UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

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

For the transition period from to

Commission File No. 001-38385

GCI LIBERTY, INC.

(Exact name of Registrant as specified in its charter)


Delaware		92-0072737
(State or other jurisdiction of		(I.R.S Employer
incorporation or organization)		Identification No.)

12300 Liberty Boulevard
Englewood,	Colorado	80112
(Address of principal executive offices)		(Zip Code)

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

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


Title of each class	Trading Symbols	Name of exchange on which registered
Series A Common Stock	GLIBA	The Nasdaq Stock Market LLC
Series A Cumulative Redeemable preferred stock	GLIBP	The Nasdaq Stock Market LLC

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

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

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


Large Accelerated Filer ☒		Accelerated Filer ☐		Non- accelerated Filer ☐		Smaller Reporting Company ☐		Emerging Growth Company ☐

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

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

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

101,325,219 shares of Series A common stock; and

4,488,674 shares of Series B common stock

Table of Contents

GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)


	June 30,		December 31,
	2020		2019
	amounts in thousands
Assets
Current assets:
Cash and cash equivalents	$	551,595	569,520
Trade and other receivables, net of allowance for doubtful accounts of $7,102 and $7,516, respectively		94,820	114,435
Other current assets		35,295	43,868
Total current assets		681,710	727,823
Investments in equity securities (note 4)		2,738,284	2,605,293
Investments in affiliates, accounted for using the equity method (note 5)		167,121	167,643
Investment in Liberty Broadband measured at fair value (note 5)		5,290,841	5,367,242
Property and equipment, net		1,056,516	1,090,901
Intangible assets not subject to amortization
Goodwill		855,837	855,837
Cable certificates		305,000	305,000
Other		41,500	41,500
		1,202,337	1,202,337
Intangible assets subject to amortization, net (note 6)		369,581	391,979
Tax sharing receivable		87,258	84,534
Other assets, net		339,482	295,693
Total assets	$	11,933,130	11,933,445

See accompanying notes to interim condensed consolidated financial statements.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)


	June 30,		December 31,
	2020		2019
	amounts in thousands,
	except share amounts
Liabilities and Equity
Current liabilities:
Accounts payable and accrued liabilities	$	108,410	92,893
Deferred revenue		25,714	27,886
Current portion of debt, including $660,963 and $0 measured at fair value, respectively (note 7)		664,087	3,008
Indemnification obligation (note 3)		214,671	202,086
Other current liabilities		71,114	69,149
Total current liabilities		1,083,996	395,022
Long-term debt, net, including $0 and $658,839 measured at fair value, respectively (note 7)		2,602,296	3,263,210
Obligations under finance leases and tower obligations, excluding current portion		94,984	97,507
Long-term deferred revenue		51,945	57,986
Deferred income tax liabilities		1,531,407	1,527,109
Preferred stock (note 8)		178,066	178,002
Derivative instrument (note 3)		61,437	71,305
Other liabilities		118,744	133,020
Total liabilities		5,722,875	5,723,161
Equity
Stockholders’ equity:
Series A common stock, $0.01 par value. Authorized 500,000,000 shares; issued and outstanding 101,328,441 shares at June 30, 2020 and 101,306,716 shares at December 31, 2019		1,013	1,013
Series B common stock, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,488,674 shares at June 30, 2020 and 4,437,593 shares at December 31,2019		45	44
Series C common stock, $0.01 par value. Authorized 1,040,000,000 shares; no issued and outstanding at June 30, 2020 and December 31, 2019		—	—
Additional paid-in capital		3,227,258	3,221,885
Accumulated other comprehensive earnings (loss), net of taxes		14,767	(4,084)
Retained earnings		2,958,423	2,982,626
Total stockholders' equity		6,201,506	6,201,484
Non-controlling interests		8,749	8,800
Total equity		6,210,255	6,210,284
Commitments and contingencies (note 10)
Total liabilities and equity	$	11,933,130	11,933,445

See accompanying notes to interim condensed consolidated financial statements.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands, except per share amounts
Revenue	$	224,820	217,566		460,619	435,302
Operating costs and expenses:
Operating expense (exclusive of depreciation and amortization shown separately below)		70,838	68,432		140,501	137,325
Selling, general and administrative, including stock-based compensation (note 9)		90,162	95,278		182,707	211,587
Depreciation and amortization expense		61,160	65,891		124,168	133,569
Insurance proceeds and restructuring, net		—	4,218		—	1,718
		222,160	233,819		447,376	484,199
Operating income (loss)		2,660	(16,253)		13,243	(48,897)
Other income (expense):
Interest expense (including amortization of deferred loan fees)		(34,387)	(40,386)		(70,642)	(78,004)
Share of earnings (losses) of affiliates, net (note 5)		2,238	(1,068)		1,531	(4,364)
Realized and unrealized gains (losses) on financial instruments, net (note 3)		860,867	679,098		26,875	1,688,698
Tax sharing agreement		14,444	7,452		3,911	16,533
Other, net		(242)	11,596		2,138	14,364
		842,920	656,692		(36,187)	1,637,227
Earnings (loss) before income taxes		845,580	640,439		(22,944)	1,588,330
Income tax (expense) benefit		(234,952)	(181,395)		1,670	(450,800)
Net earnings (loss)		610,628	459,044		(21,274)	1,137,530
Less net earnings (loss) attributable to the non-controlling interests		(26)	—		(51)	(57)
Net earnings (loss) attributable to GCI Liberty, Inc. shareholders	$	610,654	459,044		(21,223)	1,137,587
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 2)	$	5.79	4.38		(0.20)	10.85
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 2)	$	5.76	4.34		(0.20)	10.75

See accompanying notes to interim condensed consolidated financial statements.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(Unaudited)


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Net earnings (loss)	$	610,628	459,044		(21,274)	1,137,530
Other comprehensive earnings (loss), net of taxes:
Comprehensive earnings (loss) attributable to debt credit risk adjustments		(19,378)	1,920		18,851	4,820
Comprehensive earnings (loss)		591,250	460,964		(2,423)	1,142,350
Less comprehensive earnings (loss) attributable to the non-controlling interests		(26)	—		(51)	(57)
Comprehensive earnings (loss) attributable to GCI Liberty, Inc. shareholders	$	591,276	460,964		(2,372)	1,142,407

