UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
xT | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended 12/31/20082009
¨o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No. 333-115602
Grande CommunicationsRio Holdings, Inc.
(Exact name of Registrant as specified in its charter)
__________________
| |
DelawareNevada | 74-3005133 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| | |
401 Carlson Circle, San Marcos,600 Congress Ave., Ste. 200, Austin, TX | 7866678701 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (512) 878-4000917-1742
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨o No xT
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨o No xT
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 xT No ¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes o No o
* The registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. xT
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o¨ Accelerated filer o¨ Non-accelerated filer Tx Smaller reporting company ¨o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨o No xT
The aggregate market value of the voting common equity held by non-affiliates is not applicable as no public market exists for such equity of the registrant.
The number of shares of the registrant’s Common Stock outstanding as of March 15, 200931, 2010 was 12,784,072.12,104,072.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 20082009
TABLE OF CONTENTS
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| PART I | | |
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| Item 1. | | | 1 | |
| Item 1A. | | | 2625 | |
| Item 1B. | | | 3327 | |
| Item 2. | | | 3327 | |
| Item 3. | | | 3327 | |
| Item 4. | | | 3427 | |
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| PART II | | |
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| Item 5. | | | 3528 | |
| Item 6. | | | 3629 | |
| Item 7. | | | 3830 | |
| Item 7A. | | | 5545 | |
| Item 8. | | | 5545 | |
| Item 9. | | | 5545 | |
| Item 9T. | | | 5645 | |
| Item 9B. | | | 5647 | |
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| PART III | | |
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| Item 10. | | | 5748 | |
| Item 11. | | | 6252 | |
| Item 12. | | | 8664 | |
| Item 13. | | | 9874 | |
| Item 14. | | | 9975 | |
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| PART IV | | |
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| | | | |
| Item 15. | | | 10076 | |
| | 10378 | |
| | F-1 | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains statements about future events, including without limitation, information relating to business development activities, as well as capital spending, financing sources and the effects of regulation and increased competition.events. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements can sometimes be identified by our use of forward-looking words such as “expect,” “should,” “may,” “will,” “anticipate,” “estimate,” or “intend” and other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These statements involve known and unknown risks, uncertaintiesuncertain ties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance or achievements expressed or implied by these statements. You should review carefully all of the information, in this annual report on Form 10-K, including the financial statements.
These risks and uncertainties include, without limitation, those discussed below under “Risk Factors” and those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition to the risk factors described under the heading “Risk Factors,” the following important factors could affect future results, causing actual results to differ materially from those expressed in the forward-looking statements:
our dependence on existing management;
the local, regional, national or global economic climate;
an act of terrorism in the United States of America; and
changes in federal or state telecommunications laws or the administration of such laws.
These factors and the other risk factors discussed in this annual report on Form 10-K are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of the forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements included in this annual report on Form 10-K are made only as of the date of this annual report. We cannot ensure that any projected results or events will be achieved. We have no intention, and disclaim anyan y obligation to publicly update or revise any forward-looking statementsstatement, whether as a result of new information, future results or otherwise, except as required by law.
PART I
For convenience in this annual report on Form 10-K, “Grande,”Unless we indicate otherwise, references below to “we,” “us,” “our,” and “the Company” refer toand “Holdings” mean, after the consummation of the transactions contemplated by the Recapitalization Agreement, Rio Holdings, Inc. (f/k/a/Grande Communications Holdings, Inc.) and its wholly-owned subsidiary, Rio GP, LLC and mean, before the consummation of the transactions contemplated by the Recapitalization Agreement, Grande Communications Holdings, Inc. and its then consolidated subsidiary, Grande Communications Networks, Inc., taken as a whole.whole, and references to “Grande Operating” are to Grande Communications Networks, Inc. and its successor-in-interest, Grande Communications Networks LLC.
Overview
Grande’sOn September 14, 2009, we closed the transactions contemplated by that certain recapitalization agreement, dated August 27, 2009, by and among Grande Communications Holdings, Inc., a Delaware corporation and predecessor-in-interest to Rio Holdings, Inc., a Nevada Corporation (“Holdings”), Grande Communications Networks, Inc., a Delaware corporation, predecessor–in-interest to Grande Communications Networks LLC, a Delaware limited liability company and our wholly-owned subsidiary prior to the closing (“Grande Operating”), ABRY Partners VI, L.P., a Delaware limited partnership (“ABRY”), Grande Investment L.P., a Delaware limited partnership and wholly-owned subsidiary of ABRY (“Ultimate Parent”), Grande Parent LLC, a Delaware limited liability company and wholly-owned subsidiary of Ulti mate Parent (“Parent”), ABRY Partners, LLC, a Delaware limited liability company and Rio GP, LLC, a Delaware limited liability company and wholly-owned subsidiary of Holdings (“Rio GP”), which provides for the recapitalization of Grande Operating (the “Recapitalization Agreement”) and pursuant to the terms of the Recapitalization Agreement, we completed the following transactions:
(1) On September 10, 2009, Grande Operating converted to a Delaware limited liability company that is disregarded for Federal income tax purposes, and Holdings extinguished any and all intercompany receivables between it and Grande Operating simultaneous with the conversion;
(2) On September 11, 2009, Grande Operating distributed to Holdings cash in the amount of approximately $1.0 million for Holdings’ future working capital needs;
(3) On September 14, 2009, Holdings contributed assets used in the operation of the business to Grande Operating and Grande Operating assumed liabilities arising from operation of the business;
(4) On September 14, 2009, ABRY, ABRY Investment Partnership, L.P. and Grande Manager LLC, a newly formed wholly-owned subsidiary of ABRY (“Grande Manager”) contributed cash in the amount of approximately $92.3 million to Ultimate Parent (which was ultimately contributed to Grande Operating) in return for a general partner interest and a limited partner interest representing approximately 75.3% of the common equity of Ultimate Parent;
(5) On September 14, 2009, ABRY contributed cash in the amount of approximately $19.2 million to Ultimate Parent (which was ultimately contributed to Grande Operating) in return for a preferred limited partnership interest of Ultimate Parent;
(6) On September 14, 2009, Holdings contributed all of the outstanding membership interests of Grande Operating to Ultimate Parent (which was contributed to Parent) in return for the issuance to Rio GP of a general partner interest of Ultimate Parent representing approximately 24.7% of the common equity of Ultimate Parent;
(7) On September 14, 2009, Grande Operating received net proceeds of approximately $103.8 million under a new credit facility arranged by ABRY, consisting of a $103.8 million term loan and a $18.7 million revolving credit facility; and
(8) On September 14, 2009, Holdings assigned the note purchase agreement discussed below to Grande Operating which repurchased 99.4% of Holdings’ 14% senior secured notes due 2011 (“Holdings Senior Notes”) pursuant to a note purchase agreement entered into with the Requisite Bondholders (defined below), and Grande Operating redeemed all of the remaining Holdings senior notes outstanding held by the remaining holders pursuant to the mandatory redemption provisions of the Indenture (defined below), and the Indenture was discharged and paid off certain outstanding capital lease obligations using the net proceeds from the equity and debt financing transactions.
