount of $800.0 million (the “Term“Initial Term Loan Facility” and, together with Revolving Credit Facility, ; the “Margin Loan Facility” and the loans thereunder, the “Loans”). After giving effect to the initial borrowing of Revolving Loans and Term



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Loan Prepayment (as defined below) on the Closing Date, $800.0 million of loans under theDelayed Draw Term Loan Facility, were outstanding and $200.0 million of Revolving Loans were outstanding. Subsequent to the Closing Date, the Company repaid $100.0 million of the Revolving Credit Facility. The Amendment also amends certain covenants in the Margin Loan to permit, among other things, a designated GCI Liberty subsidiary to enter into a subordinated revolving note with GCI Liberty and certain additional investments.

Broadband Holdco is permitted to use the proceeds of the Revolving Loans for any purpose not prohibited under the Margin Loan, including, without limitation, (i) to make dividends and distributions, (ii) for the purchase of margin stock, (iii) to make investments not prohibited under the Margin Loan, (iv) to repay an intercompany loan to GCI Liberty, and/or (v) otherwise for general corporate purposes, including, without limitation, for payment of interest and fees and other costs and expenses. On the Closing Date, Broadband Holdco drew down on the full amount of the commitments under the Revolving Credit Facility and applied all of the proceeds to prepay, on the Closing Date, a portion of the loans outstanding under theInitial Term Loan Facility, (the “Termcollectively, the “Margin Loan Prepayment”Facilities” and the loans extended thereunder, the “Loans”).

The Loans will mature on December 29, 2019August 24, 2022 (the “maturity date”“Maturity Date”) and accrue interest at a rate equal to the 3-month LIBOR rate plus a per annum spread of 1.85%, subject to certain conditions and exceptions. The Margin Loan Agreement also provides for customary LIBOR replacement provisions. Undrawn Revolving Commitmentsrevolving commitments shall be available to Broadband Holdco from the Closing DateAugust 12, 2020 to but excluding the earlier of (i) the date that is one month prior to the maturity dateMaturity Date and (ii) the date of the termination of such Revolving Commitmentsrevolving commitments pursuant to the terms of the Margin Loan.Loan Agreement. The obligations under the Revolving Credit Facility, together with the obligations under TermMargin Loan Facility are secured by first priority liens on the shares of Liberty Broadband owned by Broadband Holdco and certain other cash collateral provided by Broadband Holdco. In addition,42,681,842 shares of Liberty Broadband Series C common stock with a value of $6.1 billion were pledged by Broadband Holdco as collateral for the Loans as of September 30, 2020.

On December 27, 2019, Broadband Holdco borrowed $100.0 million under the Revolving Credit Facility and $300.0 million under the Delayed Draw Term Loan Facility are subject toFacility. As of September 30, 2020, $1,300.0 million in borrowings were outstanding under the same affirmative and negative covenants and events of default.


Margin Loan Facility.

Exchangeable Senior Debentures


On June 18, 2018, GCI Liberty issued 1.75% exchangeable senior debentures due 2046 ("Exchangeable Senior Debentures"). Upon an exchange of debentures, GCI Liberty, at its option, may deliver Charter Class A common stock, cash or a combination of Charter Class A common stock and cash. Initially, 2.6989 shares of Charter Class A common stock are attributable to each $1,000 principal amount of debentures, representing an initial exchange price of approximately $370.52 for each share of Charter Class A common stock. A total of 1,288,051 shares of Charter Class A common stock are attributable to the debentures. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year. The debentures may be redeemed by GCI Liberty, in whole or in part, on or after October 5, 2023. Holders of debentures also have the right to require GCI Liberty to purchase their debentures on October 5, 2023. The redemption and purchase price will generally equal 100% of the adjusted principal amount of the debentures plus accrued and unpaid interest. The Company has elected to account for the debentures using the fair value option. See note 3 for information related to unrealized gains (losses) on debt measured at fair value.  As of September 30, 2020, the holders of the debentures will have the ability to exchange their debentures for the period from October 1, 2020 through at least December 31, 2020 given that the trading value of the reference shares exceeded 130% of the par value for twenty


of the last thirty trading days in the third quarter of 2020.  Given the holders’ ability to exchange the debentures within a one-year period from the balance sheet date and the Company’s option to settle any exchange in cash, shares of Charter Class A common stock, or a combination of cash and shares of Charter Class A common stock, the debentures have been classified as current within the condensed consolidated balance sheets as of September 30, 2020.  The Company reviews the terms of the debentures on a quarterly basis to determine whether an event has occurred to require current classification.

Senior Notes


On June 6, 2019, GCI, LLC, a wholly owned subsidiary of the Company, issued $325$325.0 million of 6.625% Senior Notes due 2024 at par ("2024 Notes"). The 2024 Notes are unsecured and the net proceeds were used to fund the redemption of $325$325.0 million aggregate outstanding principal amount of GCI, LLC’s 6.75% Senior Notes due 2021. Interest on the 2024 Notes and theGCI, LLC’s 6.875% Senior Notes due 2025 which were issued by GCI, Inc., which is now GCI, LLC (collectively,(the “2025 Notes” and collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at the Company'sCompany’s option, in whole or in part, at a redemption price defined in the respective indentures, and accrued and unpaid interest (if any) to the date of redemption. The Senior Notes are stated net of an aggregate unamortized premium of $22.0$18.5 million at September 30, 2019.2020. Such premium is being amortized to interest expense in the accompanying condensed consolidated statements of operations. As

I-17

Table of September 30, 2019,Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On October 7, 2020, GCI, LLC exceededissued $600.0 million of 4.750% senior notes due 2028 (the “2028 Notes”).  The 2028 Notes are unsecured and the maximum leverage threshold, as measured bynet proceeds of the terms of its Senior Notes. Accordingly, the Company, can only access additional fundingoffering, together with cash on hand and net proceeds from incremental borrowings under the revolving portion of the Senior Credit Facility (as defined below) so long as we are in compliance with, were used to fund the redemption of all $450 million aggregate outstanding principal amount of the 2025 Notes and the redemption of all $325 million aggregate outstanding principal amount of the 2024 Notes on October 14, 2020 and October 23, 2020, respectively.

Senior Credit Facility covenants after giving effect to any additional borrowings.


Senior Credit Facility

On December 27, 2018, GCI, LLC a wholly-owned subsidiary of the Company, amended and restated the Fifth Amended and Restated Credit Agreement dated as of March 9, 2018 and refinanced the revolving credit facility and term loan A with a new revolving credit facility, leaving the existing Term Loan B in place (the "Senior Credit Facility"). The Senior Credit Facility provides a $240.7 million term loan B ("Term Loan B") and a $550.0 million revolving credit facility.




facility (see below for amendment information subsequent to September 30, 2020).

GCI, LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)


GCI, LLC'sLLC’s Senior Credit Facility Total Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 6.50 to one1.00 and the Secured Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 4.00 to one.

1.00.

The revolving credit facility borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.50% and 2.75% depending on the total leverage ratio. The full principal revolving credit facility included in the Senior Credit Facility will mature on December 27, 2023 or August 6, 2021 if the Term Loan B is not refinanced or repaid in full prior to such date.


The interest rate for the Term Loan B is LIBOR plus 2.25%. The Term Loan B requires principal payments of 0.25% of the original principal amount on the last day of each calendar quarter with the full amount maturing on February 2, 2022.


The terms of the Senior Credit Facility include customary representations and warranties, customary affirmative and negative covenants and customary events of default. At any time after the occurrence of an event of default under the Senior Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Senior Credit Facility immediately due and payable and terminate any commitment to make further loans under the Senior Credit Facility. The obligations under the Senior Credit Facility are secured by a security interest on substantially all of the assets of GCI Holdings and the subsidiary guarantors, as defined in the Senior Credit Facility, and on the stock of GCI Holdings.


As of September 30, 2019,2020, there is $238.3was $235.8 million outstanding under the Term Loan B, $475.0$275.0 million outstanding under the revolving portion of the Senior Credit Facility and $8.1$4.0 million in letters of credit under the Senior Credit Facility, which leaves $66.9leaving $271.0 million available for borrowing so long as weborrowing.

On October 15, 2020, GCI, LLC amended the Senior Credit Facility to, among other things, extend the maturity dates of the borrowings and commitments under the revolving credit facility and the Term Loan B and increase the aggregate principal amount of the Term Loan B to $400.0 million (the “Amended Credit Facilities”).  The Amended Credit Facilities include a $550 million revolving credit facility, with a $25 million sub-limit for standby letters of credit, and a $400 million Term Loan B. The borrowings under the Amended Credit Facilities bear interest at either the alternate base rate or LIBOR (based on an interest period selected by GCI, LLC of one month, two months, three months or six months) at the election of GCI, LLC in each case plus a margin. The revolving credit facility borrowings that are alternate base rate loans bear interest at a per annum rate equal to the alternate base rate plus a margin that varies between 0.50% and 1.75% depending on GCI, LLC’s total leverage ratio. The revolving credit facility borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.50% and 2.75% depending on GCI, LLC’s total leverage ratio. Term Loan B borrowings that are alternate base rate loans bear interest at a per annum rate equal to the alternate base rate plus a margin of 1.75%. Term Loan B borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin of 2.75% with a LIBOR floor of 0.75%.

I-18

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The borrowings under the revolving credit facility and the Term Loan B under the Amended Credit Facilities are scheduled to mature on October 15, 2025; provided that, if the Term Loan B is not refinanced or repaid in compliancefull prior to April 15, 2025, then the borrowings under the revolving credit facility will mature on April 15, 2025.

Incremental borrowings under the revolving credit facility and the Term Loan B were used, along with cash on hand, to redeem all $325 million aggregate outstanding principal amount of the debt covenants after giving effect to any additional borrowings.


2024 Notes.

Wells Fargo Note Payable


GCI Holdings issued a note to Wells Fargo that matures on July 15, 2029 and is payable in monthly installments of principal and interest (the "Wells Fargo Note Payable"). The interest rate is variable at one month LIBOR plus 2.25%.


The note is subject to similar affirmative and negative covenants as the Senior Credit Facility. The obligations under the note are secured by a security interest and lien on the building purchased with the note.


Debt Covenants


GCI, LLC is subject to covenants and restrictions under its Senior Notes and Senior Credit Facility. The Company and GCI, LLC are in compliance with all debt maintenance covenants as of September 30, 2019.


2020.

Fair Value of Debt


The fair value of the Senior Notes was $828.5$814.7 million at September 30, 2019.


2020.

Due to the variable rate nature of the Margin Loan, Senior Credit Facility and Wells Fargo Note Payable, the Company believes that the carrying amount approximates fair value at September 30, 2019.


(9) Leases

In February 2016 and subsequently, the FASB issued new guidance which revises the accounting for leases (“ASC 842”). Under the new guidance, entities that lease assets are required to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases. In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance on January 1, 2019 and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.

The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or


GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The most significant impact of the new guidance was the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases. In addition, the Company elected the practical expedient to account for the lease and non-lease components as a single lease component and will not recognize ROU assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date.

The Company recognized $107 million of ROU assets, $28 million of short-term operating lease liabilities and $79 million of long-term operating lease liabilities in the accompanying condensed consolidated balance sheet upon the adoption of the new standard.

In 2016 and 2017, GCI Holdings sold certain tower sites and entered into a master lease agreement in which it leased back space on those tower sites. At the time, GCI Holdings determined that it was precluded from applying sales-leaseback accounting. Upon adoption of ASC 842, GCI Holdings considered whether this transaction would have resulted in a completed sale-leaseback transaction and concluded that the transaction did not meet the criteria and should continue to be accounted for in the same manner as previously determined.

The Company has entered into finance lease agreements with satellite providers for transponder capacity to transmit voice and data traffic in rural Alaska. The Company is also party to finance lease agreements for an office building and certain retail store locations. The Company also leases office space, land for towers and communication facilities, satellite transponders, fiber capacity, and equipment. These leases are classified as operating leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate at the commencement date of the lease. During the nine months ended September 30, 2019, the Company amended its lease agreement with a satellite provider that resulted in a $22.5 million reduction to the finance lease liability and a $16.0 million reduction to fixed assets, resulting in a gain of $6.5 million that is included in Other, net on the condensed consolidated statements of operations.
Our leases have remaining lease terms of less than one year to 31 years, some of which may include the option to extend for up to 40 years, and some of which include options to terminate the leases within 18 years.

The components of lease cost during the three and nine months ended September 30, 2019 were as follows:
  Three months ended Nine months ended
  September 30, 2019 September 30, 2019
  amounts in thousands
Operating lease cost (1) $12,806
 33,515
     
Finance lease cost    
Depreciation of leased assets $722
 4,321
Interest on lease liabilities 91
 908
Total finance lease cost $813
 5,229
(1) Included within operating lease costs were short-term lease costs and variable lease costs, which were not material to the financial statements.