See accompanying notes to interim condensed consolidated financial statements.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended
	June 30,
	2020		2019
	amounts in thousands
Cash flows from operating activities:
Net earnings (loss)	$	(21,274)	1,137,530
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
Depreciation and amortization		124,168	133,569
Stock-based compensation expense		6,868	12,385
Share of (earnings) losses of affiliates, net		(1,531)	4,364
Realized and unrealized (gains) losses on financial instruments, net		(26,875)	(1,688,698)
Deferred income tax expense (benefit)		(1,572)	450,793
Other, net		1,472	(6,398)
Change in operating assets and liabilities:
Current and other assets		(18,905)	43,222
Payables and other liabilities		(14,772)	(30,016)
Net cash provided (used) by operating activities		47,579	56,751
Cash flows from investing activities:
Capital expended for property and equipment		(67,382)	(70,866)
Proceeds from derivative instrument		—	105,866
Settlement of derivative instrument		—	(105,866)
Other investing activities, net		1,088	4,540
Net cash provided (used) by investing activities		(66,294)	(66,326)
Cash flows from financing activities:
Borrowings of debt		—	325,000
Repayment of debt, finance leases and tower obligations		(4,409)	(332,071)
Repurchases of GCI Liberty common stock		—	(43,910)
Other financing activities, net		(1,281)	(7,866)
Net cash provided (used) by financing activities		(5,690)	(58,847)
Net increase (decrease) in cash, cash equivalents and restricted cash		(24,405)	(68,422)
Cash, cash equivalents and restricted cash at beginning of period		576,150	492,032
Cash, cash equivalents and restricted cash at end of period	$	551,745	423,610

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:


	June 30,		December 31,
	2020		2019
	amounts in thousands
Cash and cash equivalents	$	551,595	569,520
Restricted cash included in other current assets		150	6,630
Total cash and cash equivalents and restricted cash at end of period	$	551,745	576,150

See accompanying notes to condensed consolidated financial statements.

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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)		—	—	—	—	(21,223)	(51)	(21,274)
Other comprehensive earnings (loss), net of taxes		—	—	—	18,851	—	—	18,851
Stock-based compensation		—	—	6,655	—	—	—	6,655
Issuance of common stock upon exercise of stock options		—	—	27	—	—	—	27
Withholding taxes on net share settlements of stock-based compensation		—	—	(1,256)	—	—	—	(1,256)
Other		—	1	(53)	—	(2,980)	—	(3,032)
Balances at June 30, 2020	$	1,013	45	3,227,258	14,767	2,958,423	8,749	6,210,255


					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 April 1, 2020	$	1,013	45	3,223,368	34,145	2,347,768	8,775	5,615,114
Net earnings (loss)		—	—	—	—	610,654	(26)	610,628
Other comprehensive earnings (loss), net of taxes		—	—	—	(19,378)	—	—	(19,378)
Stock-based compensation		—	—	4,106	—	—	—	4,106
Issuance of common stock upon exercise of stock options		—	—	12	—	—	—	12
Withholding taxes on net share settlements of stock-based compensation		—	—	(227)	—	—	—	(227)
Other		—	—	(1)	—	1	—	—
Balances at June 30, 2020	$	1,013	45	3,227,258	14,767	2,958,423	8,749	6,210,255

See accompanying notes to interim condensed consolidated financial statements.

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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)		—	—	—	—	1,137,587	(57)	1,137,530
Other comprehensive earnings (loss), net of taxes		—	—	—	4,820	—	—	4,820
Stock-based compensation		—	—	13,764	—	—	—	13,764
Repurchases of GCI Liberty common stock		(10)	—	(43,900)	—	—	—	(43,910)
Issuance of common stock upon exercise of stock options		1	—	1,305	—	—	—	1,306
Withholding taxes on net share settlements of stock-based compensation		—	—	(3,431)	—	—	—	(3,431)
Other		—	—	15	—	(5)	—	10
Balances at June 30, 2019	$	1,012	44	3,219,710	4,988	2,181,515	9,510	5,416,779


					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 April 1, 2019	$	1,011	44	3,212,878	3,068	1,722,471	9,510	4,948,982
Net earnings (loss)		—	—	—	—	459,044	—	459,044
Other comprehensive earnings (loss), net of taxes		—	—	—	1,920	—	—	1,920
Stock-based compensation		—	—	7,029	—	—	—	7,029
Issuance of common stock upon exercise of stock options		1	—	1,305	—	—	—	1,306
Withholding taxes on net share settlements of stock-based compensation		—	—	(1,502)	—	—	—	(1,502)
Balances at June 30, 2019	$	1,012	44	3,219,710	4,988	2,181,515	9,510	5,416,779

See accompanying notes to interim condensed consolidated financial statements.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of GCI Liberty, Inc. and its controlled subsidiaries, as well as other equity securities and equity method investments (collectively, “GCI Liberty”, the “Company”, “us”, “we” and “our”). All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. GCI Liberty is made up of its wholly-owned subsidiary, GCI Holdings, LLC (“GCI Holdings”), a controlling interest in Evite, Inc. and non-controlling interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"). These assets (other than GCI Holdings) were contributed by Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), in exchange for, among other things, a controlling interest in GCI Liberty, which was subsequently split-off (the "Holdco Split-Off").

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

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

COVID-19 has not had a material impact on GCI Liberty’s operating results for the three and six months ended June 30, 2020, however, management has increased certain estimates, including but not limited to, allowance for doubtful accounts. Other than these changes, we are not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities. Our 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 our financial statements.

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

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

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

“Combination”). Under the terms of the merger agreement each holder of Series A and B common stock of GCI Liberty will receive 0.58 of a share of Series C common stock and Series B common Stock, respectively, of Liberty Broadband. Additionally, holders of a share of Series A Cumulative Redeemable Preferred Stock of GCI Liberty will receive one share of Series A Cumulative Redeemable Preferred Stock with mirror terms to be issued by Liberty Broadband. The Combination was recommended to the Company’s Board of Directors for approval by a special committee composed solely of independent, disinterested directors and advised by independent financial and legal advisors. The closing of the Combination is subject to certain customary conditions, including: (i) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (ii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (iii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon, (iv) approval of the Liberty Broadband stock issuance by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock present in person or by proxy at the stockholder meeting and entitled to vote thereon and (v) the receipt of any applicable regulatory approvals. GCI Liberty and Liberty Broadband expect the Combination to close in the first half of 2021, subject to potential COVID-19 related delays.