On September 17, 2009, Grande Communications Holdings, Inc. merged with and into its wholly-owned subsidiary, Rio Holdings, Inc., a Nevada corporation, for the purpose of changing Holdings’ state of incorporation from Delaware to Nevada (the “Reincorporation”). The Reincorporation was accomplished pursuant to an Agreement and Plan of Merger, dated September 2, 2009, which was approved by the requisite Grande Communications Holdings, Inc. stockholders by written consent. The Reincorporation did result in the change of name of Grande Communication Holdings, Inc. to Rio Holdings, Inc. The Reincorporation did not result in any further change in the business, management, fiscal year, office locations, assets, liabilities, or employees of Holdings beyond those that resulted from the recapitali zation transactions.
As of September 14, 2009, there was outstanding an aggregate of $193 million principal amount of Holdings senior notes, pursuant to that certain Indenture, dated as of March 23, 2004, among Holdings, the guarantors named therein, and U.S. Bank National Association, as trustee, as supplemented by that certain Supplemental Indenture No. 1, dated as of July 18, 2007, by and among Holdings, the guarantors party to the Indenture and the trustee (the “Indenture”). Accrued but unpaid interest on Holdings senior notes as of September 14, 2009 was approximately $12.2 million. On August 18, 2009, Holdings entered into a note purchase agreement with Serengeti Overseas Ltd., Serengeti Partners LP, Goldman, Sachs & Co., Silver Point Capital Offshore Fund, Ltd., Silver Point Capital Fund, L.P., MAST OC I Master Fund L.P., MAST Credit Opportunities I Master Fund Limited, Whitney Private Debt Fund, L.P. (the “Requisite Bondholders”) who, in the aggregate, beneficially owned approximately $191.8 million in aggregate principal amount of Holdings senior notes. On September 14, 2009, Holdings assigned this note purchase agreement to Grande Operating. Pursuant to the note purchase agreement Grande Operating repurchased from these bondholders their Holdings senior notes upon consummation of the recapitalization transactions at a purchase price of 101.5% of the principal amount of such notes, plus accrued and unpaid interest thereon through the purchase date, which is 200 basis points lower than what would have otherwise been required under the redemption provisions of the Indenture. In addition, the Requisite Bondholders waived any and all registration rights they may have had with respect to the Holdings senior notes or any outstanding equity securities of Holdings. ABR Y provided a limited guarantee of the performance by Holdings of its obligations under the note purchase agreement, after the consummation of the recapitalization transactions.
On September 14, 2009, the closing date of the recapitalization transactions, Holdings issued a mandatory redemption notice to all of the remaining holders of the Holdings senior notes, representing approximately $1.2 million in aggregate principal amount, which were not subject to the note purchase agreement for the redemption of such notes, at a purchase price equal to 103.5% of the principal amount of such notes, plus accrued and unpaid interest thereon to the redemption date. On September 14, 2009, Holdings assigned the repayment of the Holdings senior notes pursuant to the redemption notice to Grande Operating. In connection with the closing of the recapitalization transactions, ABRY and Grande Manager contributed cash to Ultimate Parent, caused Grande Operating to enter into a new credit agreement and, using th e net proceeds from the equity contributions and the credit agreement, caused to be available to Grande Operating a sufficient amount of cash to purchase all of Holdings senior notes (whether pursuant to the note purchase agreement or, in the case of any Holdings senior notes which are not subject to the note purchase agreement, the redemption provisions of the Indenture).
All of the outstanding Holdings senior notes have been redeemed or repurchased and the indenture that governed the terms of the senior notes was discharged. As a result of these transactions, we recognized a $7.1 million loss on early extinguishment of the senior notes.
All of the outstanding shares of common stock and preferred stock of Holdings continue to remain outstanding. As a result of the closing of the recapitalization transaction, Holdings does not have any operations or material assets other than the ownership of its general partner interest of Ultimate Parent, through its wholly-owned subsidiary, Rio GP. Further, Holdings only has two persons serving as officers, Michael L. Wilfley and Walter K.L. “Scott” Ferguson, Jr., and no employees.
The transactions contemplated by the Recapitalization Agreement included the conversion of Grande Operating from a corporation to a limited liability company. Prior to such conversion, Holdings and Grande Operating were in a consolidated group and had incurred consolidated net operating losses. Upon such conversion, Holdings did not receive any payment for its stock in Grande Operating and, therefore, should not succeed to or take into account the consolidated net operating losses attributable to Grande Operating. However, Holdings should recognize a worthless stock ordinary loss deduction for its stock in Grande Operating, which may be available to offset future income of Holdings.
In connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, after October 9, 2009, we had no outstanding options to purchase any equity of Holdings.
In January 2010, Holdings filed a Form 15 with the SEC to suspend its reporting obligations under the Exchange Act. As a result of filing the Form 15, Holdings’ obligation to file certain reports and forms including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K has been suspended. We expect that this Annual Report on Form 10-K for the year ended December 31, 2009 will be the last filing made by Holdings under the Exchange Act.
Prior to the closing of the recapitalization transaction on September 14, 2009, the primary business isof Holdings and its then consolidated subsidiary, Grande Operating was providing a bundled package of cable television (“video”), telephone (“voice”), and broadband Internet (“HSD”) and other services to residential and business customers in Texas. We provideprovided these services in seven markets in the state of Texas using local broadband networks that we acquired and/or constructed. We referreferred to the homes and businesses that our network iswas capable of providing services to as “marketable homes passed.” We believe that an important measure of our growth potential is the number of marketable homes passed by our networks and the marketable homes we are able to pass in the future in the markets in which we currently operate. Marketable homes passed arewere the number of residential and business units, such as single residential homes, apartment units and condominium units, passed by our networks. Since 2001 , we havehad grown our marketable homes passed through acquisitions and the construction of our networks. The expansion of our networks has,had, in turn, allowed us to pursue a retail strategy of offering bundled video, voice and HSD services to residential and business customers. As of December 31, 2007 and 2008, we had the ability to market services to 340,058 and 340,681 distinct homes and businesses over our networks, respectively, and had 145,675 and 146,210 residential and business customers, respectively. Our operating revenues were $197.1 million in 2007 compared to $205.3 million for 2008.
GrandeHoldings was founded in November 1999 to pursue a retail strategy of constructing broadband networks in order to offer bundled video, voice, and HSD services to customers. Operating revenues from bundled services were $155.0 million in 2007 compared to $168.4 million for 2008. We have continued to grow our bundled services to commercial business customers, which increased 23% to $24.2 million during 2008 from $19.6 million during 2007.
In addition, we havehad leveraged our retail metro network build-out with the 2003 acquisition of a long haul fiber optic network to allowwhich allowed us to provide broadband transport services to medium and large enterprises and communications carriers. Operating revenues for broadband transport services were $9.4 million in 2007 compared to $12.3 million for 2008.
In July 2000, when our network construction was still in a very early stage, we acquired substantially all of the assets of Thrifty Call, Inc. (“Thrifty Call”), which had an established telephone and data network that served as the platform for the provisioning of residential voice and HSD services and iswas also the platform that providesprovided wholesale network services to medium and large enterprises and communications carriers in the wholesale market. Operating revenues for network services were $32.7 million in 2007 compared to $24.6 million for 2008.
Our network services are primarily provided using our existing infrastructure and personnel. By leveraging our brand, communications infrastructure, voice and data volume, and personnel that predominantly support our core retail business and its products, we have gained efficiencies of scale by offering telecommunications and HSD products into wholesale markets.