For the three months ended September 30, 2018, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) and operating lease expense of $2.2 million and $13.3 million, respectively. For the nine months ended September 30, 2018, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) and operating lease expense of $5.0 million and $30.1 million, respectively.



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The remaining weighted-average lease term and the weighted average discount rate were as follows:
Nine months ended
September 30, 2019
Weighted-average remaining lease term (years):
Finance leases3.6
Operating leases4.9
Weighted-average discount rate:
Finance leases5.1%
Operating leases5.0%
2020.



Supplemental balance sheet information related to leases was as follows:
  September 30,
  2019
  amounts in thousands
Operating leases:  
Operating lease ROU assets, net (1) $132,769
   
Current operating lease liabilities (2) $40,638
Operating lease liabilities (3) 88,931
Total operating lease liabilities $129,569
   
Finance Leases:  
Property and equipment, at cost $18,102
Accumulated depreciation (4,574)
Property and equipment, net $13,528
   
Current obligations under finance leases (4) $4,894
Obligations under finance leases 8,614
Total finance lease liabilities $13,508
(1) Operating lease ROU assets, net are included within the other assets, net line item in the accompanying condensed consolidated balance sheets.
(2) Current operating lease liabilities are included within the other current liabilities line item in the accompanying condensed consolidated balance sheets.
(3) Operating lease liabilities are included within the other liabilities line item in the accompanying condensed consolidated balance sheets.
(4) Current obligations under finance leases are included within the other current liabilities line item in the accompanying condensed consolidated balance sheets.



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Supplemental cash flow information related to leases was as follows:
  Nine months ended
  September 30, 2019
  amounts in thousands
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases $33,710
Operating cash flows from finance leases $983
Financing cash flows from finance leases $6,405
ROU assets obtained in exchange for lease obligations  
Operating leases $39,178
Finance leases $


Future lease payments under finance leases, operating leases and tower obligations with initial terms of one year or more at September 30, 2019 consisted of the following:
 Finance Leases Operating Leases Tower Obligations
 amounts in thousands
Remainder of 2019$1,373
 12,059
 1,932
20205,491
 44,512
 7,797
20214,076
 35,435
 7,953
20221,973
 21,683
 8,112
2023678
 14,552
 8,274
Thereafter1,734
 23,185
 142,825
Total lease payments15,325
 151,426
 176,893
Less: imputed interest(1,817) (21,857) (85,247)
Total lease liabilities$13,508
 129,569
 91,646


(10)

(8)  Preferred Stock


GCI Liberty Series A Cumulative Redeemable Preferred Stock (the "Preferred Stock") was issued as a result of the auto conversion that occurred on March 8, 2018. The Company is required to redeem all outstanding shares of Preferred Stock out of funds legally available, at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date through the redemption date, on the first business day following the twenty-first anniversary of the March 8, 2018 auto conversion. There were 7,500,000 shares of Preferred Stock authorized and 7,211,7597,199,697 shares issued and outstanding at September 30, 2019.2020. An additional 42,500,000 shares of preferred stock of the Company are authorized and are undesignated as to series. The Preferred Stock is accounted for as a liability in the accompanying condensed consolidated balance sheets because it is mandatorily redeemable. As a result, all dividends paid on the Preferred Stock are recorded as interest expense in the accompanying condensed consolidated statements of operations.


The liquidation price is measured per share and shall mean the sum of (i) $25, plus (ii) an amount equal to all unpaid dividends (whether or not declared) accrued with respect to such share that have been added to and then remain part of the liquidation price as of such date.


The holders of shares of Preferred Stock are entitled to receive, when and as declared by the GCI Liberty Board of Directors, out of legally available funds, preferential dividends that accrue and cumulate as provided in the restated GCI Liberty certificate of incorporation.


Dividends on each share of Preferred Stock accrued on a daily basis at an initial rate of 5.00% per annum of the liquidation price, and increased to 7.00% per annum of the liquidation price effective July 16, 2018 as a result2018.

I-19

Table of the Reincorporation Merger in the State of Delaware in May 2018.




Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Unaudited)


Accrued dividends are payable quarterly on each dividend payment date, which is January 15, April 15, July 15, and October 15 of each year, commencing on the first such date following the auto conversion, which occurred immediately after the market closed on March 8, 2018. If GCI Liberty fails to pay cash dividends on the Preferred Stock in full for any 4 consecutive or non-consecutive dividend periods then the dividend rate shall increase by 2.00% per annum of the liquidation price until cured. On September 16, 2019,August 31, 2020, the Company announced that it declared a quarterly cash dividend of approximately $0.44 per share of Preferred Stock which was paid on October 15, 20192020 to shareholders of record of the Preferred Stock at the close of business on September 30, 2019.


(11) Variable Interest Entities

New Markets Tax Credit Entities

GCI entered into several arrangements under the New Markets Tax Credit ("NMTC") program with US Bancorp to help fund various projects that extended terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

Each of the transactions has an investment fund, which is a special purpose entity created to effect the financing arrangement. In each of the transactions, the Company loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from the Company's loan and US Bancorp's investment to a CDE. The CDE, in turn, would loan the funds to the Company's wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.

US Bancorp is entitled to substantially all of the benefits derived from the NMTCs. All of the loan proceeds to Unicom, net of syndication and arrangement fees, were restricted for use on the projects. Restricted cash of $0.7 million was held by Unicom at September 30, 2019 and is included in the accompanying condensed consolidated balance sheets. The Company completed construction of the projects partially funded by these transactions.

These transactions include put/call provisions whereby the Company may be obligated or entitled to repurchase US Bancorp’s interest in each investment fund for a nominal amount. The Company believes that US Bancorp will exercise the put options at the end of the compliance periods for each of the transactions. The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code of 1986, as amended. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp. The Company has agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as its obligation to deliver tax benefits is relieved. There have been no credit recaptures as of September 30, 2019. The value attributed to the put/calls is nominal.

The Company has determined that each of the investment funds are variable interest entities ("VIEs"). The consolidated financial statements of each of the investment funds include the CDEs. The ongoing activities of the VIEs – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIEs. Management considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that the Company is obligated to absorb losses of the VIEs. The Company concluded that it is the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.

The assets and liabilities of the consolidated VIEs were $89 million and $63 million, respectively, as of September 30, 2019.

The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities. US Bank does not have recourse to us or our other assets, with the exception of customary representations and indemnities the Company has provided. The Company is not required and does not currently intend to provide additional financial support to these VIEs.


GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


While these subsidiaries are included in the Company's consolidated financial statements, these subsidiaries are separate legal entities and their assets are legally owned by them and not available to the Company's creditors.

The following table summarizes the key terms of each of the NMTC transactions:
Financing ArrangementInvestment FundsTransaction DateLoan AmountInterest Rate on Loan to Investment FundMaturity DateUS Bancorp InvestmentLoan to UnicomInterest Rate on Loan(s) to UnicomExpected Put Option Exercise
NMTC #2TIF 2 & TIF 2-USBOctober 3, 2012$37.7 million1%October 2, 2042$17.5 million$52.0 million0.71% to 0.77%October 2019
NMTC #3TIF 3December 11, 2012$8.2 million1%December 10, 2042$3.8 million$12.0 million1.35%December 2019
NMTC #4TIF 4March 21, 2017$6.7 million1%March 21, 2040$3.3 million$9.8 million0.73%March 2024
NMTC #5TIF 5-1 and TIF 5-2December 22, 2017$10.4 million1%December 22, 2047$5.1 million$14.7 million0.67% to 1.24%December 2024
2020.



(12)

(9) Stock-Based Compensation


GCI Liberty has granted to certain directors, employees and employees of its subsidiaries, restricted shares (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of GCI Liberty’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options, RSAs and RSUs) based on the grant-date fair value (“GDFV”) 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 based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.


Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $4.5 million and $5.8 million and $7.8 million of stock basedstock-based compensation during the three months ended September 30, 20192020 and 2018,2019, respectively, and $18.2$11.4 million and $20.9$18.2 million during the nine months ended September 30, 2020 and 2019, and 2018, respectively.


respectively.

During the nine months ended September 30, 2019,2020, and in connection with our CEO'sCEO’s new employment agreement, GCI Liberty granted 22to our CEO 359 thousand options to purchase shares of GCI Liberty Series BA common stock and 51 thousand performance-based RSUsas part of GCI Liberty Series B common stock to our CEO.CEO’s upfront term award detailed in his employment agreement. Such options had a GDFV of $18.27$16.60 per share.share and vest on December 31, 2023. Also during the nine months ended September 30, 2020, GCI Liberty granted to our CEO 148 thousand options to purchase shares of GCI Liberty Series A common stock in conjunction with our CEO’s annual awards as detailed in his employment agreement. Such options had a GDFV of $13.21 per share and vest on December 31, 2020.

Also during the nine months ended September 30, 2020, GCI Liberty granted 3 thousand time-based RSUs of GCI Liberty Series A common stock to our CEO. The RSUs had a GDFV of $53.78$59.80 per share at the time they were granted. The options cliff vested immediately upon grant, and the RSUs cliff vest on December 10, 2020.  This RSU grant was issued in onelieu of our CEO receiving 50% of his remaining base salary for the last three quarters of calendar year from2020, and he has waived his right to receive the month of grant, subject to the satisfaction of certain performance objectives. Performance objectives, which are subjective, are consideredother 50%, in determining the timing and amounteach case, in light of the compensation expense recognized. When the satisfactionongoing financial impact of the performance objectives becomes probable, the Company records compensation expense. The probability of satisfying the performance objectives is assessed at the end of each reporting period.

COVID-19.

The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of GCI Liberty'sLiberty’s stock and the implied volatility of publicly traded GCI Liberty options. The Company uses a 0 dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.


I-20

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

GCI Liberty-Outstanding Awards


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



Series A

Weighted

Aggregate

average

intrinsic

Awards

remaining

value

    

(000's)

    

WAEP

    

life

    

(millions)

Outstanding at January 1, 2020

 

604

$

48.67

 

  

 

  

 

  

Granted

 

528

$

67.49

 

  

 

  

 

  

Exercised

 

(98)

$

44.52

 

  

 

  

 

  

Forfeited/Cancelled

 

$

 

  

 

  

 

  

Outstanding at September 30, 2020

 

1,034

$

58.67

 

5.1

 

years

$

24

Exercisable at September 30, 2020

 

328

$

47.09

 

3.5

 

years

$

11

There were 0 changes to outstanding options of GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)


  Series A
               Weighted    Aggregate
      average intrinsic
  Awards   remaining value
  (000's) WAEP life (millions)
Outstanding at January 1, 2019 1,650
 $47.61
     
Granted 
 $
     
Exercised (275) $24.66
     
Forfeited/Cancelled (49) $55.65
     
Outstanding at September 30, 2019 1,326
 $52.08
 1.1years $13
Exercisable at September 30, 2019 1,053
 $54.02
 0.6years $8

  Series B
               Weighted    Aggregate
      average intrinsic
  Awards   remaining value
  (000's) WAEP life (millions)
Outstanding at January 1, 2019 1,223
 $56.10
     
Granted 22
 $58.11
     
Exercised 
 $
     
Forfeited/Cancelled 
 $
     
Outstanding at September 30, 2019 1,245
 $56.14
 3.3years $8
Exercisable at September 30, 2019 926
 $56.05
 3.7years $6


Liberty Series B common stock during the nine months ended September 30, 2020.

As of September 30, 2019,2020, the total unrecognized compensation cost related to unvested options and RSA/RSUs was approximately $4$7.0 million and $20$13.0 million, respectively. Such amounts will be recognized in the Company'sCompany’s consolidated statements of operations over a weighted average period of approximately 1.42.6 years and 2.51.9 years, respectively.


As of September 30, 2019,2020, GCI Liberty had 485427 thousand RSUs outstanding.


As of September 30, 2019,2020, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.31.0 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.


(13)

(10)  Commitments and Contingencies


Rural Health Care (“RHC”) Program

Subsidiaries

Litigation, Disputes and Regulatory Matters

The Company is involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of GCI Holdings receive supportbusiness. Management believes there are no proceedings from various Universal Service Fund ("USF") programs includingasserted and unasserted claims which if determined adversely would have a material adverse effect on the RHC Program. The USF programs are subject to change by regulatory actions taken byCompany’s financial position, results of operations or liquidity, other than those described in the Federal Communications Commission ("FCC") or legislative actions. The following paragraphs describe certain separate matters relatedCompany’s commitments and contingencies discussion in note 16 to the RHC Program that impact or could impact the revenue earned by the Company.


On November 30, 2018, a subsidiary of GCI Holdings received multiple funding denial notices from Universal Service Administrative Company ("USAC"), denying requested funding from the RHC Program operated by a rural health customer (the "Customer")accompanying consolidated financial statements to our Annual Report on our Form 10-K for the funding year that ended on June 30, 2018. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts a subsidiary of GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019 and made a supplemental filing on March 12,December 31, 2019.