GCI Liberty has entered into certain agreements with Qurate Retail and Liberty Media Corporation ("Liberty Media") (or its subsidiary), all of which are separate, publicly traded companies, in order to govern certain relationships between the companies. None of these entities have any stock ownership, beneficial or otherwise, in the other. These agreements include an indemnification agreement, a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

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

Liberty Media is a related party of GCI Liberty for accounting purposes as a result of the services agreement. Under these agreements, approximately $1.9 million and $2.2 million was reimbursable to Liberty Media for the three months ended June 30, 2020 and 2019, respectively, and $4.1 million and $4.5 million was reimbursable to Liberty Media for the six months ended June 30, 2020 and 2019, respectively.

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

In December 2019, the Company entered into an amendment to the services agreement with Liberty Media in connection with Liberty Media’s entry into a new employment arrangement with Gregory B. Maffei, the Company’s President and Chief Executive Officer ("CEO"). Under the amended services agreement, components of his compensation

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

will either be paid directly to him by each of the Company, Liberty TripAdvisor Holdings, Inc., Liberty Broadband, and Qurate Retail (collectively, the “Service Companies”) or reimbursed to Liberty Media, in each case, based on allocations among Liberty Media and the Service Companies set forth in the amended services agreement, currently set at 14% for the Company.

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

Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Excluded from diluted EPS for the three months ended June 30, 2020 and 2019 are 417 thousand and 35 thousand potential common shares, respectively, because their inclusion would have been antidilutive. Excluded from diluted EPS for the six months ended June 30, 2020 and 2019 are 417 thousand and 35 thousand potential common shares, respectively, because their inclusion would have been antidilutive.

Series A and Series B Common Stock



	Three months ended		Six months ended
	June 30,		June 30,
	2020	2019	2020	2019

	number of shares in thousands
Basic WASO	105,554	104,744	105,522	104,800
Potentially dilutive shares (a)	473	967	515	983
Diluted WASO (a)	106,027	105,711	106,037	105,783

(a)

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

(3) Assets and Liabilities Measured at Fair Value

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

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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:


	June 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	$	478,509	478,509	—	533,484	533,484	—
Equity securities	$	2,732,999	2,732,999	—	2,600,008	2,600,008	—
Investment in Liberty Broadband	$	5,290,841	5,290,841	—	5,367,242	5,367,242	—
Derivative instrument liability	$	61,437	—	61,437	71,305	—	71,305
Indemnification obligation	$	214,671	—	214,671	202,086	—	202,086
Exchangeable senior debentures	$	660,963	—	660,963	658,839	—	658,839

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

The indemnification liability is due to Liberty Interactive LLC ("LI LLC") and pertains to the ability of holders of LI LLC’s 1.75% exchangeable debentures due 2016 (the "1.75% Exchangeable Debentures") to exercise their exchange right according to the terms of the 1.75% Exchangeable Debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification obligation recorded in the accompanying condensed consolidated balance sheets as of June 30, 2020 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of June 30, 2020, a holder of the 1.75% Exchangeable Debentures has the ability to exchange and, accordingly, such indemnification obligation is included as a current liability in the accompanying condensed consolidated balance sheets.

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

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


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Equity securities	$	395,075	258,718		133,941	593,038
Investment in Liberty Broadband		565,107	532,669		(76,401)	1,373,928
Derivative instruments		(37,272)	(47,217)		9,868	(118,361)
Indemnification obligation		(34,925)	(23,031)		(12,585)	(54,826)
Exchangeable senior debentures		(27,118)	(42,041)		(27,948)	(105,081)
	$	860,867	679,098		26,875	1,688,698

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

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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) attributable to the change in the instrument specific credit risk and recognizes such amount in other comprehensive income. The change in the fair value of the exchangeable senior debentures attributable to changes in the instrument specific credit risk was a loss of $26.5 million and a gain $2.6 million for the three months ended June 30, 2020 and 2019, respectively, and gains of $25.8 million and $6.6 million for the six months ended June 30, 2020 and 2019, respectively. The cumulative change was a gain of $20.2 million as of June 30, 2020.

(4) Investments in Equity Securities

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


	June 30,		December 31,
	2020		2019
	amounts in thousands
Charter (a)	$	2,732,999	2,599,253
Other investments (b)		5,285	6,040
	$	2,738,284	2,605,293

(a)

A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement. See note 3 for additional discussion of the indemnification agreement.

(b)

The Company has elected the measurement alternative for a portion of these securities where the fair value is not readily determinable.

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

The Company has various investments accounted for using the equity method. The following table includes the Company’s carrying amount and percentage ownership of the more significant investments in affiliates at June 30, 2020 and the carrying amount at December 31, 2019:


	June 30, 2020							December 31, 2019
	Percentage			Market		Carrying		Carrying
	ownership			value		amount		amount

	dollars in thousands
LendingTree (a)		26.4	%	$	997,138	$	166,308	166,465
Other		various			NA		813	1,178
						$	167,121	167,643

(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 June 30, 2020.

The Company’s share of LendingTree’s earnings (losses) were earnings of $2.6 million and losses of $1.3 million for the three months ended June 30, 2020 and 2019, respectively. The Company's share of LendingTree's earnings (losses) were earnings of $1.8 million and losses of $3.4 million for the six months ended June 30, 2020 and 2019, respectively.