On January 18, 2008, we issued a press release announcing that our board of directors has authorized the Company to explore all of its strategic alternatives to enhance stockholder value. The board of directors will work with the Company’s management team and its legal and financial advisors to evaluate the Company’s available alternatives. We have engaged Waller Capital Partners LLC to assist us in exploring strategic alternatives. There can be no assurance that the exploration of strategic alternatives will result in the Company adopting or approving any strategic alternative. We undertake no obligation to make any further announcements regarding the exploration of strategic alternatives unless and until a final decision is made.
We have incurred net losses for the past five years and, now that we have no operations, expect to continue to incur net losses in the future. However, we had positive Adjusted EBITDA during the past five years. See “Non-GAAP Financial Measures” below for a discussion of this non-GAAP measure of our operating performance as well as our use of Adjusted EBITDA.
Our financial results depend upon many factors that significantly affect our results of operations including, without limitation:
general economic conditions, including the availability of, and our ability to obtain additional funding, if necessary,
our ability to obtain and retain enough customers for our services to offset the costs of operating our networks,
our ability to compete effectively depends on our ability to keep pace with advances in technology and maintain high-quality services at prices generally equal to or below those charged by our competitors, and
increasing programming and other costs.
Grande Competitive Advantages
We believe we have been able to grow our customer base because of the following competitive advantages:
Competitively superior networks. We provide our services over our newly constructed, fully integrated, high-speed, high capacity network. In 2005, we began taking fiber optic cable direct to our customers’ homes on new network passings in Austin and San Antonio with a technology known as fiber-to-the-home (“FTTH”). On all passings constructed prior to our launch of FTTH, our networks deploy fiber optic cable to nodes that can serve from 24 to 450 marketable homes passed, depending on network configuration. Our networks generally utilize an 860Mhz signal, which can be upgraded to 1Ghz. Our networks are designed to have sufficient capacity to meet the growing demand for high bandwidth video, voice, HSD and other services while providing additional capacity to enable us to offer planned and future products. The architecture of our networks allows us to offer superior services, such as dedicated Internet products at high bandwidth rates that we believe are superior to the shared bandwidth Internet products offered by our cable competitors. We already offer high definition television, digital video recording, and interactive television. Our networks are positioned to deliver new services, such as video on-demand cable television, switched digital, and other high bandwidth applications with an additional capital investment of approximately one to two million dollars.
Flexible product offerings, attractively bundled and priced. We are able to deliver a wide range of products that allow our customers to select the services that meet their specific needs and preferences: from bundled product offerings that include over 300 channels, including product enhancements such as digital video recorders (“DVRs”) and high-definition television programming (“HDTV”), local and long distance voice services, and a full suite of HSD products with speeds from 384Kbps to 12.0Mbps (up to 15.0Mbps in the Company’s FTTH passings). We believe we can offer a competitively priced package to virtually any marketable home passed by our networks. Because of operating efficiencies that result from providing multiple services to one customer, we are able to provide our customers additional savings when they purchase products as part of a bundle of two or more services. We believe that our ability to provide a single consolidated bill for multiple services is also an attractive feature for our customers.
Strong local brand and customer service. We have chosen to serve customers in seven attractive and growing markets in Texas: Austin/San Marcos, San Antonio, suburban northwest Dallas, Waco, Corpus Christi, Midland/Odessa and, to a lesser extent, Houston. In each of these markets, we have established a strong local presence that we believe has positioned Grande as the hometown company, despite the fact that we are not the incumbent service provider in any of our markets. Our customer service and technical representatives, as well as our sales representatives, installation technicians and other employees who interact with our customers, know our markets and products, and are part of our customer-focused culture. We operate a virtual customer call center system, with centers in Austin and San Marcos, Texas, that allows us to offer customer care 24 hours a day, seven days a week in an efficient, cost-effective manner. We believe our hometown brand, combined with local customer service and support, enables us to appeal to residential and business customers in our markets, as well as to local universities, utilities, hospitals and other institutions.
The Grande Strategy
We seek to take advantage of our market position by executing the following operating strategy:
Increase customer penetration in markets with demonstrated demand and operating metrics. We believe that each of our existing markets has demonstrated strong consumer demand and favorable operating metrics. As of December 31, 2008, we had 146,210 customers taking an average of over two connections each. We have proven our ability to take market share from our competitors over time in the communities that we serve. We have grown our residential and business customers from 145,675 as of December 31, 2007 to 146,210 as of December 31, 2008 and have an overall 43% customer penetration rate at December 31, 2008. We believe that there is opportunity to further penetrate our existing markets, particularly in our newer passings.
Expand commercial business offering over our retail footprint. We have extensive local deep fiber networks in each of our markets (excluding Houston) that enable us to pursue our commercial business. We have leveraged our local brand, network, and telecommunications infrastructure to grow this offering by 23% over 2007 to $24.2 million in revenue during 2008. We offer our commercial customers cable television, telephone, and broadband Intranet services at competitive rates. Because of our expansive and fiber rich local networks, we believe we can cost effectively grow this business. Our commercial business is part of our overall bundled services business.
Leverage our infrastructure by serving broader telecommunications market. In addition to our primary business of offering bundled services to residential and business customers, we also offer broadband transport services and network services to medium and large enterprises and communications carriers. Broadband transport services increased 31% over 2007 while network services decreased 25% from 2007 to $12.3 million and $24.6 million in revenue, respectively during 2008. These services are primarily provided using our existing infrastructure and personnel. By leveraging our brand, communications infrastructure, voice and data volume, and personnel that predominantly support our core retail business and its products, we have gained efficiencies of scale by offering telecommunications and HSD products into broader telecommunications markets.
Services
Bundled Services
We provideprovided video, voice, HSD and other services to our residential and business customers. We arewere able to deliver a wide range of products that allowallowed our existing and potential residential and business customers to select the services that meetmet their specific needs and preferences, from products on an individual basis to bundled product offerings. Our bundled packages offeroffered the convenience and cost-savings of having one bill and one company providing the services. We believe we were the first company in many of our markets to bundle the three products, video, voice and HSD services, to residential and business customers. We pricepriced our products competitively in each of our target markets. When customers purchasepurchased our products as part of a bundle of two or more services, they benefitbenefited from additional savings.
Our bundled services encompassincluded a broad range of services provided on an individual basis or through a bundled product offering. These services include:included:
Video. We offeroffered a wide variety of video programming and services. In addition to analog and digital video services, the Company offersGrande Operating offered numerous add-on services, such as pay-per-view, premium movie channels, digital video recorders and HDTV. Grande also offers interactiveInteractive features, such as video games, news and entertainment guides. As of December 31, 2008, we provided video services to 101,864 connections. On average, during 2008, each of our video connections generated $57.96 in monthly revenues.guides were also offered.
Our video offerings include:included:
Basic Cable. Our basic cable offering consists of over 20 channels, which generally consistsconsisted of local broadcast television, local community programming (including governmental, public and education), limited satellite-delivered or non-broadcast channels.
Expanded Cable. IncludesIncluded Basic Cable plus approximately 45 additional channels, (over 65 total), including ESPN, Disney, CNN, Comedy Central and MTV.
Super Digital Cable. Our digital cable offering consistsconsisted of our expanded cable offering plus approximately 100 additional digital cable channels for access to a total of over 300 channels. Digital service includesincluded an interactive program guide, 48 channels of digital music and Grande Interactive TV with features such asfeatured games and local guides. In addition, we have tailored our digital cable programming to include a large number of Spanish language channels to appeal to the large Spanish-speaking population in our markets. We offeroffered this target-specific content in tiers. Digital service also includesincluded advanced services such as Grande News & Info on Demand. Grande’sOur digital package includesincluded access to multi-cast premium channels such as HBO, Showtime, Cinemax, and Starz! as well as specialty programming tiers featuring Spanish programming, sports, high-definition, and movie content. Digital Cable TV subscribers must have a digital set-top box to use the service.conte nt.