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


On May 6, 2019, the Customer received a letter from USAC that denied the Customer’s appeal for all requested funding on the basis that the Customer failed to indicate that it had received, and failed to submit copies of, the responses or bids received, when it originally sought funding from the RHC Program under the 2 service contracts that a subsidiary of GCI Holdings has with the Customer. The Customer appealed USAC’s decision to the Wireline Competition Bureau of the FCC on July 5, 2019 but resolution and the timing of the appeal are unknown at this time. As of March 31, 2019, GCI Holdings had accounts receivable of approximately $21.3 million outstanding associated with these 2 service contracts, which is dependent upon receipt of funding from USAC. Given that USAC has denied the Customer’s appeal as specifically outlined in the May 6, 2019 letter received by the Customer, it is probable that GCI Holdings has incurred a loss and an accounts receivable reserve has been recorded in the amount of $21.3 million and an associated bad debt expense has been recorded during the first quarter of 2019, and included within selling, general, and administrative expense in the condensed consolidated statements of operations. Additionally, because of the uncertainty of the Customer's future appeals process and uncertainty relating to our ability to recover payment directly from the Customer, we no longer believe revenue associated with the two service contracts should be recognized due to the unpredictability surrounding the collection of consideration under these two service contracts currently being denied by USAC. Revenue has not been recognized beyond the first quarter of 2019 and will not be recognized until an adequate level of clarity is reached on the matter and the applicable revenue recognition criteria are met.

(14)

(11) Information About the Company'sCompany’s Operating Segments


The Company, through its interests in subsidiaries and other companies, is primarily engaged in the broadband communications services industry. The Company identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of the Company’s annual pre‑taxpre-tax earnings.


I-21

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA (as defined below), and subscriber metrics.

For the three and nine months ended September 30, 2019,2020, the Company has identified the following subsidiary as a reportable segment:

GCI Holdings - provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska.

GCI Holdings-provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska.

For presentation purposes the Company is providing financial information for Liberty Broadband. While the Company’s equity method investment in Liberty Broadband does not meet the reportable segment threshold defined above, the Company believes that the inclusion of such information is relevant to users of these financial statements.

Liberty Broadband - an equity method affiliate of the Company, accounted for at fair value, has a non-controlling interest in Charter, and a wholly-owned subsidiary, Skyhook Wireless, Inc. ("Skyhook"). Charter is the second largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services. Skyhook provides a Wi-Fi based location platform focused on providing positioning technology and contextual location intelligence solutions.

Liberty Broadband-an equity method affiliate of the Company, accounted for at fair value, has a non‑controlling interest in Charter, and a wholly‑owned subsidiary, Skyhook Wireless, Inc. ("Skyhook"). Charter is the second largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services. Skyhook provides a Wi‑Fi based location platform focused on providing positioning technology and contextual location intelligence solutions.

The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the consolidated subsidiaries included in the segments are the same as those described in the Company’s Summary of Significant Accounting Policies in note 2 to the accompanying consolidated financial statements to theour Annual Report on Form 10-K for the year ended December 31, 2018.




GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


2019.

Performance Measures


Revenue by segment from contracts with customers, classified by customer type and significant service offerings follows:

Three months ended

Nine months ended

    

September 30, 

September 30, 

2020

2019

2020

2019

amounts in thousands

GCI Holdings

    

    

    

Consumer Revenue

Wireless

$

31,334

29,509

89,598

84,506

Data

47,852

42,920

137,562

125,555

Video

23,927

21,194

65,141

63,255

Voice

3,654

4,051

11,169

12,833

Business Revenue

Wireless

20,019

20,060

58,873

57,837

Data

89,549

69,960

245,871

201,803

Video

2,277

4,115

10,726

11,928

Voice

6,614

6,747

20,077

19,587

Lease, grant, and subsidies revenue

19,040

22,472

59,391

67,914

Total GCI Holdings

244,266

221,028

698,408

645,218

Corporate and other

2,626

6,016

9,103

17,128

Total

$

246,892

227,044

707,511

662,346

I-22

 Three months ended Nine months ended
 September 30, September 30,
 2019 2018 2019 2018
 amounts in thousands
GCI Holdings       
Consumer Revenue       
Wireless$29,509
 25,584
 84,506
 62,312
Data42,920
 39,652
 125,555
 88,921
Video21,194
 22,272
 63,255
 50,180
Voice4,051
 4,368
 12,833
 10,246
Business Revenue       
Wireless20,060
 18,071
 57,837
 44,889
Data69,960
 59,585
 201,803
 154,239
Video4,115
 4,927
 11,928
 9,436
Voice6,747
 6,361
 19,587
 14,282
Lease, grant, and revenue from subsidies22,472
 24,226
 67,914
 55,114
Total GCI Holdings221,028
 205,046
 645,218
 489,619
Corporate and other6,016
 5,100
 17,128
 15,221
Total$227,044
 210,146
 662,346
 504,840


Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Liberty Broadband revenue totaled $3.7$4.2 million and $3.5$3.7 million for the three months ended September 30, 20192020 and 2018,2019, respectively and $10.9$12.4 million and $18.7$10.9 million for the nine months ended September 30, 2020 and 2019, and 2018, respectively.


The Company had gross receivables of $216$329.6 million and deferred revenue of $38$36.5 million at September 30, 20192020 from contracts with customers, which amounts exclude receivables and deferred revenue arising from leases, grants, and subsidies. Our customers generally pay for services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue is recognized as revenue in the accompanying condensed consolidated statements of operations as the services are provided. Changes in the contract liability balance for the Company during the three and nine months ended September 30, 20192020 were not materially impacted by other factors.


The Company expects to recognize revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) of approximately $63$80.0 million in the remainder of 2019, $2332020, $250.6 million in 2020, $1642021, $157.3 million in 2021, $1122022, $59.0 million in 20222023 and $97$72.1 million in 20232024 and thereafter.


The Company applies certain practical expedients as permitted under ASC 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, information about revenue remaining from usage based performance obligations that are recognized over time as-invoiced, or variable consideration allocated to wholly unsatisfied performance obligations.


For segment reporting purposes, the Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock‑basedstock-based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses by identifying those items that are not directly a reflection of each business'business’ performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock‑basedstock-based compensation, separately reported litigation settlements, insurance proceeds and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in



GCI LIBERTY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.

Although GCI Liberty owns less than 100% of the outstanding shares of Liberty Broadband, 100% of the Liberty Broadband amounts are included in the tables below and subsequently eliminated in order to reconcile the account totals to the GCI Liberty condensed consolidated financial statements.

Adjusted OIBDA is summarized as follows:

Three months ended

Nine months ended

September 30, 

September 30, 

2020

2019

2020

2019

amounts in thousands

GCI Holdings

    

$

91,617

    

71,960

    

256,057

    

182,552

    

Liberty Broadband

 

(14,270)

 

(4,586)

(26,658)

 

(11,877)

Corporate and other

 

(16,336)

 

(5,382)

(36,497)

 

(17,199)

 

61,011

 

61,992

192,902

 

153,476

Eliminate Liberty Broadband

 

14,270

 

4,586

26,658

 

11,877

$

75,281

66,578

219,560

165,353

I-23

 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 amounts in thousands
GCI Holdings$71,960
 57,945
 182,552
 156,608
Liberty Broadband(4,586) (2,198) (11,877) (414)
Corporate and other(5,382) (7,205) (17,199) (20,256)
 61,992
 48,542
 153,476
 135,938
Eliminate Liberty Broadband4,586
 2,198
 11,877
 414
 $66,578
 50,740
 165,353
 136,352


Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Other Information

  September 30, 2019
  Total Investments Capital
  assets in affiliates expenditures
  amounts in thousands
GCI Holdings $3,346,168
 580
 107,431
Liberty Broadband 12,172,047
 12,067,329
 75
Corporate and other 7,299,135
 168,259
 1,202
Eliminate Liberty Broadband (12,172,047) (12,067,329) (75)
Consolidated $10,645,303
 168,839
 108,633



September 30, 2020

Total

Investments

Capital

assets

in affiliates

expenditures

amounts in thousands

GCI Holdings

    

$

3,195,906

    

528

    

106,370

    

Liberty Broadband

 

12,861,689

 

12,450,425

 

42

Corporate and other

 

10,163,936

 

156,956

 

877

 

26,221,531

 

12,607,909

 

107,289

Eliminate Liberty Broadband

 

(12,861,689)

 

(12,450,425)

 

(42)

Consolidated

$

13,359,842

 

157,484

 

107,247

The following table provides a reconciliation of Adjusted OIBDA to operatingOperating income (loss) and earningsEarnings (loss) from continuing operations before income taxes:

    

Three months ended

    

Nine months ended

    

September 30, 

September 30, 

2020

2019

2020

2019

amounts in thousands

Adjusted OIBDA

$

75,281

 

66,578

219,560

 

165,353

Stock‑based compensation

 

(4,521)

 

(5,768)

(11,389)

 

(18,153)

Depreciation and amortization

 

(60,688)

 

(66,466)

(184,856)

 

(200,035)

Insurance proceeds and restructuring, net

 

 

1,482

 

(236)

Operating income (loss)

 

10,072

 

(4,174)

23,315

 

(53,071)

Interest expense

 

(29,722)

 

(38,353)

(100,364)

 

(116,357)

Share of earnings (loss) of affiliates, net

 

(9,035)

 

1,921

(7,504)

 

(2,443)

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

 

1,172,685

 

156,165

1,199,560

 

1,844,863

Tax Sharing Agreement

 

26,146

 

2,362

30,057

 

18,895

Other, net

 

(7,314)

 

(540)

(5,176)

 

13,824

Earnings (loss) before income taxes

$

1,162,832

 

117,381

1,139,888

 

1,705,711

(4)

I-24

 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 amounts in thousands
Adjusted OIBDA$66,578
 50,740
 165,353
 136,352
Stock‑based compensation(5,768) (7,761) (18,153) (20,926)
Depreciation and amortization(66,466) (62,848) (200,035) (143,257)
Insurance proceeds and restructuring, net1,482
 
 (236) 
Operating income (loss)(4,174) (19,869) (53,071) (27,831)
Interest expense(38,353) (37,614) (116,357) (81,304)
Share of earnings (loss) of affiliates, net1,921
 10,856
 (2,443) 18,714
Realized and unrealized gains (losses) on financial instruments, net156,165
 495,509
 1,844,863
 (4,328)
Tax Sharing Agreement2,362
 2,492
 18,895
 (25,456)
Other, net(540) (834) 13,824
 (982)
Earnings (loss) from continuing operations before income taxes$117,381
 450,540
 1,705,711
 (121,187)


Table of Contents



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


Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the recoverability of the Company'sCompany’s goodwill and other long-lived assets; the Company'sCompany’s projected sources and uses of cash; the Rural Healthcare Program; the impact of the Alaskan recession andrecession; the remediation of a material weakness; regulatory developments; the anticipated impact of COVID-19 (as defined below); the Combination (as defined below); and 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:

The impact of the novel coronavirus ("COVID-19") pandemic and local, state and federal governmental responses to the pandemic on the economy, our customers, our vendors and our businesses generally;
the satisfaction of conditions to the Combination;
customer demand for the Company’s products and services and the Company’s ability to adapt to changes in demand;
competitor responses to the Company’s and its businesses’ products and services;
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission (the "FCC"), and adverse outcomes from regulatory proceedings;
uncertainties inherent in the development and integration of new business lines and business strategies;
future financial performance, including availability, terms and deployment of capital;
the ability of suppliers and vendors to deliver products, equipment, software and services;
cyberattacks or other network disruptions;
the outcome of any pending or threatened litigation;
availability of qualified personnel;
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;
domestic and international economic and business conditions and industry trends, specifically the state of the Alaska economy, including the impacts of the COVID-19 pandemic to unemployment levels;
consumer spending levels, including the availability and amount of individual consumer debt;
rapid technological changes;
failure to protect the security of personal information about the Company’s and its businesses’ customers; and
the regulatory and competitive environment of the industries in which the Company operates.

The ability of GCI Liberty, Inc. (the "Company") to successfully integrate and recognize anticipated efficiencies and benefits from the Transactions (as defined below); 
customer demand for the Company's products and services and the Company's ability to adapt to changes in demand; 
competitor responses to the Company's and its businesses' products and services; 
the levels of online traffic to the Company's businesses' websites and its ability to convert visitors into consumers or contributors; 
uncertainties inherent in the development and integration of new business lines and business strategies; 
future financial performance, including availability, terms and deployment of capital; 
the ability of suppliers and vendors to deliver products, equipment, software and services; 
the outcome of any pending or threatened litigation; 
availability of qualified personnel; 
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission (the "FCC"), and adverse outcomes from regulatory proceedings; 
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors; 
domestic and international economic and business conditions and industry trends, specifically the state of the Alaska economy; 
consumer spending levels, including the availability and amount of individual consumer debt; 
rapid technological changes; 
failure to protect the security of personal information about the Company's and its businesses' customers, subjecting the Company and its businesses to potentially costly government enforcement actions or private litigation and reputational damage; and
the regulatory and competitive environment of the industries in which the Company operates.