Investment in Liberty Broadband

As of June 30, 2020, the Company has a 23.5% 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 investment based on the trading price of Liberty Broadband. The Company recognizes changes in the fair value of its

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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:


	June 30,		December 31,
	2020		2019
	amounts in thousands
Current assets	$	19,706	52,133
Investment in Charter, accounted for using the equity method		12,306,593	12,194,674
Other assets		9,100	9,535
Total assets		12,335,399	12,256,342
Long-term debt		573,593	572,944
Deferred income tax liabilities		1,017,921	999,757
Other liabilities		23,151	15,695
Equity		10,720,734	10,667,946
Total liabilities and shareholders' equity	$	12,335,399	12,256,342


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Revenue	$	4,114	3,747		8,218	7,205
Operating expenses, net		(13,946)	(10,913)		(25,325)	(20,572)
Operating income (loss)		(9,832)	(7,166)		(17,107)	(13,367)
Share of earnings (losses) of affiliates		158,128	45,400		219,810	80,249
Gain (loss) on dilution of investment in affiliate		(46,001)	(16,322)		(105,326)	(57,725)
Other income (expense), net		(5,103)	(5,936)		(10,801)	(12,056)
Income tax benefit (expense)		(24,978)	(3,924)		(22,204)	650
Net earnings (loss)	$	72,214	12,052		64,372	(2,249)

(1)

(2)

(6) Intangible Assets

Intangible Assets Subject to Amortization


	June 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	$	408,267	(112,192)	296,075		408,267	(95,167)	313,100
Other amortizable intangibles		145,028	(71,522)	73,506		139,721	(60,842)	78,879
Total	$	553,295	(183,714)	369,581		547,988	(156,009)	391,979

Amortization expense for intangible assets with finite useful lives was $14.0 million and $15.0 million for the three months ended June 30, 2020 and 2019, respectively. Amortization expense for intangible assets with finite useful lives was $28.0 million and $31.3 million for the six months ended June 30, 2020 and 2019, respectively. Amortization

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):


Remainder of 2020	$	27,713
2021	$	45,434
2022	$	39,491
2023	$	34,966
2024	$	31,081

(3)

(7) Debt

Debt is summarized as follows:


	Outstanding
	principal		Carrying value
	June 30,		June 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		660,963	658,839
Senior notes		775,000		794,408	796,138
Senior credit facility		511,436		511,436	512,666
Wells Fargo note payable		6,773		6,773	7,066
Deferred financing costs		—		(7,197)	(8,491)
Total debt	$	3,070,459		3,266,383	3,266,218
Debt classified as current				(664,087)	(3,008)
Total long-term debt			$	2,602,296	3,263,210

Margin Loan

Broadband Holdco, LLC ("Broadband Holdco") entered into Amendment No. 2 to the Margin Loan Agreement ("Amendment No. 2" and, together with the original margin loan agreement and first amendment thereto, the “Margin Loan Agreement”) on November 25, 2019. Pursuant to Amendment No. 2, lenders have agreed to, among other things, extend the maturity date of the original term loan in an aggregate principal amount of $1.0 billion (the “Margin Loan”) to December 29, 2021 and provide commitments for a new delayed draw term loan facility in an aggregate principal amount of $300.0 million ("Delayed Draw Term Loan Facility"). This facility also provides a revolving credit facility in an aggregate principal amount of up to $200.0 million (the “Revolving Credit Facility”) and the original loan credit facility under the Margin Loan (the “Term Loan Facility”, and, together with the Revolving Credit Facility and the Delayed Draw Term Loan Facility, the "Margin Loan Facility" and the loans thereunder, the "Loans"). The Loans will mature on December 29, 2021 (the “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. Undrawn revolving commitments shall be available to Broadband Holdco from November 25, 2019 to but excluding the earlier of (i) the date that is one month prior to the Maturity Date and (ii) the date of the termination of such revolving commitments pursuant to the terms of the Margin Loan Agreement. The obligations under the Margin 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. 42,681,842 shares of Liberty Broadband Series C common stock with a value of $5.3 billion were pledged by Broadband Holdco as collateral for the Loans as of June 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. As of June 30, 2020, $1,300.0 million in borrowings were outstanding under the Margin Loan Facility.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 June 30, 2020, the holders of the debentures will have the ability to exchange their debentures for the period from July 1, 2020 through at least September 30, 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 second 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 June 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 $325.0 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 $325.0 million aggregate outstanding principal amount of GCI, LLC’s 6.75% Senior Notes due 2021. Interest on the 2024 Notes and GCI, LLC’s 6.875% Senior Notes due 2025 (collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at the Company’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 $19.4 million at June 30, 2020. Such premium is being amortized to interest expense in the accompanying condensed consolidated statements of operations.

Senior Credit Facility

On December 27, 2018, GCI, LLC 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.

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

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.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

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 four consecutive or non-consecutive dividend periods then the dividend rate shall increase by 2.00% per annum of the liquidation price until cured. On May 21, 2020, the Company announced that it declared a quarterly cash dividend of approximately $0.44 per share of Preferred Stock which was paid on July 15, 2020 to shareholders of record of the Preferred Stock at the close of business on June 30, 2020.

(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 $4.4 million and $6.8 million of stock-based compensation during the three months ended June 30, 2020, and 2019, respectively, and $6.9 million and $12.4 million during the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, and in connection with our CEO’s new employment agreement, GCI Liberty granted to our CEO 359 thousand options to purchase shares of GCI Liberty Series A common stock as part of our CEO’s upfront term award detailed in his employment agreement. Such options had a GDFV of $16.60 per share and vest on December 31, 2023. Also during the six months ended June 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 six months ended June 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 $59.80 per share and cliff vest on December 10, 2020. This RSU grant was issued in lieu of our CEO receiving 50% of his remaining base salary for the last three quarters of calendar year 2020, and he has waived his right to receive the other 50%, in each case, in light of the ongoing financial impact of 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’s stock and the implied volatility of publicly traded GCI Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

GCI Liberty-Outstanding Awards

The following table 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	513	$	67.10
Exercised	(29)	$	36.94
Forfeited/Cancelled	—	$	—
Outstanding at June 30, 2020	1,088	$	57.70	5.2	years	$	15
Exercisable at June 30, 2020	393	$	47.28	3.7	years	$	9

There were no changes to outstanding options of GCI Liberty Series B common stock during the six months ended June 30, 2020.

As of June 30, 2020, the total unrecognized compensation cost related to unvested options and RSA/RSUs was approximately $8.0 million and $16.4 million, respectively. Such amounts will be recognized in the Company’s consolidated statements of operations over a weighted average period of approximately 2.3 years and 2.0 years, respectively.