High-Definition Television. HDTV iswas offered to all digital cable subscribers. HDTV is a digital television service that displays enhanced picture quality that surpasses standard analog and digital television images. We currently offer a minimum of 31 channels of HDTV programming (number of channels may vary by market).
Premium Movie Channels. These 59 additional channels provideprovided commercial-free movies and other programming including HBO, Cinemax, Showtime, The Movie Channel, Starz! and Encore.
Pay-Per-View. Premium content, such as movies, sports and concerts that arewere offered on a commercial-free basis for additional fees.
Digital Video Recorder. For an additional fee, Grande offerswe offered digital set-top boxes that allowallowed customers to digitally record television programs and watch them on their own schedule. In addition to recording and replay, DVRs also allowallowed customers to pause and rewind live programming. Grande offersWe offered dual-tuner DVRs that allow customers to record programs while watching other channels.
Voice. We offeroffered a variety of local and long distance calling plans as well as numerous advanced calling features. Grande’sOur voice plans generally includeincluded unlimited local calling, free calls to existing Grandeour customers, directory listing service options and bundles of local and long distance calling with a variety of calling features. Grande’s voice plans offer consumers superior service and value compared to other offerings in the market. As of December 31, 2008, we provided service to 114,512 telephone connections. On average, during 2008, each of our telephone connections generated $41.02 in monthly revenues, including local and long-distance service.
Our voice offerings include:included:
Local Service. Our local telephone services includeincluded standard dial tone access, 911 access, operator services and directory assistance, all over a powered network affording greater reliability.assistance. In addition, we offeroffered a wide range of custom call services, including call waiting, call forwarding, call return, caller blocker, anonymous call rejection, auto redial, speed dial, three-way calling, priority-call and voice mail, each of which may be activated or deactivated by a customer, usually by dialing a simple activation code.
Long Distance. Our long-distance services includeincluded traditional switched and dedicated long distance, toll-free calling, international and operator services. We offeroffered our customers an option of a flat rate for domestic or intrastate long-distance calls all day, every day, with no minimum monthly usage fees, and several prepaid long distance plans by which the customer payspaid a monthly fee for a pre-determined number of long distance minutes and a flat per minute rate for any additional minutes. We also offeroffered flat per minute rate for direct-dial international calling with no additional fees, surcharges or minimum call times per call. Our customers also maycould purchase 800 number calling services or toll restriction services. We believe our long-distance telephone services are competitively priced. We offeroffered our retail customers, as part of their subscription to our services, “free Grande-to-Grande,” which meansmeant there arewere no long-distance charges for calls between two of our phone subscribers in different markets.
HSD and Other. As of December 31, 2008, we had 101,502 HSD and other service connections. On average, during 2008, each of our HSD and other connections generated $34.94 in monthly revenues. HSD and other services include:included:
HSD Service. We provideprovided our HSD customers with a full suite of high-speed broadband Internet products through our networks, with speeds up to 12Mbps download, up to 24Mbps with addition of our Bolt burstable Internet product, (15Mbps to our FTTH customers) for residential customers.networks. We offeroffered multiple tiers of high-speed broadband access, including dedicated access and tiered bandwidth with Ethernet speeds up to 1000Mbps, to business customers. We also offeroffered DSL and low-price dial-up Internet access, but most of our residential and business customers taketook advantage of the high data speeds available on our broadband networks. Our HSD customers havealso had a choice of services with different download and upload speeds for different monthly charges. Grande HSD service provides unlimited access to the Internet without dialing in or logging on to a network and without a dedicated telephone line. Our higher speed service offers superior speeds to DSL and, we believe, appeals to the more sophisticated broadband Internet user. We also provideprovided to our customers a specific number of free e-mail accounts, personal Web space, email switching services and Internet security software. We also offeroffered web premium packages, such as additional Internet security, family oriented premiums, sports, gaming and learning web applications as well asa s downloadable music and movies. Customers havehad the option to purchase or rent a cable modem from us or purchase it directly from a retailer. We believe businesses and sophisticated users continue to require faster Internet access and more bandwidth as content is becoming more robust, and we intend to offer products that will meet that demand using our high capacity networks.
Security Solutions. We discontinued actively marketing our security product in 2006. However, we continuecontinued to provide service to our existing customer base. Through our wireless security product, we installed leading wireless security systems in private residences. We useused a third party for 24 hours a day, 7 days a week monitoring, and our trained technical staff iswas licensed by the Private Security Board under the Texas Department of Public Safety.
Broadband TransportBundled Services
We offer accessprovided video, voice, HSD and other services to our metro arearesidential and long-haul fiber networks in 16 cities in Texas, as well as in Tulsa and Oklahoma City, Oklahoma, Little Rock, Arkansas and Shreveport, Louisiana and provide our broadband transport customers withbusiness customers. We were able to deliver a fullwide range of network-relatedproducts that allowed our residential and business customers to select the services that met their specific needs and preferences, from products on an individual basis to bundled product offerings. Our bundled packages offered the convenience and cost-savings of having one bill and one company providing the services. The Grande network provides intercity long haul transport services between 20 citiesWe priced our products competitively in Texas, Oklahoma, Arkansas and Louisiana with collocation facilities in 15 of those cities. These services can include dark fiber leases and indefeasible rights of use, custom network construction or lateral builds and access to the networks at various wavelengths. We also provide private line services to enterprises, carriers and Internet service providers which allow the customer to connect multiple sites through dedicated point-to-point circuits, which carry voice and data traffic at high-speeds. A metro area network is a high-speed data intra-city network, usually including a fiber optic ring that links multiple locations within a city. Eacheach of our metro area networks connects to most carrier pointstarget markets. When customers purchased our products as part of presence, major incumbent local exchange carriers,a bundle of two or ILECs, and competitive local exchange carriers, or CLECs, central offices, hotels, central and suburban business centers, data centers and co-location facilities in these areas. We also provide equipment co-locationmore services, that permit Internet service providers to collocate modems, routers or network servers with our network equipment.they benefited from additional savings.
Network Services
We offer networkOur bundled services to other communications service providers and carriers. Our wholesale network services encompassincluded a broad range of voice telephony products including domesticservices provided on an individual basis or through a bundled product offering. These services included:
Video. We offered a wide variety of video programming and international terminations, originating and terminating local access and national directory assistance.services. In addition to analog and digital video services, Grande provides wholesale dataOperating offered numerous add-on services, ranging from dial up to Gigabit Ethernet Internet access. Allsuch as pay-per-view, premium movie channels, digital video recorders and HDTV. Interactive features, such as video games, news and entertainment guides were also offered.
Our video offerings included:
Basic Cable. Our basic cable offering generally consisted of these services are provided using primarily the same personnellocal broadcast television, local community programming (including governmental, public and network infrastructure that we use to provide voiceeducation), limited satellite-delivered or non-broadcast channels.
Expanded Cable. Included Basic Cable plus additional channels, including ESPN, Disney, CNN, Comedy Central and HSD services to our retail customers. This allows us to leverage our existing resources and expertise to generate incremental revenues and cash flow, which we believe has allowed us to support the early developmentMTV.