For additional risk factors, please see Part I, Item 1A1A. Risk Factors of theour Annual Report on Form 10-K for the year ended December 31, 20182019 and Part II, Item 1A1A. Risk Factors in theour Quarterly ReportReports on Form 10-Q for the three monthsquarters ended March 31, 2020 and June 30, 2019.2020 and this Quarterly Report on Form 10-Q. Any forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.


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


I-25

Overview

Table of Contents

On April 4, 2017,

Overview

The accompanying condensed consolidated financial statements include the accounts of GCI Liberty, Inc. and its controlled subsidiaries, as well as other equity securities and equity method investments (collectively, “GCI Liberty”, the “Company”, “us”, “we” and “our”). GCI Liberty is made up of its wholly-owned subsidiary, GCI Holdings, LLC (“GCI Holdings”), a controlling interest in Evite, Inc. (“Evite”) until Evite was sold on September 14, 2020 and non-controlling interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. These assets (other than GCI Holdings) were contributed by Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement"and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group) were contributed to GCI Liberty in exchange for, among other things, a controlling interest in GCI Liberty, (the "contribution"). Qurate Retail and LI LLC contributed towhich was subsequently split-off.

On August 6, 2020, GCI Liberty their entire equity interests inand Liberty Broadband



Corporation (" entered into a definitive merger agreement under which Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"),Broadband agreed to acquire all of the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number ofoutstanding shares of GCI Liberty Classin a stock-for-stock merger (the “Combination”).  Under the terms of the merger agreement each holder of Series A and B common stock of GCI Liberty will receive 0.58 of a share of Series C common stock and Series B common stock, respectively, of Liberty Broadband.  Additionally, holders of a numbershare of sharesSeries A Cumulative Redeemable Preferred Stock of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.

Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split-Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed forwill receive one share of Series A Cumulative Redeemable Preferred Stock with mirror terms to be issued by Liberty Broadband.  The Combination was recommended to the Company’s Board of Directors for approval by a special committee composed solely of independent, disinterested directors and advised by independent financial and legal advisors.  The closing of the Combination is subject to certain customary conditions, including: (i) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty Class A commonoutstanding stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

On May 10, 2018, pursuantentitled to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delawarevote thereon not owned by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty or the Company prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.

We refer to the combination of GCI Holdings, LLC ("GCI Holdings"), non controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite,John C. Malone and certain other assets and liabilities as "GCI Liberty",persons, (ii) the "Company", "us", "we"and "our." Although HoldCo was reported as a combined company until the dateadoption of the HoldCo Split-Off,merger agreement by holders of a majority of the accompanying financial statementsaggregate voting power of the Liberty Broadband outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (iii) the following discussionadoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon, (iv) approval of the Liberty Broadband stock issuance by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock present all periods as consolidatedin person or by proxy at the Company.
stockholder meeting and entitled to vote thereon and (v) the receipt of any applicable regulatory approvals.  GCI Liberty and Liberty Broadband expect the Combination to close no later than the first quarter of 2021, subject to potential COVID-19 related delays.

Update on Economic Conditions


GCI Holdings offers wireless and wireline telecommunication services, data services, video services, and managed services to customers primarily throughout Alaska. Because of this geographic concentration, growth of GCI Holdings'Holdings’ business and operations depends upon economic conditions in Alaska. In December 2019, Chinese officials reported a novel coronavirus outbreak. COVID-19 has since spread through China and internationally. On March 11, 2020, the World Health Organization assessed COVID-19 as a global pandemic, causing many countries throughout the world to take aggressive actions, including imposing travel restrictions and stay-at-home orders, closing public attractions and restaurants, and mandating social distancing practices, which has caused a significant disruption to most sectors of the economy.

As the COVID-19 pandemic develops and significantly impacts Alaska, GCI Holdings has continued to deliver services uninterrupted by the pandemic and expects to be able to continue to respond to the increase in network activity. The economymajority of GCI Holdings’ workforce has transitioned to working at home full time and it expects to keep those employees working from home through early next year.

The State of Alaska has placed restrictions on public utilities, such as GCI Holdings, from charging late fees or disconnecting service from residential customers who are experiencing financial hardship as a result of the COVID-19 crisis. These state-level restrictions will remain in place until November 15, 2020. As a major provider of Internet services in Alaska, GCI Holdings believes it plays an instrumental role in enabling social distancing through telecommuting and e-learning across the state and remains focused on its service to customers, as well as the health and safety of its employees and customers.

GCI Holdings cannot predict the ultimate impact of COVID-19 on its business, including the depth and duration of the economic impact to its customers’ ability to pay for products and services including the impact of extended

I-26

Table of Contents

unemployment benefits and other stimulus packages and what assistance may be provided to its customers. GCI Holdings expects its accounts receivable and bad debt expense to increase substantially due to the restrictions on GCI Holdings’ ability to collect from its customers. In addition, there is uncertainty regarding the impact of government emergency declarations, the ability of suppliers and vendors to provide products and services to GCI Holdings and the risk of limitations on the deployment and maintenance of its services.

The Alaska economy is dependent upon the oil industry, state government spending, United States military spending, investment earnings and tourism. Prolonged periodsThe price of Alaska North Slope Crude oil has remained low oil prices adversely impactsand large tourism companies have decided not to operate during 2020 due to the Alaska economy, which in turn can have an adverse impact on the demand for GCI Holdings' products and services and on its results of operations and financial condition.


COVID-19 pandemic. Low oil prices havecontinue to put significant pressure on the Alaska state government budget since the majority of its revenue comes from the oil industry. While thebudget. The Alaska state government has significant reserves that GCI Holdings believes will help fund the state government for the next couple of years, but major structural budgetary reforms will need to be implemented in order to offset the impact of low oil prices.

GCI Holdings cannot predict the long-term impact COVID-19 will have on these sectors of the Alaska economy; however, adverse circumstances in these industries can have an adverse impact on the demand for its products and services and on its results of operations and financial condition.

The Alaska economy iswas in a recession that started in late 2015. At the end of 2019, the Alaska economy showed signs of emerging from this recession, however, the recession has continued as a result of the COVID-19 pandemic and continued low oil prices. While it is difficult for GCI Holdings to predict the future impact of thea renewed or continuing recession on its business, these conditions have had an adverse impact on its business and could continue to adversely affect the affordability of and demand for some of its products and services and cause customers to shift to lower priced products and services or to delay or forgo purchases of its products and services. Additionally, GCI Holdings'Holdings’ customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to GCI Holdings. If that were to occur, GCI Holdings could be required to increase its allowance for doubtful accounts, and the number of days outstanding for its accounts receivable could increase. If the recession continues, it could continue to negatively affect GCI Holdings'Holdings’ business including its financial position, results of operations, or liquidity, as well as its ability to service debt, pay other obligations and enhance shareholder returns.


Rural Health Care (“RHC”) Program


Subsidiaries of

GCI Holdings receivereceives support from various Universal Service Fund ("USF") programs including the RHC Program. The USF programs are subject to change by regulatory actions taken by the FCC, interpretations of or



compliance with USF program rules, or legislative actions. Changes to any of the USF programs that GCI Holdings participates in could result in a material decrease in revenue and accounts receivable, which could have an adverse effect on GCI Holdings’ business and the Company’s financial position, results of operations or liquidity. The following paragraphs describe certain separate matters related to the RHC Program that impact or could impact the revenue earned by the Company. As of September 30, 2020, the Company had net accounts receivable from the RHC Program of approximately $32 million, which is included within Other assets, net and approximately $175 million, which is included within Trade and other receivables in the condensed consolidated balance sheets.


I-27

Table of Contents

The Company disclosed the following items related to itsGCI Holdings’ involvement in the RHC Program in its Annual Report on Form 10-K for the year ended December 31, 2018:


2019:

The FCC reduced the rates charged to RHC customers by approximately 26%.
The FCC increased the RHC Program funding cap for multiple funding years.
GCI Holdings received a letter of inquiry and request for information from the Enforcement Bureau of the FCC (the “Enforcement Bureau”) in March 2018.
GCI Holdings received multiple funding denial notices from Universal Service Administrative Company ("USAC") which originally denied the RHC funding requests that had been submitted by a rural health customer.
The FCC released an order adopting changes to the RHC Program that will revise the manner in which support issued under the RHC Program will be calculated and approved.
GCI Holdings became aware of potential RHC Program compliance issues related to certain of its currently active and expired contracts with certain of its RHC customers.

The Company has additional significant information regarding the (i) rates charged to RHC customers, by approximately 26%.

The Company's participating subsidiary received a letter of inquiry and request from the Enforcement Bureau of the FCC in March 2018.
The Company's participating subsidiary received multiple(ii) RHC Program funding denial notices from Universal Service Administrative Company ("USAC"), denying the RHC funding requests that had been submitted by a rural health customer.

The Company has no new information regarding the items noted above except with respect to thecap, (iii) multiple funding denial notices that were received, in which USAC denied funding requests that had been submitted by a rural health customer (the “Customer”).

On November 30, 2018, a subsidiary of GCI Holdings received multiple funding denial notices from USAC, denying requested funding(iv) additional inquiries from the RHC Program operated by the Customer for the funding year that ended on June 30, 2018. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts a subsidiary of GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted wasEnforcement Bureau related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019original letter of inquiry received in March 2018, and made a supplemental filing on March 12, 2019.

On May 6, 2019,(v) the Customer received a letter from USAC that denied the Customer’s appeal for all requested funding on the basis that the Customer failedFCC order adopting changes to indicate that it had received, and failed to submit copies of, the responses or bids received, when it originally sought funding from the RHC Program under the two service contracts that a subsidiary of GCI Holdings has with the Customer. The Customer appealed USAC’s decision toProgram.

On October 20, 2020, the Wireline Competition Bureau of the FCC issued two separate letters approving the cost-based rural rates GCI Holdings applied when recognizing revenue for services provided to its RHC customers for the funding years that ended on July 5,June 30, 2019 but resolution and June 30, 2020. In consideration of receiving these letters, we anticipate that we will collect approximately $175 million in accounts receivable related to these two funding years within one year and historical experience would lead us to believe collection will likely occur within three to six months from the timingdate of receipt of the appealletters.

On October 19, 2020, the FCC issued an order stating that total RHC Program demand for the funding year that will end June 30, 2021 is less than available program funding and, further, waiving the yearly sub-cap for upfront and multi-year payments to ensure that no RHC Program requests are unknown at this time. As of March 31, 2019, GCI Holdings hadsubject to prioritized or pro rata reductions based on the annual caps.  

The multiple funding denial notices resulted in a $21.3 million accounts receivable of approximately $21.3 million outstanding associated with these two service contracts, which is dependent upon receipt of funding from USAC. Given that USAC has denied the Customer’s appeal as specifically outlined in the May 6, 2019 letter received by the Customer, it is probable that GCI Holdings has incurred a loss and an accounts receivable reserve has been recorded in the amount of $21.3 million and an associated bad debt expense has been recorded during the first quarter of 2019 and included within selling, general, and administrative expense in the condensed consolidated statements of operations. Additionally, because2019. Because of the uncertainty ofcaused by the Customer’s future appeals processfunding denial notices and the uncertainty relating to our ability to recover payment directly from the Customer,rural healthcare customer, we no longer believebelieved revenue associated with the two service contracts should be recognized due to the unpredictability surrounding the collection of consideration under these two service contracts currently being denied by USAC. Historical annualsuch that no revenue associated with the two service contracts was approximately $12 million in total and was expected to be the same in future periods. Revenue has not been recognized beyond the first quarter of 2019. On February 19, 2020, an FCC order granted the appeal of the rural health customer and reversed the FCC’s previous funding denials, resulting in the reversal of the previously recorded $21.3 million accounts receivable reserve in the fourth quarter of 2019. Because GCI Holdings was unable to conclude at any time prior to December 31, 2019 and willthat collection of consideration for services provided to the rural healthcare customer was probable, we concluded that revenue should not be recognized until an adequate levelfor any period subsequent to the first quarter of clarity is reached on2019 even though we continued to provide services to the matter andrural healthcare customer.

In light of the FCC order, we evaluated the applicable revenue recognition criteria are met.in the first quarter of 2020 and concluded that we met the applicable revenue recognition criteria and could recognize revenue for the services provided subsequent to the first quarter of 2019. The result of meeting the applicable revenue recognition criteria in the first quarter of 2020 was to record revenue of approximately $9 million related to the services provided during 2019 for which revenue had not been previously recognized and to begin recording revenue in the first quarter of 2020 for services provided to the rural healthcare customer.