As of June 30, 2020, GCI Liberty had 429 thousand RSUs outstanding.

As of June 30, 2020, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.1 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.

(10) Commitments and Contingencies

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 business. Management believes there are no proceedings from asserted and unasserted claims which if determined adversely would have a material adverse effect on the Company’s financial position, results of operations or liquidity, other than those described in the Company’s commitments and contingencies discussion in note 16 to the accompanying consolidated financial statements to our Annual Report on our Form 10-K for the year ended December 31, 2019.

(11) Information About the Company’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-tax earnings.

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.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

For the three and six months ended June 30, 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.

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.

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 our Annual Report on Form 10-K for the year ended December 31, 2019.

Performance Measures

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


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
GCI Holdings
Consumer Revenue
Wireless	$	29,906	27,505		58,264	54,997
Data		45,416	41,457		89,710	82,635
Video		20,456	21,045		41,214	42,061
Voice		3,715	4,321		7,515	8,782
Business Revenue
Wireless		19,616	19,393		38,854	37,777
Data		72,928	63,733		156,322	131,843
Video		4,427	3,988		8,449	7,813
Voice		7,047	6,636		13,463	12,840
Lease, grant, and subsidies revenue		19,070	22,901		40,351	45,442
Total GCI Holdings		222,581	210,979		454,142	424,190
Corporate and other		2,239	6,587		6,477	11,112
Total	$	224,820	217,566		460,619	435,302

Liberty Broadband revenue totaled $4.1 million and $3.7 million for the three months ended June 30, 2020 and 2019, respectively and $8.2 million and $7.2 million for the six months ended June 30, 2020 and 2019, respectively.

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company had gross receivables of $286.5 million and deferred revenue of $37.3 million at June 30, 2020 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 six months ended June 30, 2020 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 $148.8 million in the remainder of 2020, $227.0 million in 2021, $141.5 million in 2022, $51.0 million in 2023 and $64.8 million in 2024 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-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’ 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-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 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				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019

	amounts in thousands
GCI Holdings	$	78,045		66,121		164,440		110,592
Liberty Broadband		(7,407)		(4,174)		(12,388)		(7,291)
Corporate and other		(9,832)		(5,511)		(20,161)		(11,817)
		60,806		56,436		131,891		91,484
Eliminate Liberty Broadband		7,407		4,174		12,388		7,291
	$	68,213		60,610		144,279		98,775

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GCI LIBERTY, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Other Information


	June 30, 2020
	Total		Investments	Capital
	assets		in affiliates	expenditures
	amounts in thousands
GCI Holdings	$	3,151,685	475	66,704
Liberty Broadband		12,335,399	12,306,593	35
Corporate and other		8,781,445	166,646	678
		24,268,529	12,473,714	67,417
Eliminate Liberty Broadband		(12,335,399)	(12,306,593)	(35)
Consolidated	$	11,933,130	167,121	67,382

The following table provides a reconciliation of Adjusted OIBDA to Operating income (loss) and Earnings (loss) before income taxes:


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Adjusted OIBDA	$	68,213	60,610		144,279	98,775
Stock‑based compensation		(4,393)	(6,754)		(6,868)	(12,385)
Depreciation and amortization		(61,160)	(65,891)		(124,168)	(133,569)
Insurance proceeds and restructuring, net		—	(4,218)		—	(1,718)
Operating income (loss)		2,660	(16,253)		13,243	(48,897)
Interest expense		(34,387)	(40,386)		(70,642)	(78,004)
Share of earnings (loss) of affiliates, net		2,238	(1,068)		1,531	(4,364)
Realized and unrealized gains (losses) on financial instruments, net		860,867	679,098		26,875	1,688,698
Tax Sharing Agreement		14,444	7,452		3,911	16,533
Other, net		(242)	11,596		2,138	14,364
Earnings (loss) before income taxes	$	845,580	640,439		(22,944)	1,588,330

(4)

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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. 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"), in exchange for, among other things, a controlling interest in GCI Liberty, which was subsequently split-off.

On August 6, 2020, GCI Liberty and Liberty Broadband entered into a definitive merger agreement under which Liberty Broadband agreed to acquire all of the outstanding shares of GCI Liberty in a stock-for-stock merger (the “Combination”). Under the terms of the merger agreement each holder of Series A and B common stock of GCI Liberty will receive 0.58 of a share of Series C common stock and Series B common Stock, respectively, of Liberty Broadband. Additionally, holders of a share of Series A Cumulative Redeemable Preferred Stock of GCI Liberty will receive one share of Series A Cumulative Redeemable Preferred Stock with mirror terms to be issued by Liberty Broadband. The Combination was recommended to the Company’s Board of Directors for approval by a special committee composed solely of independent, disinterested directors and advised by independent financial and legal advisors. The closing of the Combination is subject to certain customary conditions, including: (i) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (ii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock entitled to vote thereon not owned by John C. Malone and certain other persons, (iii) the adoption of the merger agreement by holders of a majority of the aggregate voting power of the GCI Liberty outstanding stock entitled to vote thereon, (iv) approval of the Liberty Broadband stock issuance by holders of a majority of the aggregate voting power of the Liberty Broadband outstanding stock present in person or by proxy at the stockholder meeting and entitled to vote thereon and (v) the receipt of any applicable regulatory approvals. GCI Liberty and Liberty Broadband expect the Combination to close in the first half 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’ 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 majority of GCI Holdings’ workforce has transitioned to working at home full time and it expects to keep those employees working from home through at least the end of the year.

GCI Holdings also participated in the Federal Communications Commission’s Keep Americans Connected pledge, waiving late fees and pausing disconnects for residential and small business customers faced with COVID-19 related payment challenges through June 30, 2020. Additionally, 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 or the earlier conclusion of the COVID-19 public health emergency. 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.

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The Company disclosed the following items related to GCI Holdings’ involvement in the RHC Program in its Annual Report on Form 10-K for the year ended December 31, 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 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 no additional significant information regarding the items noted above except with respect to the multiple funding denial notices that were received, additional inquiries from the Enforcement Bureau related to the original letter of inquiry received in March 2018, and the FCC order adopting changes to the RHC Program.