Super Digital Cable. Our digital cable offering consisted of our core retailexpanded cable offering plus approximately 100 additional digital cable channels for access to a total of over 300 channels. Digital service included an interactive program guide, digital music and Grande Interactive TV with featured games and local guides. In addition, we tailored our digital cable programming to include a large number of Spanish language channels to appeal to the large Spanish-speaking population in our markets. We offered this target-specific content in tiers. Digital service also included advanced services while amortizing the cost of our networks oversuch as Grande News & Info on Demand. Our digital package included access to multi-cast premium channels such as HBO, Showtime, Cinemax, and Starz! as well as specialty programming tiers featuring Spanish programming, sports, high-definition, and movie conte nt.
High-Definition Television. HDTV was offered to all digital cable subscribers. HDTV is a larger revenue base. Since our networks pass or interconnect with these larger enterprisesdigital television service that displays enhanced picture quality that surpasses standard analog and carriers anyway, our goal has been to serve these customers and earn a return from every mile of network.digital television images.
Our wholesale network services primarily include:
Carrier Voice. Premium Movie Channels. These services consist of our transmission services to carriersadditional channels provided commercial-free movies and other telecommunications companies. This primarily involves our selling access toprogramming including HBO, Cinemax, Showtime, The Movie Channel, Starz! and transporting minutes for long-distance telephone companies for intrastate, interstate and international long-distance traffic terminations.Encore.
Data ServicesPay-Per-View. We provide services to Internet service providers, which we call our managed modem services that allow the Internet service provider to deliver dial-up Internet service to customers in areas where our network is located. We provide the modems, offer dial-up and a variety of related services, including server hosting, direct access between our networks and the network of the Internet service provider, a customer-maintained user database, and end-user technical support services. We also offer various other data services,Premium content, such as VoIP terminations, inbound local callingmovies, sports and toll-free calling. A portion of our data revenue is derived from reciprocal compensation. A Federal Communications Commission (“FCC”) order, described more thoroughly below under the caption “Regulation of Telecommunications Services”, regarding this revenue stream negatively impacted our revenue beginning in the latter half of 2005.concerts that were offered on a commercial-free basis for additional fees.
Managed ServicesDigital Video Recorder. For an additional fee, we offered digital set-top boxes that allowed customers to digitally record television programs and watch them on their own schedule. In addition to recording and replay, DVRs also allowed customers to pause and rewind live programming. We provide telephone services, as well as the infrastructure neededoffered dual-tuner DVRs that allow customers to offer local telephone service, to competitive local exchange carriers. This enables the carriers to offer telephone services to their customers using our networks, including a local dial tone, local telephone features, long-distance switching and calling cards. We also provide access to a comprehensive national directory assistance service, which includes local and long-distance directory assistance for listings in the United States. We also provide equipment co-location services that permit Internet service providers to collocate modems, routers or network servers with our network equipment.record programs while watching other channels.
MarketingVoice. We offered a variety of local and Saleslong distance calling plans as well as numerous advanced calling features. Our voice plans generally included unlimited local calling, free calls to our customers, directory listing service options and bundles of local and long distance calling with a variety of calling features.
Our salesvoice offerings included:
Local Service. Our local telephone services included standard dial tone access, 911 access, operator services and marketing efforts focus on building loyalty withdirectory assistance. In addition, we offered a wide range of custom call services, including call waiting, call forwarding, call return, caller blocker, anonymous call rejection, auto redial, speed dial, three-way calling, priority-call and voice mail, each of which may be activated or deactivated by a customer, usually by dialing a simple activation code.
Long Distance. Our long-distance services included traditional switched and dedicated long distance, toll-free calling, international and operator services. We offered our customers an option of a flat rate for domestic or intrastate long-distance calls all day, every day, with no minimum monthly usage fees, and acquiring newseveral prepaid long distance plans by which the customer paid a monthly fee for a pre-determined number of long distance minutes and a flat per minute rate for any additional minutes. We also offered flat per minute rate for direct-dial international calling with no additional fees, surcharges or minimum call times per call. Our customers alongcould purchase 800 number calling services or toll restriction services. We offered our retail customers, as part of their subscription to our services, “free Grande-to-Grande,” which meant there were no long-distance charges for calls between two of our phone subscribers in different markets.
HSD and Other. HSD and other services included:
HSD Service. We provided our HSD customers with a full suite of high-speed broadband Internet products through our networks. We offered multiple tiers of high-speed broadband access, including dedicated access and tiered bandwidth to business customers. We also offered DSL and low-price dial-up Internet access, but most of our residential and business customers took advantage of the high data speeds available on our broadband networks. Our HSD customers also had a choice of services with different download and upload speeds for different monthly charges. We also provided to our customers a specific number of free e-mail accounts, personal Web space, email switching services and Internet security software. We also offered web premium packages, such as additional Internet security, family oriented premiums, sports, gaming and learning web applications as well a s downloadable music and movies. Customers had the option to purchase or rent a cable modem from us or purchase it directly from a retailer.
Security Solutions. We discontinued actively marketing our security product in 2006. However, we continued to provide service to our existing network footprint.customer base. Through our wireless security product, we installed leading wireless security systems in private residences. We emphasizeused a third party for 24 hours a day, 7 days a week monitoring, and our trained technical staff was licensed by the convenience, savings and improved service that can be obtained by subscribing to bundled services.
Marketing
In eachPrivate Security Board under the Texas Department of our markets, we have established a strong community presence that we believe has positioned Grande as the hometown company, despite the fact that we are not an incumbent service provider in any of our markets. Grande’s marketing focuses on three primary strategies that are used to drive sales, create awareness, and help retain customers. These strategies include: (i) a strong community presence that we believe positions Grande as a hometown company; (ii) a targeted branding strategy that seeks to provide overarching brand awareness; and (iii) a heavy direct marketing strategy that maximizes the efficiency of our marketing efforts.Public Safety.
Grande’s heavy involvement in community events and participation with local charitable organizations is driven primarily by our local Community Relations and Direct Sales teams in the markets. As part of this effort, our employees run our Passion and Commitment Investment Club, which supports community organizations in our markets that provide food, shelter, clothing and healthcare to persons in need. Grande’s Passion and Commitment Investment Club has made significant donations to non profit organizations across our markets and has been recognized with numerous local and state awards for its community service. We believe these activities help develop a strong local brand that in turn translates into support for our direct sales efforts.
Grande also uses targeted branding opportunities to create additional brand awareness in the marketplace. In our less ubiquitous markets, we employ tactics such as outdoor advertising, vehicle wraps, and local sponsorships. In areas where our footprint has a greater reach, we are also able to use mass media such as television and radio on a limited basis. Additionally, we are becoming more involved in emerging Internet technologies to help further extend our brand by utilizing social media tactics such as Twitter, Facebook, and corporate blog sites.
This overarching brand strategy serves to provide an umbrella of awareness that increases the effectiveness of the third component of our strategy, direct marketing. Grande’s unique footprint is the primary driver of our direct marketing strategy. Because of our unique footprint, we must deliver materials on a household level in order to maximize our marketing efforts. We utilize a variety of tactics such as direct mail, zoned newspaper inserts, door tags, telemarketing, and door-to-door sales in an effort to generate new sales. Additionally, we utilize third party market segmentation data in an effort to segment our markets and target each unique customer segment with the appropriate mix of messaging, product offering, and pricing.