On May 28, 2020, GCI Holdings received a second letter of inquiry from the Enforcement Bureau in the same matter noted above. This second letter, which was in response to a voluntary disclosure made by GCI Holdings to the FCC, extended the scope of the original inquiry to also include various questions regarding compliance with the records retention requirements related to the (i) original inquiry and (ii) RHC Program. While the letter expands the scope of review, it does not alter the Company’s assessment of the Enforcement Bureau inquiry.


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On August 20, 2019, the FCC released an order adopting changes to the RHC Program that will revise the manner in which support issued under the RHC Program will be calculated and approved. Some of these changes will become effective beginning with the funding year ending June 30, 2021, while others will apply beginning with the funding year ending June 30, 2022. On October 21, 2019, GCI Holdings appealed the order to the United States Court of Appeals for the District of Columbia Circuit. On December 6, 2019, that appeal was held in abeyance for nine months due to pending Petitions for Reconsideration filed by other parties at the FCC, and on September 25, 2020, the period of abeyance was extended through March 8, 2021. At the direction of the FCC, USAC has released a database that purports to determine a median rate which will cap the amount of support available for each service sold under the program, starting in the funding year ending June 30, 2022.  On September 30, 2020, USAC released a refreshed version of the database incorporating limited changes submitted by interested parties.  GCI Holdings anticipates pursuing a cost-based waiver to support rates charged for numerous services sold under the program.  The waiver process is not yet fully developed and it is uncertain what the outcome of GCI Holdings’ cost-based waiver request will be.  In addition, on July 30, 2020, GCI Holdings filed an administrative appeal of certain parameters prescribed for the USAC database by the FCC’s Wireline Competition Bureau, and anticipates filing an additional administrative appeal related to the September 30, 2020 refreshed USAC database. Because the outcome of GCI Holdings’ administrative appeals and anticipated waiver request remain undetermined, GCI Holdings cannot assess at this time the impact that these changes adopted by the FCC will have on funding.

Results of Operations - Consolidated


General.We provide in the tables below information regarding our consolidated operating results and other income and expenses, as well as information regarding the contribution to those items from our reportable segments.segments in the tables below. The "Corporate and other" category consists of those assets or businesses which do not qualify as a separate reportable segment. For a more detailed discussion and analysis of the financial results of our principal reportable segment see "Results of Operations-GCI Holdings"Holdings, LLC" below.



 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 amounts in thousands
Revenue       
GCI Holdings$221,028
 205,047
 645,218
 489,620
Corporate and other6,016
 5,099
 17,128
 15,220
Consolidated$227,044
 210,146
 662,346
 504,840
        
Operating Income (Loss)       
GCI Holdings$3,663
 (8,859) (27,516) 4,661
Corporate and other(7,837) (11,010) (25,555) (32,492)
Consolidated$(4,174) (19,869) (53,071) (27,831)
        
Adjusted OIBDA       
GCI Holdings$71,960
 57,945
 182,552
 156,608
Corporate and other(5,382) (7,205) (17,199) (20,256)
Consolidated$66,578
 50,740
 165,353
 136,352

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Revenue

 

  

 

  

  

 

  

GCI Holdings

$

244,266

 

221,028

698,408

 

645,218

Corporate and other

 

2,626

 

6,016

9,103

 

17,128

Consolidated

$

246,892

 

227,044

707,511

 

662,346

Operating Income (Loss)

 

  

 

  

  

 

  

GCI Holdings

$

28,048

 

3,663

66,040

 

(27,516)

Corporate and other

 

(17,976)

 

(7,837)

(42,725)

 

(25,555)

Consolidated

$

10,072

 

(4,174)

23,315

 

(53,071)

Adjusted OIBDA

 

  

 

  

  

 

  

GCI Holdings

$

91,617

 

71,960

256,057

 

182,552

Corporate and other

 

(16,336)

 

(5,382)

(36,497)

 

(17,199)

Consolidated

$

75,281

 

66,578

219,560

 

165,353

Revenue. Our consolidated revenue increased $16.9$19.8 million and $157.5$45.2 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The increaseincreases in revenue for the three month period is due to a $16.0 million increase at GCI Holdings for the same period. The increase for theand nine month period isperiods were primarily due to an increaseincreases of $155.6$23.2 million and $53.2 million, respectively, at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018, which resulted in a partial quarter of activity for the first quarter of 2018 and a full quarter of activity for the first quarter of 2019.Holdings. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.


Operating Income (Loss). Our consolidated operating loss decreased $15.7income increased $14.2 million and increased $25.2$76.4 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The decreaseincreases in the operating lossincome for the three and nine month period isperiods were primarily due to a $12.5increases of $24.4 million decrease in the operating loss for

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and $93.6 million, respectively, at GCI Holdings. The increase in the operating loss for the nine month period is primarily due to a $32.2 million increase in the operating loss at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018 and associated depreciation and amortization as a result of acquisition accounting. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.


Operating losses for corporateCorporate and other decreased $3.2increased $10.1 million and $6.9$17.2 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year, due to a decrease in costs associated withincreased professional service fees at the Transactions.


corporate level related to the Combination, as well as increased operating losses at certain of our subsidiaries.

Stock-based compensation. Stock based compensation includes compensation related to restricted shares of GCI Liberty'sLiberty’s common stock and preferred stock, restricted stock units with respect to GCI Liberty'sLiberty’s common stock, and options to purchase shares of GCI Liberty'sLiberty’s common stock granted to certain of the Company'sCompany’s directors, employees, and employees of its subsidiaries. We recorded $5.8The decreases in stock-based compensation of $1.2 million and $7.8 million of stock compensation expense for the three months ended September 30, 2019 and 2018, respectively, and $18.2 million and $20.9 million of stock compensation expense for the nine months ended September 30, 2019 and 2018, respectively. The decrease of $2.0 million and $2.7$6.8 million for the three and nine months ended September 30, 2019,2020, respectively, waswere primarily due to decreases in stock compensation at Corporate and other of $1.3 million and $3.7 million for the three and nine month periods, respectively, and a decrease at GCI Holdings of $0.7 million and an increase of $1.0$5.1 million for the three and nine month periods, respectively. As of September 30, 2019,2020, the total unrecognized compensation cost related to unvested options and RSAs was approximately $4$7.0 million and $20$13.0 million, respectively. Such amounts will be recognized in the Company'sCompany’s consolidated statements of operations over a weighted average period of approximately 1.42.6 years and 2.51.9 years, respectively.


Adjusted OIBDA. To provide investors with additional information regarding our financial results, the Company also discloses Adjusted OIBDA, which is a non-GAAP financial measure. The Company defines Adjusted OIBDA as operating income (loss) plus depreciation and amortization, stock-based compensation, separately reported litigation settlements, insurance proceeds, restructuring, acquisition and other related costs and impairment charges. The Company'sCompany’s chief operating decision maker and



management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. The Company believes this is an important indicator of the operational strength and performance of its businesses by identifying those items that are not directly a reflection of each business'business’ performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles. The following table providesa reconciliation of operating income (loss) to Adjusted OIBDA:

  Three months ended September 30, Nine months ended September 30,
  2019 2018 2019 2018
  amounts in thousands
Operating income (loss) $(4,174) (19,869) (53,071) (27,831)
Depreciation and amortization 66,466
 62,848
 200,035
 143,257
Stock-based compensation 5,768
 7,761
 18,153
 20,926
Insurance proceeds and restructuring, net (1,482) 
 236
 
Adjusted OIBDA $66,578
 50,740
 165,353
 136,352

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Operating income (loss)

$

10,072

 

(4,174)

23,315

 

(53,071)

Depreciation and amortization

 

60,688

 

66,466

184,856

 

200,035

Stock-based compensation

 

4,521

 

5,768

11,389

 

18,153

Insurance proceeds and restructuring, net

 

 

(1,482)

 

236

Adjusted OIBDA

$

75,281

 

66,578

219,560

 

165,353

Consolidated Adjusted OIBDA increased $15.8$8.7 million and $29.0$54.2 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The increaseincreases for the three and nine month period isperiods were primarily due to an increaseincreases in revenue at GCI Holdings. The increaseand, for the nine month period is primarily due to the acquisition ofmonths ended September 30, 2020, decreases in selling, general and administrative expenses at GCI Holdings on March 9, 2018.Holdings. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.


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Table of Contents


Other Income and Expense


Components of Other income (expense) are presented in the table below.

 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 amounts in thousands
Interest expense       
GCI Holdings$(22,765) (21,266) (68,248) (47,455)
Corporate and other(15,588) (16,348) (48,109) (33,849)
Consolidated$(38,353) (37,614) (116,357) (81,304)
        
Share of earnings (losses) of affiliates, net       
GCI Holdings$(28) (36) (139) (86)
Corporate and other1,949
 10,892
 (2,304) 18,800
Consolidated$1,921
 10,856
 (2,443) 18,714
        
Realized and unrealized gains (losses) on financial instruments, net       
GCI Holdings$
 
 1,669
 
Corporate and other156,165
 495,509
 1,843,194
 (4,328)
Consolidated$156,165
 495,509
 1,844,863
 (4,328)
        
Tax sharing agreement       
GCI Holdings$
 
 
 
Corporate and other2,362
 2,492
 18,895
 (25,456)
Consolidated$2,362
 2,492
 18,895
 (25,456)
        
Other, net       
GCI Holdings$319
 (198) 13,081
 620
Corporate and other(859) (636) 743
 (1,602)
Consolidated$(540) (834) 13,824
 (982)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Interest expense

 

  

 

  

  

 

  

GCI Holdings

$

(17,074)

 

(22,765)

(53,244)

 

(68,248)

Corporate and other

 

(12,648)

 

(15,588)

(47,120)

 

(48,109)

Consolidated

$

(29,722)

 

(38,353)

(100,364)

 

(116,357)

Share of earnings (losses) of affiliates, net

 

  

 

  

  

 

  

GCI Holdings

$

53

 

(28)

(57)

 

(139)

Corporate and other

 

(9,088)

 

1,949

(7,447)

 

(2,304)

Consolidated

$

(9,035)

 

1,921

(7,504)

 

(2,443)

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

 

  

 

  

  

 

  

GCI Holdings

$

 

 

1,669

Corporate and other

 

1,172,685

 

156,165

1,199,560

 

1,843,194

Consolidated

$

1,172,685

 

156,165

1,199,560

 

1,844,863

Tax sharing agreement

 

  

 

  

  

 

  

GCI Holdings

$

 

 

Corporate and other

 

26,146

 

2,362

30,057

 

18,895

Consolidated

$

26,146

 

2,362

30,057

 

18,895

Other, net

 

  

 

  

  

 

  

GCI Holdings

$

16,089

 

319

17,532

 

13,081

Corporate and other

 

(23,403)

 

(859)

(22,708)

 

743

Consolidated

$

(7,314)

 

(540)

(5,176)

 

13,824

Interest Expense. Consolidated interest expense increased $0.7decreased $8.6 million and $35.1$16.0 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year. The decreases were primarily due to lower amounts outstanding on the Senior Credit Facility (as defined in note 7 of the accompanying condensed consolidated financial statements), as well as lower interest rates. This decrease was partially offset by increased amounts outstanding under the Margin Loan Facility (as defined in note 7 of the accompanying condensed consolidated financial statements).

Share of earnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net decreased $11.0 million and $5.1 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in the prior year respectively. The increase for the three month period was primarily due to higher interest rates partially offset by a decreasean increase in amounts owed under the Senior Credit Facility and Margin Loan (each as defined in note 8 of the accompanying condensed consolidated financial statements). The increase for the nine month period was primarily due to the acquisition of GCI Holdings on March 9, 2018, the Margin Loan and the Exchangeable Senior Debentures (as defined in note 8 of the accompanying condensed consolidated financial statements) that were issued on June 18, 2018.


Share of earnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net decreased $8.9 million and $21.2 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively, due to a decrease in earningslosses by our affiliates.


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Table of Contents


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

  Three months ended September 30, Nine months ended September 30,
  2019 2018 2019 2018
  amounts in thousands
Equity securities $90,770
 175,359
 683,808
 (53,681)
Investment in Liberty Broadband 19,207
 366,211
 1,393,135
 (36,706)
Derivative instruments 60,640
 (3,223) (57,721) 69,329
Indemnification obligation (3,485) (14,937) (58,311) 48,671
Exchangeable senior debentures (10,967) (27,901) (116,048) (31,941)
  $156,165
 495,509
 1,844,863
 (4,328)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Equity securities

$

612,465

 

90,770

746,406

 

683,808

Investment in Liberty Broadband

 

807,114

 

19,207

730,713

 

1,393,135

Derivative instruments

 

(2,019)

 

60,640

7,849

 

(57,721)

Indemnification obligation

 

(94,871)

 

(3,485)

(107,456)

 

(58,311)

Exchangeable senior debentures

 

(150,004)

 

(10,967)

(177,952)

 

(116,048)

$

1,172,685

 

156,165

1,199,560

 

1,844,863

The changes in these accounts are primarily due to market factors and changes in the fair value of the underlying stocks or financial instruments to which these related. The decreaseincrease for the three months ended September 30, 20192020 as compared to the corresponding period in the prior year was primarily driven by increases in the unrealized gains for our investment in Liberty Broadband and Charter.  The decrease for the nine months ended September 30, 2020 as compared to the corresponding period in the prior year was primarily driven by a decrease in the unrealized gain for our investment in Liberty Broadband and Charter. The increase for the nine months ended September 30, 2019 as compared to the corresponding period in the prior year was primarily driven by an unrealized gain in our investments in Liberty Broadband and Charter.