The multiple funding denial notices resulted in a $21.3 million accounts receivable reserve and an associated bad debt expense during the first quarter of 2019. Because of the uncertainty caused by the funding denial notices and the uncertainty relating to our ability to recover payment directly from the rural healthcare customer, we no longer believed revenue should be recognized such that no revenue was 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 that collection of consideration for services provided to the rural healthcare customer was probable, we concluded that revenue should not be recognized for any period subsequent to the first quarter of 2019 even though we continued to provide services to the rural healthcare customer.

In light of the FCC order, we evaluated the applicable revenue recognition criteria 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.

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. 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. Interested parties have until August 31, 2020 to provide additional information on rates and services relevant to the median rate calculation. USAC will refresh the database by September 30, 2020. In addition, on July 30, 2020, GCI filed an administrative appeal of certain parameters prescribed for the USAC database by the FCC’s Wireline Competition Bureau. Because the median rate determinations are not finalized, and because the FCC’s Order also permits service providers to file for a waiver to permit charging above-cap rates based on the cost of service, GCI Holdings cannot assess at this time the impact that these changes adopted by the FCC will have on funding.

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Results of Operations - Consolidated

General. We provide 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 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, LLC" below.


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Revenue
GCI Holdings	$	222,581	210,979		454,142	424,190
Corporate and other		2,239	6,587		6,477	11,112
Consolidated	$	224,820	217,566		460,619	435,302

Operating Income (Loss)
GCI Holdings	$	14,806	(7,201)		37,992	(31,179)
Corporate and other		(12,146)	(9,052)		(24,749)	(17,718)
Consolidated	$	2,660	(16,253)		13,243	(48,897)

Adjusted OIBDA
GCI Holdings	$	78,045	66,121		164,440	110,592
Corporate and other		(9,832)	(5,511)		(20,161)	(11,817)
Consolidated	$	68,213	60,610		144,279	98,775

Revenue. Our consolidated revenue increased $7.3 million and $25.3 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases in revenue for the three and six month periods were primarily due to increases of $11.6 million and $30.0 million, respectively, at GCI 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 income increased $18.9 million and $62.1 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases in operating income for the three and six month periods were primarily due to increases of $22.0 million and $69.2 million, respectively, at GCI Holdings. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

Operating losses for Corporate and other increased $3.1 million and $7.0 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year due to increased operating losses at certain of our subsidiaries.

Stock-based compensation. Stock based compensation includes compensation related to restricted shares of GCI Liberty’s common stock and preferred stock, restricted stock units with respect to GCI Liberty’s common stock, and options to purchase shares of GCI Liberty’s common stock granted to certain of the Company’s directors, employees, and employees of its subsidiaries. The decreases in stock-based compensation of $2.4 million and $5.5 million for the three and six months ended June 30, 2020, respectively, were primarily due to decreases in stock compensation at GCI Holdings of $1.2 million and $4.4 million for the three and six month periods, respectively. As of June 30, 2020, the total unrecognized compensation cost related to unvested options and RSAs was approximately $8.0 million and $16.4 million, respectively. Such amounts will be recognized in the Company’s consolidated statements of operations over a weighted average period of approximately 2.3 years and 2.0 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

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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’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’ 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 provides a reconciliation of operating income (loss) to Adjusted OIBDA:


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Operating income (loss)	$	2,660	(16,253)		13,243	(48,897)
Depreciation and amortization		61,160	65,891		124,168	133,569
Stock-based compensation		4,393	6,754		6,868	12,385
Insurance proceeds and restructuring, net		—	4,218		—	1,718
Adjusted OIBDA	$	68,213	60,610		144,279	98,775

Consolidated Adjusted OIBDA increased $7.6 million and $45.5 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases for the three and six month periods were primarily due to increases in revenue and decreases in selling, general and administrative expenses at GCI 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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Other Income and Expense

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


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Interest expense
GCI Holdings	$	(17,969)	(24,307)		(36,170)	(45,483)
Corporate and other		(16,418)	(16,079)		(34,472)	(32,521)
Consolidated	$	(34,387)	(40,386)		(70,642)	(78,004)

Share of earnings (losses) of affiliates, net
GCI Holdings	$	(67)	(5)		(110)	(111)
Corporate and other		2,305	(1,063)		1,641	(4,253)
Consolidated	$	2,238	(1,068)		1,531	(4,364)

Realized and unrealized gains (losses) on financial instruments, net
GCI Holdings	$	—	(189)		—	1,669
Corporate and other		860,867	679,287		26,875	1,687,029
Consolidated	$	860,867	679,098		26,875	1,688,698

Tax sharing agreement
GCI Holdings	$	—	—		—	—
Corporate and other		14,444	7,452		3,911	16,533
Consolidated	$	14,444	7,452		3,911	16,533

Other, net
GCI Holdings	$	637	11,553		1,443	12,762
Corporate and other		(879)	43		695	1,602
Consolidated	$	(242)	11,596		2,138	14,364

Interest Expense. Consolidated interest expense decreased $6.0 million and $7.4 million for the three and six months ended June 30, 2020, 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 increased $3.3 million and $5.9 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year due to an increase in earnings by our affiliates.

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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			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Equity securities	$	395,075	258,718		133,941	593,038
Investment in Liberty Broadband		565,107	532,669		(76,401)	1,373,928
Derivative instruments		(37,272)	(47,217)		9,868	(118,361)
Indemnification obligation		(34,925)	(23,031)		(12,585)	(54,826)
Exchangeable senior debentures		(27,118)	(42,041)		(27,948)	(105,081)
	$	860,867	679,098		26,875	1,688,698

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 increase for the three months ended June 30, 2020 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 six months ended June 30, 2020 as compared to the corresponding period in the prior year was primarily driven by an increase in the unrealized loss for our investment in Liberty Broadband and a decrease in the unrealized gain for our investment in Charter.

Tax sharing agreement. The change in the tax sharing receivable due from Qurate Retail resulted in gains of $14.4 million and $7.5 million for the three months ended June 30, 2020 and 2019, respectively, and gains of $3.9 million and $16.5 million for the six months ended June 30, 2020 and 2019, respectively. The change in the tax sharing receivable for both 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.