We believe our marketing strategies help us penetrate our target markets where the acquisition of new customers is typically dependent upon customers switching to our services from their existing providers. We have grown our residential and business customers from 145,675 as of December 31, 2007 to 146,210 as of December 31, 2008 and have an overall 43% customer penetration rate at December 31, 2008.
Sales
We have separate sales teams in each of our markets dedicated to residential, multiple family dwelling units (“MDUs”), and commercial customers. Each of these sales teams reports to separate sales management that is responsible for all of the sales in a particular product area. We also have a separate sales team dedicated to broadband transport and network services.
A standard residential sales team consists of direct sales, outbound and inbound call center sales, counter sales and support personnel. A typical commercial sales team consists of account executives and specialized business installation coordinators. Our MDU sales team has developed relationships with owners and management of the MDU properties in our target markets, which enables us to gain access to new customers as soon as they move into their unit. Our network services sales team focuses on making direct contact with communications providers principally via sales calls, trade shows and our sales team’s existing industry relationships. Our call center sales team handles substantially all incoming and outgoing residential and commercial sales calls for all markets.
Our sales teams are cross-trained on all our products to support our bundling strategy. Our sales teams are compensated based on both revenues and connections and are therefore motivated to sell more than one product to each customer. However, our sales force is highly incentivized to sell the right services to a particular customer without overselling. Our sales personnel do not get credit for selling products that are later cancelled within a certain number of months after the start of service. We believe that by providing the appropriate level of services to each customer, we are more likely to retain that customer, which reduces our overall customer turnover rate.
In addition, we have different strategies for marketing to customers in newly constructed network areas and to customers in established network areas. In new areas, prior to activation of our services, we target customers with door-to-door solicitations and outbound telemarketing as part of an extensive marketing campaign in the area. In established areas, we assign territories to individual direct sales representatives, allowing them to adjust sales techniques to fit the profile of different buyers in particular areas. We have also established relationships with certain strategic partners, such as local grocery stores, to market through certain products and services.
We work to gain customer referrals for additional sales by focusing on service and customer satisfaction. We have implemented several retention and customer referral tactics, including customer newsletters, personalized e-mail communications and loyalty programs. These programs are designed to increase loyalty, retention and up-sell among our current base of customers.
Customer Care, Billing and Installation
Customer Care
We believe that the combination of bundled communications services on our own networks and quality customer care are key drivers to effectively compete in the residential and business markets. We believe that the quality of service and responsiveness differentiates us from many of our competitors. We provide customer service 24 hours a day, seven days a week. Our representatives are cross-trained to handle customer service transactions for all of our products. We operate a virtual customer call center system, with centers in Austin and San Marcos, Texas, that handle all customer service transactions other than network trouble calls, which we handle through our technical service center also located in San Marcos, Texas. In addition, we provide our business customers with a local customer service representative, which we believe improves our responsiveness to customer needs and distinguishes our products in the market. We believe it is a competitive advantage to provide our customers with the convenience of a single point of contact for all customer service issues for our video, voice and HSD services and is consistent with our bundling strategy.
We monitor our networks 24 hours a day, seven days a week through our network operations and control center (“NOCC”) located in San Marcos, Texas. Typically, our NOCC allows us to detect problems before or as soon as any service interruption occurs. We strive to resolve service delivery problems prior to customer awareness of any service interruptions.
Billing
We have invested significant resources in outsourced integrated provisioning and billing systems that we believe are sufficiently scalable to support a full build-out in our existing markets and beyond for our retail customer base. This system greatly enhances our ability to address customer billing issues and also enables us to send a single bill to our customers for video, voice and HSD services. We have separate billing platforms for enterprise, broadband transport and network services that we also believe meet our business needs for accuracy and flexibility.
Installation
Within each market, we have a single group of installers who install the equipment for all our of our video, voice, and HSD offerings. This creates operating efficiencies for us by reducing the number of necessary installation personnel and allowing us to make one trip to the customer premises at the commencement of service. Our dispatch, order taking and installation management processes are coordinated for increased efficiency. We believe that this integrated and streamlined installation process creates a positive experience for Grande’s customers.
Industry
In recent years, regulatory developments have led to changes and increased competition, both intra-modal and inter-modal, in the communications industry. The Telecommunications Act of 1996 and its implementation through FCC regulations have broken down barriers between providers of different types of communications services. Companies that were effectively limited to providing one telecommunications service can now provide additional services with fewer regulatory restrictions or requirements.
We believe the industry is moving more towards an environment of inter-modal competition where both the cable television providers and the local telephone providers, and to some extent wireless service providers, will be competing head to head for local telephone, long distance, cable television or other video, and high speed data service. Advances in technology have furthered convergence in the industry by enabling delivery of cable television or video services, telephone services and broadband Internet services over different types of networks and making the delivery of more than one service over one broadband network, whether wireless or wireline, feasible and economical. The cable companies have introduced telephone services via Voice over Internet Protocol (“VoIP”) to residential customers, and the local telephone providers are investing large amounts of capital into new networks to offer television or video service using IP-enabled technologies in addition to their existing telephone and DSL services. Verizon Communications Inc. (“Verizon”) is constructing fiber-to-the-home networks and AT&T Inc. (“AT&T”) has begun serving customers via a fiber-to-the-curb network, in an effort to sell television over IP. Separately, advances in technology are enabling providers of wireless service to accommodate the transmission of video and other broadband applications. We compete against companies that have significant competitive advantages over us, including more years of experience, greater resources, significant mass marketing capabilities and broader name recognition.
We also compete with the growing availability of wireless high-speed Internet access, or Wi-Fi service, principally when offered by municipal authorities or authorized third parties in a particular geographic region. Wi-Fi services, particularly when combined with VoIP or other advanced IP-based applications, can enable users to communicate by phone, access the Internet, or engage in other broadband activities, typically at a minimal flat-rate charge.
We believe as the market continues to converge across product and market segments, communications providers will have to distinguish themselves from competitors by offering: high quality products, services, and applications across all service types; better pricing that reflects some of the operational efficiencies; and convenience to the customer in the form of a single bill and unified customer support. We believe that our ability to provide a tailored package of bundled services developed from a wide range of service options at competitive prices over one network system with a regional focus on Texas has been a key factor in enabling us to penetrate our markets.
Markets
The following table sets forth, in each of our markets, the marketable homes we pass.
| | | December 31, | |
| | | | |
Market Areas in Texas | | 2006 | | | 2007 | | | 2008 | |
| | | | | | | | | | |
| Austin/San Marcos | | | 73,527 | | | | 74,713 | | | | 75,327 | |
| San Antonio | | | 63,692 | | | | 63,800 | | | | 64,044 | |
| Suburban Northwest Dallas | | | 59,618 | | | | 57,317 | | | | 54,695 | |
| Corpus Christi | | | 47,932 | | | | 49,332 | | | | 49,620 | |
| Waco | | | 44,270 | | | | 44,909 | | | | 45,154 | |
| Midland/Odessa | | | 40,750 | | | | 42,734 | | | | 44,589 | |
| Houston | | | 7,236 | | | | 7,253 | | | | 7,252 | |
| | | | | | | | | | | | | |
| Total | | | 337,025 | | | | 340,058 | | | | 340,681 | |
| | | | | | | | | | | | | |
Competition
The broadband communications industry is highly competitive. We compete primarily on the basis of the price, availability, reliability, variety, quality of our offerings, our employees, and on the quality of our customer service. Our ability to compete effectively depends on our ability to maintain high-quality services at prices generally equal to or below those charged by our competitors. Price competition in the retail services and broadband transport services markets generally has been intense and is expected to continue, although cable rates increase annually.