Broadband.

Tax sharing agreement. The change in the tax sharing receivable due from Qurate Retail resulted in gains of $2.4$26.1 million and $2.5$2.4 million for the three months ended September 30, 2020 and 2019, respectively, and 2018, respectively, and a gaingains of $18.9$30.1 million and a loss of $25.5$18.9 million for the nine months ended September 30, 2020 and 2019, and 2018, respectively.respectively. The change in the tax sharing receivable for 2019all periods was primarily the result of the tax effect of the movement in the fair value of Qurate Retail’s 1.75% exchangeable senior debentures due 2046. The change in the tax sharing receivable for 2018 was primarily the result of the tax effect of the movement in the fair value of Qurate Retail's 1.75% exchangeable senior debentures due 2046 and an increase in the valuation allowance recorded against Qurate Retail's Colorado net operating loss deferred tax asset as a result of a Colorado tax law change in the second quarter of 2018. 


Other, net. The change in Other, net at GCI Holdings for the three months ended September 30, 2020 was primarily due to a gain on sale of certain assets of $15.4 million. The change in Other, net for GCI Holdings for the nine months ended September 30, 2019 is2020 was primarily due to a $6.5gain on sale of certain assets of $15.4 million, compared to $10.7 million of gain for an amendment maderelated to a finance lease amendment and a $3.2 million gain for thepremium write-off of the premium recorded for the senior notes that were refinanced duringin the second quarter of 2019.  The change in Other, net at Corporate and other for the three and nine months ended September 30, 2019 is2020 was primarily due to investment gains or losses.


the loss on the sale of Evite of $23.0 million.

Income taxes. Earnings (losses) before income taxes and income tax (expense) benefit are as follows:

  Three months ended September 30, Nine months ended September 30,
  2019 2018 2019 2018
  amounts in thousands
Earnings (loss) before income taxes $117,381
 450,540
 1,705,711
 (121,187)
Income tax (expense) benefit $(28,087) (133,284) (478,887) (35,768)
Effective income tax rate 24% 30% 28% 30%

The

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Earnings (loss) before income taxes

$

1,162,832

 

117,381

1,139,888

 

1,705,711

Income tax (expense) benefit

 

(338,446)

 

(28,087)

 

(336,776)

 

(478,887)

Effective income tax rate

 

29%

24%

 

30%

28%

For the three and nine months ended September 30, 2020 and 2019, the Company recognized income tax expense in excess of expected federal tax expense, for the three and nine months ended September 30, 2019, primarily due to state income tax expense.


The Company recognized additional income tax expense in the three months ended September 30, 2018, primarily due to state income tax expense.

The Company recognized additional income tax expense in the nine months ended September 30, 2018 primarily related to an increase in the Company's state effective tax rate used to measure deferred taxes resulting from the HoldCo Split-Off in March 2018, partially offset by a decrease in the Company's state effective tax rate used to measure deferred taxes resulting from a state law change during the second quarter and the effect of additional state income tax benefits.

Net earnings (loss). The Company had net earnings of $89.3$824.4 million and $317.3$89.3 million for the three months ended September 30, 20192020 and 2018,2019, respectively. The Company had net earnings of $803.1 million and $1,226.8 million and a net loss of $157.0 million



for the nine months ended September 30, 20192020 and 2018,2019, respectively. The change in net earnings (loss) was the result of the above-described fluctuations in our revenue, expenses, and other income and expenses.


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Table of Contents

Liquidity and Capital Resources


As of September 30, 2019,2020, substantially all of ourthe Company’s cash and cash equivalents were invested in U.S. Treasury securities, securities of other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.


The following are potential sources of liquidity: available cash balances, proceeds from asset sales, monetization of our investments, outstanding or anticipated debt facilities, and debt and equity issuances. The available sources of liquidity discussed above provideTo the extent that the Company adequate options to addressrecognizes any taxable gains from the Margin Loan prior to maturity. Assale of September 30, 2019, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of its Senior Notes. Accordingly,assets, the Company can only access additional funding under the revolving portion of the Senior Credit Facility so long as we are in compliance with the Senior Credit Facility covenants after giving effectmay incur tax expense and be required to make tax payments, thereby reducing any additional borrowings. We believe we havecash proceeds. The Company believes it has sufficient cash from operating activities and cash on hand to fund ourits business.


As of September 30, 2019,2020, the Company had a cash and cash equivalents balance of $410.1$552.6 million.

  Nine months ended September 30,
  2019 2018
  amounts in thousands
Cash flow information    
Net cash provided (used) by operating activities $82,114
 38,563
Net cash provided (used) by investing activities (102,293) 12,700
Net cash provided (used) by financing activities (60,987) 64,942
  $(81,166) 116,205

Nine months ended

September 30, 

    

2020

    

2019

amounts in thousands

Cash flow information

 

  

 

  

Net cash provided (used) by operating activities

$

67,899

 

82,114

Net cash provided (used) by investing activities

 

(81,613)

 

(102,293)

Net cash provided (used) by financing activities

 

(9,656)

 

(60,987)

$

(23,370)

 

(81,166)

During the nine months ended September 30, 2020, the Company’s primary use of cash was capital expenditures.  During the nine months ended September 30, 2019, the Company’s primary uses of cash included capital expenditures and repurchases of GCI Liberty Series A common stock.stock and capital expenditures. The Company'sCompany’s significant recurring investing activity has been capital expenditures and is expected to continue in the future. A significant portion of our capital expenditures are based on the level of customer growth and updated technology. The Company’s primary sources of cash included cash from operations and cash on hand.


Proceeds from borrowings fluctuate from year to year based on our liquidity needs. We may use excess cash to make optional repayments on our debt or repurchase our common stock depending on various factors, such as market conditions.


The projected uses of the Company'sCompany’s cash for the remainder of 20192020 are capital expenditures of approximately $33$35 million, approximately $48$40 million for interest payments on outstanding debt, paymentsapproximately $5 million for preferred stock dividends repurchases of GCI Liberty Series A common stock under the approved share buyback program, and potential additional investments in existing or new businesses.


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Results of Operations - GCI Holdings, LLC


GCI Holdings provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska. We have seen a general decrease in subscriber metrics primarily due to the recession in Alaska as discussed in the Overview section. The following table highlights selected key performance indicators used in evaluating GCI Holdings as of September 30, 20192020 and 2018.



2019.

September 30, 

    

2020

    

2019

Consumer

 

  

 

  

Wireless:

 

  

 

  

Revenue generating wireless lines in service1

 

179,600

 

180,100

Non-revenue generating wireless lines in service2

 

2,700

 

8,300

Wireless lines in service

 

182,300

 

188,400

Data:

 

  

 

  

Revenue generating cable modem subscribers3

138,200

124,600

Non-revenue generating cable modem subscribers4

Cable modem subscribers

 

138,200

 

124,600

Video:

 

  

 

  

Basic subscribers5

 

76,000

 

82,200

Homes passed6

 

253,400

 

253,400

Voice:

 

  

 

  

Total local access lines in service7

 

37,300

 

40,800

Business

 

  

 

  

Wireless:

 

  

 

  

Revenue generating wireless lines in service1

25,200

21,100

Data:

 

  

 

Revenue generating cable modem subscribers3

12,800

9,000

Voice:

 

  

 

  

Total local access lines in service7

 

33,400

 

34,800

 September 30,
 2019 2018
Consumer   
Wireless:   
Wireless lines in service1
188,400
 197,800
Data:   
Cable modem subscribers2
124,600
 125,300
Video:   
Basic subscribers3
82,200
 90,300
Homes passed253,400
 253,400
Voice:   
Total local access lines in service4
40,800
 45,800
Business   
Wireless:   
Wireless lines in service1
21,100
 22,000
Data:   
Cable modem subscribers2
9,000
 9,200
Voice:   
Total local access lines in service4
34,800
 36,600
    
1 A wireless line in service is defined as a revenue generating wireless device.
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber.
3 A basic subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof regardless of the number of outlets purchased.
4 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.

As described

1A revenue generating wireless line in notes 1 and service is defined as a wireless device with a monthly fee for services.

2A non-revenue generating wireless line in service is defined as a data-only line with no monthly fee for services.

3 A revenue generating cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber.

4 A non-revenue generating cable modem subscriber is defined by the provision of basic cable modem service as a promotion to aid those impacted by COVID-19.

5A basic subscriber is defined by the purchase of basic video service.

6A home passed is defined as a dwelling unit that can be connected to GCI Holdings’ network without the need of otherwise extending its network.

7A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the accompanying condensed consolidated financial statements, for accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution. Although GCI Holdings’ results are only included in the Company’s results beginning on March 9, 2018, we believe a discussionpublic switched telephone network.

I-34

Table of GCI Holdings’ results for all periods presented promotes a better understanding of the overall results of its business. For comparison and discussion purposes we are presenting the pro forma results of GCI Holdings for the three and nine months ended September 30, 2018, inclusive of acquisition accounting adjustments. The pro forma financial information was prepared based on the historical financial information of GCI Holdings and assuming the acquisition of GCI Holdings took place on January 1, 2017. We have made pro forma adjustments to the results for the three and nine months ended September 30, 2018 to reflect the impact of the FCC's decision in regards to RHC funding as described above in the Overview section. The financial information below is presented for illustrative purposes only and does not purport to represent what the results of operations of GCI Holdings would actually have been had the business combination occurred on January 1, 2017, or to project the results of operations of GCI Holdings for any future periods. The pro forma adjustments are based on available information and certain assumptions that the Company's management believes are reasonable. The pro forma adjustments are directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, stock-based compensation, and the exclusion of transaction related costs; RHC funding as described above; and the new revenue standard and are expected to have a continuing impact on the results of operations of the Company.Contents




GCI Holdings’ operating results for the three and nine months ended September 30, 2020 and 2019 and pro forma operating results for the three and nine months ended September 30, 2018 wereare as follows:

 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 amounts in thousands
Revenue$221,028
 215,636
 645,218
 649,066
Operating expenses (excluding stock-based compensation included below):       
Operating expense(67,722) (61,201) (195,666) (190,020)
Selling, general and administrative expenses(81,346) (86,044) (267,000) (253,400)
Adjusted OIBDA71,960
 68,391
 182,552
 205,646
Stock-based compensation(4,017) (1,667) (11,940) (5,010)
Legal settlement
 
 
 (3,600)
Insurance proceeds and restructuring, net1,482
 
 (236) 
Depreciation and amortization(65,762) (62,081) (197,892) (178,743)
Operating income (loss)$3,663
 4,643
 (27,516) 18,293

Three months ended

Nine months ended

 

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

 

amounts in thousands

 

Revenue

$

244,266

 

221,028

698,408

 

645,218

Operating expenses (excluding stock-based compensation included below):

 

  

 

  

  

 

  

Operating expense

 

(67,053)

 

(67,722)

(198,873)

 

(195,666)

Selling, general and administrative expenses

 

(85,596)

 

(81,346)

(243,478)

 

(267,000)

Adjusted OIBDA

 

91,617

 

71,960

256,057

 

182,552

Stock-based compensation

 

(3,285)

 

(4,017)

(6,829)

 

(11,940)

Insurance proceeds and restructuring, net

 

 

1,482

 

(236)

Depreciation and amortization

 

(60,284)

 

(65,762)

(183,188)

 

(197,892)

Operating income (loss)

$

28,048

 

3,663

66,040

 

(27,516)

Revenue


The components of revenue for the three and nine months ended September 30, 20192020 and 2018, respectively,2019, are as follows:

 Three months ended September 30, Nine months ended September 30,
 2019 2018 2019 2018
 amounts in thousands
Consumer       
Wireless$41,929
 38,552
 121,751
 121,477
Data42,920
 39,652
 125,555
 117,957
Video21,198
 22,276
 63,268
 66,903
Voice4,275
 4,897
 13,306
 15,586
Business       
Wireless24,393
 24,392
 70,876
 72,680
Data70,813
 69,592
 204,476
 208,167
Video4,115
 4,927
 11,928
 12,100
Voice11,385
 11,348
 34,058
 34,196
Total$221,028
 215,636
 645,218
 649,066

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

amounts in thousands

Consumer

 

  

 

  

  

 

  

Wireless

$

43,749

 

41,929

126,849

 

121,751

Data

 

47,852

 

42,920

137,562

 

125,555

Video

 

23,931

 

21,198

65,154

 

63,268

Voice

 

3,795

 

4,275

11,643

 

13,306

Business

 

 

 

  

Wireless

 

21,440

 

24,393

64,964

 

70,876

Data

 

90,377

 

70,813

248,347

 

204,476

Video

 

2,277

 

4,115

10,726

 

11,928

Voice

 

10,845

 

11,385

33,163

 

34,058

Total

$

244,266

 

221,028

698,408

 

645,218

Consumer wireless revenue increased $3.4$1.8 million and $0.3$5.1 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The increase in revenue duringincreases for the three and nine month periods waswere primarily due to increased plan service fee revenue of $3.9$1.3 million and $4.2$4.3 million, respectively, driven by the absence in 2019 of the forgiveness of a month of service for the Company's wireless customers, which occurred in 2018, and subscribers'subscribers’ selection of plans with higher recurring monthly charges that offer higher usage limits.  During the third quarter of 2018, the Company implemented a new billing system that included a transition of wireless customers from billing in arrearsAdditionally, equipment sales revenue increased $0.4 million and $0.8 million due to billing in advance. To ease the transition for customers, the Company forgave one month of service for those customers who would have otherwise received an invoice for two months of service. The increase in revenuethe number of handsets sold for the three and nine month periods, was partially offset by a decrease in the number of subscribers, a decrease in USF high cost support ("High Cost Support") of $0.6 million and $1.8 million, respectively, due to the previously disclosed end of High Cost Support for urban areas as of December 31, 2018 and a $0.3 million and $1.1 million decrease in the subsidy for Lifeline subscribers for the three and nine month periods, respectively, due to a reduction of the subsidy provided by the State of Alaska.




respectively.