Other, net. The change in Other, net at GCI Holdings for the three and six months ended June 30, 2020 was primarily due to a $7.5 million gain for an amendment made to a finance lease in the second quarter of 2019 and a $3.2 million gain for the write-off of the premium recorded for the senior notes that were refinanced during the second quarter of 2019. The change in Other, net at Corporate and other for the three and six months ended June 30, 2020 was primarily due to decreased interest income.

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


	Three months ended			Six months ended
		June 30,		June 30,
	2020		2019	2020		2019

	amounts in thousands
Earnings (loss) before income taxes	$	845,580	640,439		(22,944)	1,588,330
Income tax (expense) benefit		(234,952)	(181,395)		1,670	(450,800)
Effective income tax rate		28%	28%		7%	28%

For the three months ended June 30, 2020, the Company recognized income tax expense in excess of expected federal tax expense, primarily due to state income tax expense. For the six months ended June 30, 2020, the Company recognized income tax benefit below the expected federal tax benefit, primarily due to state income tax expense, nondeductible interest expense on preferred stock, and non-taxable equity contribution, partially offset by state net operating loss benefit.

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

Net earnings (loss). The Company had net earnings of $610.6 million and $459.0 million for the three months ended June 30, 2020 and 2019, respectively. The Company had net losses of $21.3 million and net earnings of $1,137.5 million for the six months ended June 30, 2020 and 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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Liquidity and Capital Resources

As of June 30, 2020, substantially all of the 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. To the extent that the Company recognizes any taxable gains from the sale of assets, the Company may incur tax expense and be required to make tax payments, thereby reducing any cash proceeds. The Company believes it has sufficient cash from operating activities and cash on hand to fund its business.

As of June 30, 2020, the Company had a cash and cash equivalents balance of $551.6 million.


	Six months ended
	June 30,
	2020		2019
	amounts in thousands
Cash flow information
Net cash provided (used) by operating activities	$	47,579	56,751
Net cash provided (used) by investing activities		(66,294)	(66,326)
Net cash provided (used) by financing activities		(5,690)	(58,847)
	$	(24,405)	(68,422)

During the six months ended June 30, 2020, the Company’s primary use of cash was capital expenditures. During the six months ended June 30, 2019, the Company’s primary uses of cash included repurchases of GCI Liberty Series A common stock and capital expenditures. The Company’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’s cash for the remainder of 2020 are capital expenditures of approximately $75 million, approximately $50 million for interest payments on outstanding debt, approximately $5 million for preferred stock dividends, potential 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. The following table highlights selected key performance indicators used in evaluating GCI Holdings as of June 30, 2020 and 2019.


	June 30,
	2020	2019
Consumer
Wireless:
Revenue generating wireless lines in service¹	179,400	181,400
Non-revenue generating wireless lines in service²	3,600	9,800
Wireless lines in service	183,000	191,200
Data:
Revenue generating cable modem subscribers³	134,900	124,100
Non-revenue generating cable modem subscribers⁴	800	—
Cable modem subscribers	135,700	124,100
Video:
Basic subscribers⁵	77,700	84,100
Homes passed⁶	253,400	253,400
Voice:
Total local access lines in service⁷	38,200	42,200
Business
Wireless:
Revenue generating wireless lines in service¹	25,000	21,400
Data:
Revenue generating cable modem subscribers⁴	8,700	9,000
Voice:
Total local access lines in service⁷	33,500	35,600

¹A revenue generating wireless line in 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 public switched telephone network.

GCI Holdings’ operating results for the three and six months ended June 30, 2020 and 2019 are as follows:


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Revenue	$	222,581	210,979		454,142	424,190
Operating expenses (excluding stock-based compensation included below):
Operating expense		(66,869)	(63,639)		(131,820)	(127,944)
Selling, general and administrative expenses		(77,667)	(81,219)		(157,882)	(185,654)
Adjusted OIBDA		78,045	66,121		164,440	110,592
Stock-based compensation		(2,696)	(3,927)		(3,544)	(7,923)
Insurance proceeds and restructuring, net		—	(4,218)		—	(1,718)
Depreciation and amortization		(60,543)	(65,177)		(122,904)	(132,130)
Operating income (loss)	$	14,806	(7,201)		37,992	(31,179)

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Revenue

The components of revenue for the three and six months ended June 30, 2020 and 2019, are as follows:


	Three months ended			Six months ended
	June 30,			June 30,
	2020		2019	2020		2019

	amounts in thousands
Consumer
Wireless	$	42,327	39,915		83,100	79,822
Data		45,416	41,457		89,710	82,635
Video		20,461	21,049		41,223	42,070
Voice		3,843	4,547		7,848	9,031
Business
Wireless		21,035	23,726		43,524	46,483
Data		73,756	64,628		157,970	133,663
Video		4,427	3,988		8,449	7,813
Voice		11,316	11,669		22,318	22,673
Total	$	222,581	210,979		454,142	424,190

Consumer wireless revenue increased $2.4 million and $3.3 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases were primarily due to increased plan service fee revenue of $1.8 million and $3.0 million driven by subscribers’ selection of plans with higher recurring monthly charges that offer higher usage limits. Additionally, equipment sales revenue increased $0.7 million and $0.4 million due to an increase in the number of handsets sold for the three and six month periods, respectively.

Consumer data revenue increased $4.0 million and $7.1 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases were driven by 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.

Consumer video revenue decreased $0.6 million and $0.8 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decreases were primarily due to an 8% decrease in the number of subscribers, partially offset by an increase in prices to video plans that occurred in the second quarter of 2019 and moving subscribers to plans with higher recurring monthly charges.

Consumer voice revenue decreased $0.7 million and $1.2 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decreases were primarily due to a reduction in the number of customers.

Business wireless revenue decreased $2.7 million and $3.0 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decreases were primarily due to wholesale customers removing backhaul circuits from our 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 $9.1 million and $24.3 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases were due to $13.9 million and $31.8 million increases in data and transport revenue driven by increased sales to school and medical customers for service upgrades for the three and six month periods, respectively. The increase for the six 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 $4.7 million and $7.6 million decreases in professional services revenue driven by a decrease in time and materials project work for the three and six month periods, respectively.