We are not the first provider of any one of our three principal bundled services in any of our markets. We compete with numerous other companies that have provided services for longer periods of time in each of our markets, and we often have to convince consumers to switch from other companies to Grande. Some of our competitors have significant competitive advantages over us, such as more years of experience, greater resources, significant mass marketing capabilities and broader name recognition. Our primary competitors include:
for video services: Time Warner Cable, Cable One Inc. (“Cable One”), Suddenlink Communications, Comcast Corporation (“Comcast”), Charter Communications Inc. (“Charter”), DIRECTV Holdings LLC (“DIRECTV”), DISH Network Corporation (“DISH Network”), AT&T, Verizon and others;
for HSD services: AT&T, Time Warner Cable, Time Warner Telecom, Verizon, Comcast, Charter, Cable One, Suddenlink Communications, CenturyTel Inc. (“CenturyTel”), Clearwire Corporation (“Clearwire”) and others;
for long-distance telephone services: AT&T, Verizon, Sprint, Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage Holdings Corp (“Vonage”) and others;
for local telephone services: AT&T, Verizon, CenturyTel, Birch Telecom Inc. (“Birch Telecom”), Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage and others.
Advances in communications technology as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. In certain areas of our markets, for example in Austin, we compete for local and long distance services against the VoIP offerings of Vonage and Time Warner Cable. In addition, the continuing trend toward business combinations and alliances in the telecommunications industry will create significant new competitors. As a result of these business combinations and the introduction of VoIP offerings, we anticipate that the competitive environment will continue to intensify. In addition to terrestrial competition, we continue to see consumers choose to eliminate a second line, their long distance, and/or their primary landline and use wireless telephone service instead. This dynamic is more prevalent in younger, more transient households such as MDUs in which students or young adults tend to move every twelve to eighteen months. Advances in technology also are leading to changes in video distribution platforms, making downloadable, on-demand video content accessible in both traditional wireline and wireless mobile viewing devices. These and other developments are requiring traditional communications providers such as us to regularly rethink the model for successfully marketing and providing video, voice and HSD content and services to consumers.
Bundled Services
We believeprovided video, voice, HSD and other services to our residential and business customers. We were able to deliver a wide range of products that amongallowed our existing competitors, incumbent cable providers, ILECs, CLECsresidential and satellite television providers representbusiness customers to select the services that met their specific needs and preferences, from products on an individual basis to bundled product offerings. Our bundled packages offered the convenience and cost-savings of having one bill and one company providing the services. We priced our primary competitorsproducts competitively in the deliveryeach of our target markets. When customers purchased our products as part of a bundle of two or more video, voice and HSD services. In some of our markets, our competitors are also offering wireless service. services, they benefited from additional savings.
Our competitors could have a significant adverse impact on our ability to market our bundled services to customers.included a broad range of services provided on an individual basis or through a bundled product offering. These services included:
Video. OurWe offered a wide variety of video service competes with the incumbent cable television provider in all of our markets except in certain private-development subdivisionsprogramming and MDUs where we currently are the only cable provider. The incumbent cable providers in our markets,services. In addition to analog and digital video services, Grande Operating offered numerous add-on services, such as Time Warner Cable in Austin, San Antonio, Dallas, Corpus Christipay-per-view, premium movie channels, digital video recorders and Waco; Cable One in Odessa; Suddenlink Communications in Midland and Austin; and Charter in northwest Dallas, have significantly greater resources and operating history than we do. We also compete with satellite television providersHDTV. Interactive features, such as DIRECTV, as well as other cable television providers, broadcast television stationsvideo games, news and wireless cable services. We face additional competition from private satellite master antenna television systems that serve condominiums, apartment and office complexes and private residential developments, and these systems generally are free of any regulation by state or local government authorities.entertainment guides were also offered.
LegislativeOur video offerings included:
Basic Cable. Our basic cable offering generally consisted of local broadcast television, local community programming (including governmental, public and regulatory developments may leadeducation), limited satellite-delivered or non-broadcast channels.
Expanded Cable. Included Basic Cable plus additional channels, including ESPN, Disney, CNN, Comedy Central and MTV.
Super Digital Cable. Our digital cable offering consisted of our expanded cable offering plus approximately 100 additional digital cable channels for access to additional competition in the cablea total of over 300 channels. Digital service included an interactive program guide, digital music and video market. The Cable Television Consumer ProtectionGrande Interactive TV with featured games and Competition Act of 1992 contains provisions, which the FCC has implemented through regulations, to enhance the ability of competitors to cable to purchase and make available to consumers certain satellite-deliveredlocal guides. In addition, we tailored our digital cable programming at competitive costs. The Telecommunications Actto include a large number of 1996 eliminated many ofSpanish language channels to appeal to the restrictions on local telephone companies that offer cable programming, and we face increased competition from such companies. Major local telephone companieslarge Spanish-speaking population in our markets. We offered this target-specific content in tiers. Digital service also included advanced services such as VerizonGrande News & Info on Demand. Our digital package included access to multi-cast premium channels such as HBO, Showtime, Cinemax, and AT&T now provideStarz! as well as specialty programming tiers featuring Spanish programming, sports, high-definition, and movie conte nt.
High-Definition Television. HDTV was offered to all digital cable subscribers. HDTV is a digital television or similar video services to homesservice that displays enhanced picture quality that surpasses standard analog and compete with us to the extent they modify or overbuild their networks to sell these services to the same homes we serve now or will serve in the future. AT&T, for example, has launched an Internet Protocol-based video service to some of its customers in Texas. Verizon has been overbuilding its own network and extending it into greenfield communities, which require the construction of new local loops, through a FTTH architecture (known commercially as FIOS) to enable the delivery of its cable service. Verizon already has launched its cable service in north Texas, and it currently passes approximately 3% of the total marketable homes we pass as of December 31, 2008. Verizon utilizes Internet protocol to provide video services.digital television images.
We obtain our cablePremium Movie Channels. These additional channels provided commercial-free movies and other programming by entering into arrangements or contracts with cable programming suppliers. Currently, a programming supplier that delivers its programming terrestrially (as opposed to by satellite) may be able to enter into an exclusive arrangement with one of our cable competitors for the delivery of certain programming, creating a competitive disadvantage for us by restricting our access to that programming. This generally involves localincluding HBO, Cinemax, Showtime, The Movie Channel, Starz! and regional programming,Encore.
Pay-Per-View. Premium content, such as newsmovies, sports and sporting events.concerts that were offered on a commercial-free basis for additional fees.
Some of our competitors may purchase programming at more advantageous rates dueDigital Video Recorder. For an additional fee, we offered digital set-top boxes that allowed customers to digitally record television programs and watch them on their size and the availability of volume discounts. We purchase a large portion of our programming using the services of a national cooperative that seeks to obtain more favorable pricing on behalf of smaller cable providers nationwide.
The FCC and Congress have adopted laws and policies that today provide, and may in the future provide, in some cases a more favorable operating environment for new and existing technologies that compete with our various video distribution systems. These technologies today include, among others, direct broadcast satellite service in which signals are transmitted by satellite to receiving facilities located on customer premises. In the future, these technologies could include, among others, video distribution systems that provide service to mobile phones or other hand-held devices.