Consumer data revenue increased $3.3$4.9 million and $7.6$12.0 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The increase wasincreases were driven by subscribers'an increase in the number of subscribers and the subscribers’ selection of plans with higher recurring monthly charges that offer higher speeds and higher usage limits. The increase was partially offset by a decrease driven by the loss of subscribers.


Consumer video revenue decreased $1.1 increased $2.7 million and $3.6$1.9 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The decrease was primarilyincreases were due to a 9%$4.1 million increase in advertising revenue driven by a reorganization effective August 1, 2020. The Company transitioned its advertising sales to Consumer video following the sale of the Company’s broadcast television station.  The increase was partially offset by a decrease in plan fee revenue driven by a decrease in the number of subscribers partially offset by customers choosing plans with higher recurring monthly charges that offer more channels.subscribers.


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Consumer voice revenue decreased $0.6$0.5 million and $2.3$1.7 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The decreases were primarily due to a $0.3 million and $1.0 million decrease in High Cost Support due to a scheduled decrease in funding for urban areas for the three and nine months ended September 30, 2019, respectively, and a decrease in long distance plan fee revenue driven by a reduction in the number of customers.


Business wireless revenuewas flatdecreased $3.0 million and decreased $1.8$5.9 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The decrease in the nine month period isdecreases were primarily due to wholesale customers removing backhaul circuits from our network.


network and a decrease in grant revenue partially offset by increases in roaming revenue driven by the renegotiation of a roaming contract.

Business data revenue increased $1.2$19.6 million and decreased $3.7$43.9 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The increase for the three month period isincreases were due to a $2.2$21.6 million increaseand $53.4 million increases in data and transport revenue driven by an increase in the price of business cable modems and higherincreased sales to school and medical customers.customers for service upgrades for the three and nine month periods, respectively. The increase for the threenine month period also included $9 million associated with prior periods for an RHC customer whose funding was initially denied but subsequently approved in the first quarter of 2020. The increases were partially offset by a $0.9$2.0 million decreaseand $9.6 million decreases in professional services revenue driven by a reduction in time and materials project work for the three and nine month periods, respectively.

Business video revenue decreased $1.8 million and $1.2 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decreases were primarily due to the sale of the Company’s broadcast television station.

Business voice revenue decreased $0.5 million and $0.9 million for the three and nine months ended September 30, 2020 as compared to the corresponding periods in the prior year.  The decreases were driven by a decrease in speciallocal service lines partially offset by an increase in long distance and conferencing services.

Operating expenses decreased $0.7 million and increased $3.2 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decrease for the three month period is primarily due to a $2.0 million decrease in professional services costs driven by a reduction in time and materials project work and a reduction of revenue from$0.9 million decrease in video costs paid to content producers driven by a healthcare customer whose funding was denied as discusseddecrease in the Overview section above.video subscribers. The decrease for the three month period is partially offset by a $1.7 million increase in wireless handset costs and $0.5 million in costs to operate our network. The increase for the nine month period is primarily due to a reduction of revenue from a healthcare customer whose funding was denied as discussed in the Overview section above partially offset by increased revenue from school and medical customers and the increase in business cable modem prices.


Business video revenue decreased $0.8 million and $0.2 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The decrease for three and nine month periods is primarily due to a decrease in political advertising revenue.

Business voice revenue was relatively flat for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively.

Operating expensesincreased $6.5 million and $5.6 million for the three and nine months ended September 30, 2019 as compared to the corresponding periods in the prior year, respectively. The increase for the three month period was primarily due to a $2.6 million increase in wireless network and roaming costs, a $2.0$11.9 million increase in costs to operate our satellite network driven by a transition from accounting for satellite transponders as operating leases instead of finance leases due to a modification in the prior year and a $1.2$2.5 million increase in video costs driven by increases in what we pay content producers.wireless handset costs. The increase for the nine month period was primarily due to a $1.3is partially offset by decreases of $6.8 million increase in wireless network and roamingprofessional services costs a $3.0 million increase in costs to operate our satellite network driven by a transition from accounting for satellite transponders as operating leases instead of finance leases,reduction in time and a $1.3materials project work and $3.1 million increase in video costs paid to content producers driven by an increasea decrease in contractual costs for video customer premise equipment.

subscribers.

Selling, general and administrative expenses decreased $4.7 increased $4.3 million and increased $13.6decreased $23.5 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The decreaseincrease for the three month period was primarily due to a decrease$5.1 million increase in labor related expense driven by an increase in employee incentive compensation and a $1.8 million increase in legal and compliance costs. The increase for the Company'sthree month period is partially offset by a $1.8 million decrease in bad debt expense and the Company’s cost cutting efforts. The increasedecrease for the nine month period was driven by aprimarily due to the absence of $21.3 million increase in the allowance for receivables as a result of USAC denying an appeal from one of our customers whichthat was recorded during first quarter of 2019, a $2.7 million decrease in labor related expense driven by reduced healthcare costs due to reduced healthcare interactions as employees limit doctor appointments, hospital visits and elective procedures due to COVID-19 and the Company’s cost cutting efforts. The decrease for the nine month period was partially offset by a $6.3$4.4 million decreaseincrease in laborlegal and contract laborcompliance costs. See Rural Health Care Program in the Overview section above for more information.


Stock based compensation increased $2.4decreased $0.7 million and $6.9$5.1 million for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively,year. The decrease for the three month period was primarily due to the reversal of expense for employees who left the company prior to the vesting of their awards grantedand a reduction in the fourth quarternumber of 2018outstanding awards. The decrease for the nine month period was primarily due to

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the reversal of expense for performance-based awards that did not vest due to a shortfall in certain financial metrics and first quarterqualitative criteria and for employees who left the company prior to the vesting of 2019.




their awards.

Depreciation and amortization increased $3.7decreased $5.5 million and $19.1$14.7 million or 6% and 11% for the three and nine months ended September 30, 20192020, respectively, as compared to the corresponding periods in the prior year, respectively.year. The increasedecrease for the three and nine months ended September 30, 20192020 was primarily due to newassets which became fully depreciated prior to the three and nine month periods in 2020, a decrease in assets placed in service since March 9, 2018, partially offset by assets which became fully depreciated since March 9, 2018January 1, 2019, and lower amortization expense because of an accelerated recognition pattern for amortizing intangibles.


Item 3. Quantitative and Qualitative Disclosures about Market Risk


The Company is exposed to market risk in the normal course of business due to its ongoing investing and financial activities. Market risk refers to the risk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. The Company has established policies, procedures and internal processes governing its management of market risks and the use of financial instruments to manage its exposure to such risks.


The Company is exposed to changes in interest rates primarily as a result of its borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of its long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. The Company manages its exposure to interest rates by maintaining what it believes is an appropriate mix of fixed and variable rate debt. The Company believes this best protects it from interest rate risk. The Company has achieved this mix by (i) issuing fixed rate debt that it believes has a low stated interest rate and significant term to maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when it deems appropriate.


As of September 30, 2019,2020, the Company'sCompany’s debt is comprised of the following amounts:

 Variable rate debt Fixed rate debt
 Principal amount Weighted average interest rate Principal amount Weighted average interest rate
 dollar amounts in thousands
GCI Holdings$720,477
 4.7% $775,000
 6.8%
Corporate and other$900,000
 4.0% $477,250
 1.8%

Variable rate debt

Fixed rate debt

 

    

    

Weighted

    

    

Weighted

 

average

average

 

Principal

interest

Principal

interest

 

amount

rate

amount

rate

 

 

dollar amounts in thousands

GCI Holdings

$

517,430

 

2.1

%  

$

775,000

 

6.8

%

Corporate and other

$

1,300,000

 

2.1

%  

$

477,250

 

1.8

%

GCI Liberty’s borrowings under the Margin Loan Agreement (as defined in note 7 of the accompanying condensed consolidated financial statements) and the Senior Credit Facility carry a variable interest rate based on LIBOR as a benchmark for establishing the rate of interest. LIBOR is the subject of national, international and other regulatory guidance and proposals for reform. On July 27, 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of borrowings under the aforementioned debt instruments. In preparation for the expected phase out of LIBOR, and to the extent alternate reference rates were not included in existing debt agreements, GCI Liberty has incorporated alternative reference rates when amending these facilities.

The Company is exposed to changes in stock prices primarily as a result of its significant holdings in publicly traded securities. The Company continually monitors changes in stock markets, in general, and changes in the stock prices of its holdings, specifically. The Company believes that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. The Company periodically uses equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments are recorded at fair value based on option pricing models.

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Table of Contents

At September 30, 2019,2020, the fair value of the Company'sCompany’s equity securities was $2.2$3.3 billion. Had the market price of such securities been 10% lower at September 30, 2019,2020, the aggregate value of such securities would have been $221$335 million lower. At September 30, 2019,2020, the fair value of our investment in Liberty Broadband was $4.5$6.1 billion. Had the market price of such security been 10% lower at September 30, 2019,2020, the fair value of such security would have been $447$610 million lower.


Item 4. Controls and Procedures


Disclosure Controls and Procedures


In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company'sCompany’s disclosure controls and procedures were not effective as of September 30, 20192020 because of the material weaknessesweakness in our internal control over financial reporting as discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Form 10-K”). Management has continued to monitor the implementation of the remediation plan described in the 20182019 Form 10-K, as described below.




Changes in Internal Control Over Financial Reporting


During the third quarter of 2019,2020, we continued to review the design of our controls, made adjustments and continued implementing controls to alleviate the noted control deficiencies. Other than these items, there has been no change in the Company'sCompany’s internal control over financial reporting that occurred during the three months ended September 30, 20192020 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.


We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic.

Remediation Plan for Material WeaknessesWeakness in Internal Control Over Financial Reporting


In response to the material weaknessesweakness identified in Management’s Report on Internal Control Over Financial Reporting as set forth in Part II, Item 9A in the 20182019 Form 10-K, the Company, with oversight from the Audit Committee of the Board of Directors, developed a plan to remediate the material weaknessesweakness at GCI Holdings. The remediation actions included the following:

Continue to hire, train and retain individuals with appropriate skills and experience related to designing, operating and documenting internal control over financial reporting.
Communicate expectations, monitor for compliance with expectations, and hold individuals accountable for their roles related to internal control over financial reporting.
Design and implement a comprehensive and continuous risk assessment process to identify and assess financial statement risks and ensure that the financial reporting process and related internal controls are in place to respond to those risks.
Enhance the design of and implement additional process-level control activities and ensure they are properly evidenced and operating effectively.

Improvement of the design and operation of control activities and procedures associated with user access to the affected IT systems, including removing all inappropriate IT system access associated with the material weakness and ensuring no inappropriate activity occurred during the period.
Enhance management’s risk assessment to emphasize and evaluate the interdependencies of business processes, automated control activities, and effective ITGCs.
Enhance controls related to the review of payroll changes and of payroll calculations after payroll is processed by the third-party processing company, but before payments are disbursed to employees.

The Company believes the foregoing efforts remediatedwill effectively remediate the technical components of the two material weaknesses disclosedweakness described in “Management’s Report on Internal Control Over Financial Reporting” in the 2018 Form 10-K after the assessment date and prior to the filing of the 20182019 Form 10-K. However, becauseBecause the reliability of the internal control process requires repeatable execution, the successful on-going remediation of thesethe material weaknessesweakness will require on-going training, continued monitoring, additional control enhancementsreview and evidence of effectiveness prior to concluding that the controls are effective.