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Business video revenue increased $0.4 million and $0.6 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases were primarily due to an increase in political advertising revenue.

Business voice revenue decreased $0.4 million for both the three and six months ended June 30, 2020 as compared to the corresponding periods in the prior year. The decreases were driven by a decrease in local service lines.

Operating expenses increased $3.2 million and $3.9 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The increases were primarily due to a $3.5 million and $6.0 million increase for the three and six month periods, respectively, in costs to operate our 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, partially offset by a decrease of $0.7 million and $2.3 million for the three and six month periods, respectively, in video costs paid to content producers driven by a decrease in video subscribers.

Selling, general and administrative expenses decreased $3.6 million and $27.8 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decrease for the three month period was primarily due to a $3.3 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 six month period was primarily due to the absence of $21.3 million in the allowance for receivables as a result of USAC denying an appeal from one of our customers that was recorded during first quarter of 2019 and a $7.8 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 six month period was partially offset by a $2.6 million increase in legal and compliance costs.

Stock based compensation decreased $1.2 million and $4.4 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior 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. The decrease for the six month period was primarily due to the reversal of expense for performance-based awards that did not vest due to a shortfall in certain financial metrics and qualitative criteria and for employees who left the company prior to the vesting of their awards.

Depreciation and amortization decreased $4.6 million and $9.2 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year. The decrease for the three and six months ended June 30, 2020 was primarily due to assets which became fully depreciated prior to the three and six month periods in 2020, a decrease in assets placed in service since January 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.

I-35

Table of Contents

As of June 30, 2020, the Company’s debt is comprised of the following amounts:


	Variable rate debt				Fixed rate debt
			Weighted				Weighted
			average				average
	Principal		interest		Principal		interest
	amount		rate		amount		rate
	dollar amounts in thousands
GCI Holdings	$	518,209	2.2	%	$	775,000	6.8	%
Corporate and other	$	1,300,000	2.2	%	$	477,250	1.8	%

GCI Liberty’s borrowings under the margin loan 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 expects to incorporate alternative reference rates when amending these facilities, as applicable.

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.

At June 30, 2020, the fair value of the Company’s equity securities was $2.7 billion. Had the market price of such securities been 10% lower at June 30, 2020, the aggregate value of such securities would have been $273 million lower. At June 30, 2020, the fair value of our investment in Liberty Broadband was $5.3 billion. Had the market price of such security been 10% lower at June 30, 2020, the fair value of such security would have been $529 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’s disclosure controls and procedures were not effective as of June 30, 2020 because of the material weakness 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, 2019 (the “2019 Form 10-K”). Management has continued to monitor the implementation of the remediation plan described in the 2019 Form 10-K, as described below.

Changes in Internal Control Over Financial Reporting

During the second quarter of 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’s internal control over financial reporting that occurred during the three months ended June 30, 2020 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.

I-36

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of business. Management believes there are no proceedings from asserted and unasserted claims which if determined adversely would have a material adverse effect on our financial position, results of operations or liquidity.

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 Report on Form 10-Q for the quarter ended March 31, 2020.

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.

The announcement and pendency of the Combination could divert the attention of management and cause disruptions in the businesses of GCI Liberty, which could have an adverse effect on the business and financial results of GCI Liberty.

Management of GCI Liberty may be required to divert a disproportionate amount of attention away from its day-to-day activities and operations, and devote time and effort to consummating the Combination. The risks, and adverse effects, of such disruptions and diversions could be exacerbated by a delay in the completion of the Combination. These factors could adversely affect the financial position or results of operations of GCI Liberty, regardless of whether the Combination is completed.

GCI Liberty is subject to contractual restrictions while the Combination is pending, which could adversely affect its business and operations.

Under the terms of the merger agreement, GCI Liberty is subject to certain restrictions on the conduct of its business prior to completing the Combination which may adversely affect its and its subsidiaries’ ability to execute certain of its business strategies, maintain customers, or manage risks associated with its business, operations, technology, infrastructure or compliance functions, including the ability in certain cases to acquire or dispose of assets, incur indebtedness, incur capital expenditures, engage with regulators or settle actual or potential claims. Such limitations could adversely affect GCI Liberty prior to the completion of the Combination. These risks may be exacerbated by delays or other adverse developments with respect to the completion of the Combination.

The Combination is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the Combination could have material adverse effects on GCI 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 the affirmative vote of holders of a majority of the aggregate voting power of outstanding shares not owned by John C. Malone and certain other persons for each company. 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. There can be no assurance that the conditions to the closing of the Combination will be satisfied or (to the extent permitted by law and the merger agreement) waived or that the Combination will be completed. Also, subject to limited exceptions, either Liberty Broadband or GCI Liberty may

II-1


Part I. Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (unaudited)	I-3
	Condensed Consolidated Statements of Operations (unaudited)	I-5
	Condensed Consolidated Statements of Comprehensive Earnings (Loss) (unaudited)	I-6
	Condensed Consolidated Statements of Cash Flows (unaudited)	I-7
	Condensed Consolidated Statements of Equity (unaudited)	I-8
	Notes to Condensed Consolidated Financial Statements (unaudited)	I-10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	I-24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	I-35
Item 4.	Controls and Procedures	I-36

Part II. Other Information
Item 1.	Legal Proceedings	II-1
Item 1A.	Risk Factors	II-1
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	II-2
Item 6.	Exhibits	II-3

SIGNATURES		II-4



Exhibit No.		Description
10.1		Time-Based Restricted Stock Units Agreement between the Registrant and Gregory B. Maffei under the GCI Liberty, Inc. 2018 Omnibus Incentive Plan.*
31.1		Rule 13a-14(a)/15d-14(a) Certification*
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).*



	GCI LIBERTY, INC.

Date: August 10, 2020	By:	/s/ GREGORY B. MAFFEI
		Gregory B. Maffei Chief Executive Officer and President

Date: August 10, 2020	By:	/s/ BRIAN J. WENDLING
		Brian J. Wendling Chief Accounting Officer and Principal Financial Officer