Additionally, The Company’s remediation efforts are underway; however, there is no assurance that the Company and GCI Holdings intend to continue to monitor information system access and the assessment of process level risks to determine whether additional adjustments shouldremediation efforts will be made to ensure controls are effective in the future.future or that additional material weaknesses will not develop or be identified.


I-38




PART II. OTHER INFORMATION


Item 1. Legal Proceedings


We are involved in various lawsuits, billing disputes,

Our Annual Report on Form 10-K for the year ended December 31, 2019 includes “Legal Proceedings” under Item 3 of Part I. There have been no material changes from the legal proceedings and regulatory matters that have arisen from time to timedescribed in the normal courseForm 10-K, except as described below.

On October 9, 2020, a putative class action complaint was filed by two purported GCI Liberty stockholders in the Court of business.  Chancery of the State of Delaware under the caption Hollywood Firefighters' Pension Fund, et al. v. GCI Liberty, Inc., et al. On October 11, 2020, a new version of the complaint was filed, and the case has been assigned Case No. 2020-0880. The lawsuit names as defendants GCI Liberty, as well as the members of the GCI Liberty board of directors. The lawsuit alleges, among other things, that Messrs. Maffei and Malone in their purported capacities as controlling stockholders and directors of GCI Liberty, and the other directors of GCI Liberty, breached their fiduciary duties by approving the Combination. The lawsuit also alleges that various prior and current relationships between the members of the GCI Liberty special committee and Mr. Malone and Mr. Maffei render the members of the GCI Liberty special committee not independent. The lawsuit further alleges that the Combination violates Section 203 of the General Corporation Law of the State of Delaware (“DGCL”) and that the joint proxy statement/prospectus that was filed in connection with the Combination misstates and omits material information. The lawsuit seeks certification of a class action, declarations that Messrs. Maffei and Malone and the other directors of GCI Liberty breached their fiduciary duties and that the Combination violates Section 203 of the DGCL, an injunction barring the stockholder vote and the Combination, and the recovery of damages and other relief. On October 15, 2020, the plaintiffs filed a motion for expedited proceedings. On October 27, 2020, after a hearing, the Court granted the motion.

GCI Liberty believes this lawsuit is without merit.  However, the outcome of this lawsuit or any other lawsuit that may be filed challenging the Combination or the other transactions contemplated by the transaction documents is uncertain.

On October 23, 2020, a lawsuit was filed by a purported GCI Liberty stockholder in the United States District Court for the District of Delaware under the caption Lewis Baker v. GCI Liberty, Inc., et al., Case No. 1:20-cv-01425-UNA. The lawsuit named as defendants GCI Liberty, the members of the GCI Liberty board of directors, Liberty Broadband and certain subsidiaries of Liberty Broadband. The lawsuit asserted claims under Section 14(a) of the Exchange Act and Rule 14a-9 under the Exchange Act, as well as Section 20(a) of the Exchange Act. The lawsuit alleged that the defendants caused a registration statement that omitted material information to be filed in connection with the combination, which allegedly rendered the registration statement false and misleading. The lawsuit further alleged that the members of the GCI Liberty board of directors and Liberty Broadband acted as controlling persons of GCI Liberty and had knowledge of the allegedly false and misleading statements contained in the registration statement. The lawsuit sought an injunction barring the combination, rescission of the combination in the event it had been consummated, an order directing the GCI Liberty board of directors to disseminate a registration statement that did not contain any allegedly untrue statements or omit material facts, a declaration that defendants violated the Exchange Act, costs and attorneys’ fees, and other relief.

GCI Liberty believes this lawsuit was without merit.  On October 29, 2020, the plaintiff voluntarily dismissed the lawsuit with prejudice.

Item 1A. Risk Factors

Except as discussed below, there have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A. Risk Factors of its Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. Risk Factors of its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.

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GCI Liberty will incur direct and indirect costs as a result of the Combination.

GCI Liberty will incur substantial expenses in connection with and as a result of completing the Combination, including advisory, legal and other transaction costs, and, following the completion of the Combination, Liberty Broadband expects to incur additional expenses in connection with combining the companies. A majority of these costs have already been incurred or will be incurred regardless of whether the Combination is completed. Factors beyond GCI Liberty’s control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately. Management believes there areof GCI Liberty continues to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the Combination. Although GCI Liberty expects that the realization of benefits related to the Combination will offset such costs and expenses over time, no proceedings from asserted and unasserted claimsassurances can be made that this net benefit will be achieved in the near term, or at all.

The Combination is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if determined adversely wouldat all. Failure to complete the Combination could have a material adverse effecteffects on ourGCI Liberty.

The completion of the Combination is subject to a number of conditions, including, among other things, receipt of the required Liberty Broadband and GCI Liberty stockholder approvals, including approval of the merger agreement by the affirmative vote of holders of a majority of the aggregate voting power of outstanding shares of each company that are not owned by John C. Malone and certain other persons for each company. While the parties have agreed in the merger agreement to use reasonable best efforts to satisfy the closing conditions, the parties may not be successful in their efforts to do so.  The failure to satisfy all of the required conditions could delay the completion of the Combination for a significant period of time or prevent it from occurring at all. Any delay in completing the Combination could cause GCI Liberty not to realize some or all of the benefits, or realize them on a different timeline than expected, that GCI Liberty expects to achieve if the Combination is successfully completed within the expected timeframe. There can be no assurance that the conditions to the closing of the Combination will be satisfied or (to the extent permitted) waived or that the Combination will be completed. Also, subject to limited exceptions, either Liberty Broadband or GCI Liberty may terminate the merger agreement if the Combination has not been completed by August 6, 2021, subject to possible extension as set forth in the merger agreement.

If the Combination is not completed, GCI Liberty may be materially adversely affected and, without realizing any of the benefits of having completed the Combination, and GCI Liberty will be subject to a number of risks, including the following:

the market price of GCI Liberty capital stock could decline;
GCI Liberty could owe a substantial termination fee to Liberty Broadband under certain circumstances;
if the merger agreement is terminated and GCI Liberty seeks another business combination, GCI Liberty may not find a party willing to enter into a transaction on terms equivalent to or more attractive than the terms agreed to in the merger agreement;
time and resources, financial and other, committed by GCI Liberty’s and its subsidiaries’ management to matters relating to the Combination could otherwise have been devoted to pursuing other beneficial opportunities;
GCI Liberty and its subsidiaries may experience negative reactions from the financial markets or from its customers, suppliers or employees;
GCI Liberty will be required to pay its costs relating to the Combination, such as legal, accounting, financial advisory and printing fees, whether or not the Combination is completed; and
reputational harm due to the adverse perception of any failure to successfully complete the Combination.

In addition, if the Combination is not completed, GCI Liberty could be subject to litigation related to any failure to complete the Combination or related to any enforcement proceeding commenced against it to perform its obligations under the merger agreement. Any of these risks could materially and adversely impact GCI Liberty’s financial position,condition, financial results and stock price.

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


Share Repurchase Programs


On March 9, 2018, the board of directors authorized a share repurchase program for $650 million of GCI Liberty Class A and Class B common stock. On June 25, 2018, the board of directors of GCI Liberty reapproved such repurchase program with respect to GCI Liberty'sLiberty’s Series A and Series B common stock. There were no repurchases of GCI Liberty capital stock under the authorized share repurchase program during the three months ended September 30, 2019.2020.  As of September 30, 2020, $494.4 million of GCI Liberty’s Series A and Series B common stock may be purchased under the repurchase program.

No shares of GCI Liberty Series A and Series B common stock and no shares of GCI Liberty Preferred Stock were surrendered by our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock and restricted stock units during the three months ended September 30, 2020.


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Item 6. Exhibits


Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):

Exhibit No.

Description

31.1

2.1

Agreement and Plan of Merger, dated as of August 6, 2020, by and among GCI Liberty, Inc., Liberty Broadband Corporation, Grizzly Merger Sub 1, LLC, and Grizzly Merger Sub 2, Inc. (incorporated by reference to Exhibit 2.1 to GCI Liberty, Inc.’s Current Report on Form 8-K (File No. 001-38385), filed on August 7, 2020 (the “August 2020 8-K”)).

4.1

Form of Amendment No. 3 to Margin Loan Agreement, dated as of August 12, 2020.*

10.1

Amended and Restated Letter Agreement Regarding Personal Use of Company Aircraft, effective as of January 1, 2019, between GCI Communication Corp. and Ronald A. Duncan.*

10.2

Executive Employment Agreement, effective as of July 1, 2020, between GCI Communication Corp. and Ronald A. Duncan.*

10.3

Voting Agreement, dated as of August 6, 2020, by and among Liberty Broadband Corporation, GCI Liberty, Inc. and the Stockholders named therein (incorporated by reference to Exhibit 10.1 to the August 2020 8-K).

10.4

Voting Agreement, dated as of August 6, 2020, by and among Liberty Broadband Corporation, GCI Liberty, Inc. and the Stockholders named therein (incorporated by reference to Exhibit 10.2 to the August 2020 8-K).

10.5

Assumption and Joinder Agreement to Tax Agreement, made and entered into as of August 6, 2020, by and among Liberty Broadband Corporation, GCI Liberty, Inc. and Qurate Retail, Inc. (incorporated by reference to Annex H to Liberty Broadband Corporation’s Registration Statement on Form S-4 (File No. 333-248854), filed on September 17, 2020 (the “September 2020 Form S-4”)).

10.6

Tax Sharing Agreement, dated as of March 9, 2018, by and between GCI Liberty, Inc. and Qurate Retail, Inc. (incorporated by reference to Exhibit 10.1 to GCI Liberty, Inc.’s Current Report on Form 8-K filed on March 14, 2018 (File No. 001-38385) (the "March 2018 8-K")).

10.7

Assumption and Joinder Agreement to Indemnification Agreement, made and entered into as of August 6, 2020, by and among Liberty Broadband Corporation, GCI Liberty, Inc., LV Bridge, LLC, Qurate Retail, Inc. and Liberty Interactive LLC (incorporated by reference to Annex I to the September 2020 Form S-4).

10.8

Indemnification Agreement, dated as of March 9, 2018, by and among Qurate Retail, Inc., GCI Liberty, Inc., Liberty Interactive LLC and LV Bridge, LLC (incorporated by reference to Exhibit 10.2 to the March 2018 8-K).

10.9

Assignment and Assumption Agreement, dated as of August 6, 2020, by and among Liberty Broadband Corporation, GCI Liberty, Inc., Qurate Retail, Inc., Liberty Interactive LLC and Grizzly Merger Sub 1, LLC (incorporated by reference to Annex J to the September 2020 Form S-4).

10.10

Agreement and Plan of Reorganization, dated as of April 4, 2017, by and among Liberty Interactive Corporation, Liberty Interactive LLC and General Communication, Inc. (incorporated by reference to Exhibit 2.1 to GCI Liberty, Inc.’s Current Report on Form 8-K/A filed on May 1, 2017 (File No. 000-15279)).

10.11

Amendment No. 1 to Reorganization Agreement, dated as of July 19, 2017, by and among Liberty Interactive Corporation, Liberty Interactive LLC, and General Communication, Inc. (incorporated by reference to Exhibit 10.4 to GCI Liberty, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 2, 2017 (File No. 000-15279)).

10.12

Amendment No. 2 to Reorganization Agreement, dated as of November 8, 2017, by and among Liberty Interactive Corporation, Liberty Interactive LLC and General Communication, Inc. (incorporated by reference to Exhibit 10.1 to GCI Liberty, Inc.'s Current Report on Form 8-K filed on November 9, 2017 (File No. 000-15279)).

10.13

Termination Agreement, dated as of August 6, 2020, by and among Liberty Broadband Corporation, GCI Liberty, Inc. and LV Bridge, LLC (incorporated by reference to Annex G to the September 2020 Form S-4).

31.1

Rule 13a-14(a)/15d-14(a) Certification*

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31.2

Rule 13a-14(a)/15d-14(a) Certification*

32

Section 1350 Certification**

101.INS

Inline XBRL Instance Document* - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document*

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document*

101.LAB

Inline XBRL Taxonomy Label Linkbase Document*

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document*

101.DEF

Inline XBRL Taxonomy Definition Document*

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).*

*

*

Filed herewith.

**

**

Furnished herewith

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


GCI Liberty, Inc.


Signature

TitleDate

GCI LIBERTY, INC.

Date: November 5, 2020

By:

/s/ GREGORY B. MAFFEI

/s/

Gregory B. Maffei

President and

Chief Executive Officer

November 12, 2019 and President

Gregory B. Maffei

(Principal Executive Officer)

Date: November 5, 2020

By:

/s/ BRIAN J. WENDLING

/s/

Brian J. Wendling

Senior Vice President, Controller

Chief Accounting Officer and Principal Financial Officer

November 12, 2019
Brian J. Wendling(Principal Financial Officer and Principal Accounting Officer)


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