We also face competition from a number of different sources, including companies that deliver movies, television shows and other video programming over broadband Internet connections, such as Hulu.com, as well as online order services with mail delivery, and video stores and home video services. Increasingly, content owners are utilizing Internet-based delivery of content directly to consumers, often without charging a fee for access to the content. Furthermore, due to consumer electronics innovations, consumers will over time be more readily able to watch such Internet-delivered content on television sets.own schedule. In addition to multi-channel video providers, we compete with allrecording and replay, DVRs also allowed customers to pause and rewind live programming. We offered dual-tuner DVRs that allow customers to record programs while watching other sources of news, information and entertainment, including over-the-air television broadcast reception, live events, movie theaters and the Internet.channels.
Voice. We offered a variety of local and long distance calling plans as well as numerous advanced calling features. Our principal competitor forvoice plans generally included unlimited local services is the incumbent carrier in the particular market, which is AT&T incalling, free calls to our customers, directory listing service options and bundles of local and long distance calling with a large majorityvariety of our market areas. Incumbent carriers enjoy substantial competitive advantages arising from their historical monopoly position in the local telephone market, including pre-existing customer relationships with all or virtually all end-users. We also face competition from alternative service providers, including competitive providers and other CLECs, many of which already have established local operations in our markets. Cable service providers have also entered the voice communication market in some of our service areas. Time Warner Cable and Suddenlink Communications, for example, are offering a VoIP telephony product in their service areas, some of which overlap with ours. Other VoIP providers such as Vonage and Skype have also entered the telephony market.calling features.
We expect to continue to face significant competition for long-distanceOur voice offerings included:
Local Service. Our local telephone services from incumbentincluded standard dial tone access, 911 access, operator services and directory assistance. In addition, we offered a wide range of custom call services, including call waiting, call forwarding, call return, caller blocker, anonymous call rejection, auto redial, speed dial, three-way calling, priority-call and voice mail, each of which may be activated or deactivated by a customer, usually by dialing a simple activation code.
Long Distance. Our long-distance providersservices included traditional switched and dedicated long distance, toll-free calling, international and operator services. We offered our customers an option of a flat rate for domestic or intrastate long-distance calls all day, every day, with no minimum monthly usage fees, and several prepaid long distance plans by which the customer paid a monthly fee for a pre-determined number of long distance minutes and a flat per minute rate for any additional minutes. We also offered flat per minute rate for direct-dial international calling with no additional fees, surcharges or minimum call times per call. Our customers could purchase 800 number calling services or toll restriction services. We offered our retail customers, as part of their subscription to our services, “free Grande-to-Grande,” which meant there were no long-distance charges for calls between two of our phone subscribers in different markets.
HSD and Other. HSD and other services included:
HSD Service. We provided our HSD customers with a full suite of high-speed broadband Internet products through our networks. We offered multiple tiers of high-speed broadband access, including dedicated access and tiered bandwidth to business customers. We also offered DSL and low-price dial-up Internet access, but most of our residential and business customers took advantage of the high data speeds available on our broadband networks. Our HSD customers also had a choice of services with different download and upload speeds for different monthly charges. We also provided to our customers a specific number of free e-mail accounts, personal Web space, email switching services and Internet security software. We also offered web premium packages, such as AT&T, Verizonadditional Internet security, family oriented premiums, sports, gaming and Sprint, which together account for the majority of all U.S. long-distance revenues. The major long-distance service providers benefit from established market share, both in traditional direct-dial serviceslearning web applications as well asa s downloadable music and movies. Customers had the option to purchase or rent a cable modem from us or purchase it directly from a retailer.
Security Solutions. We discontinued actively marketing our security product in prepaid2006. However, we continued to provide service to our existing customer base. Through our wireless security product, we installed leading wireless security systems in private residences. We used a third party for 24 hours a day, 7 days a week monitoring, and dial-around products, and from established trade names through nationwide advertising. We regard our long-distance service as a complementary service rather than a principal sourcetrained technical staff was licensed by the Private Security Board under the Texas Department of revenues. However, certain incumbents, including AT&T, Verizon and Sprint, also view their long-distance service in a similar way and are able to offer local services in their markets using their existing network. Additional new threats may present themselves if incumbent carriers continue to acquire or merge with other large providers of telecommunications services.Public Safety.
We also face competition in the local and long-distance telephone market from wireless carriers. We believe that the assumption that wireless telephone service is viewed primarily, although not entirely, by consumers as a supplement to, and not a replacement for, traditional wireline telephone service is under increasing pressure. Wireless service generally is more expensive than traditional telephone service and is priced on a usage-sensitive basis. However, the rate differential between wireless and traditional telephone service has begun to decline and is expected to decline further and lead to more competition between providers of wireline and wireless telephone services. Expansion of IP technology in the wireless industry will be expected to further narrow the historic price differential. Although customers generally continue to subscribe to their landline telephone service, wireless service may become an even bigger threat to the traditional telephone market as usage rates for wireless service continue to decline and “buckets” of nationwide wireless telephone minutes are offered for flat monthly rates. We also believe that younger consumers view wireless as a substitute, rather than a supplement to terrestrial wireline services.
We also increasingly face competition from businesses, including incumbent cable providers, offering long-distance services through VoIP. These businesses could enjoy a significant cost advantage because, at this time, they generally do not pay carrier access charges although interconnect VoIP providers are now required to pay federal universal service fees. As explained more fully below under the caption “Legislation and Regulation,” the regulatory status of VoIP service continues to be considered by the FCC, various states and reviewing courts. While the FCC has made some preliminary determinations about VoIP already, a number of important regulatory issues have not yet been resolved fully. The conclusions reached by federal and state agencies and courts largely will determine the viability and profitability of VoIP service, and, possibly, the success of our competitors offering this service. Currently, AT&T, Time Warner Cable, Suddenlink Communications, Cable One, Comcast and Vonage each provide a VoIP offering in certain of our market areas.
HSD Services. The Internet access market is extremely competitive and highly fragmented. Providing broadband Internet services is a rapidly growing business and competition is increasing in each of our markets. Some of our competitors benefit from stronger name recognition and greater resources, experience and marketing capabilities. For HSD services, we compete primarily with AT&T, Time Warner Cable, Verizon, Suddenlink Communications, Cable One, Comcast, Charter CenturyTel and Clearwire. Other competitors include traditional dial-up Internet service providers, providers of satellite-based Internet services, other local and long-distance telephone companies and cable television companies. We also expect to compete with providers of wireless high-speed Internet access, or Wi-Fi service, principally when offered by municipal authorities or authorized third parties in a particular geographic region. New technologies, such as Access Broadband over Power Line, continue to emerge as well.
Broadband Transport Services
We offered access to our metro area and long-haul fiber networks in 16 cities in Texas, as well as in Tulsa and Oklahoma City, Oklahoma, Little Rock, Arkansas and Shreveport, Louisiana and provided our broadband transport customers with a full range of network-related services. Our network provided intercity long haul transport services between 20 cities in Texas, Oklahoma, Arkansas and Louisiana with collocation facilities in 15 of those cities. These services could include dark fiber leases and indefeasible rights of use, custom network construction or lateral builds and access to the networks at various wavelengths. We also provided private line services to enterprises, carriers and Internet service providers which allowed the customer to connect multiple sites through dedicated point-to-point circuits, which carried voice and data tr affic at high-speeds. A metro area network was a high-speed data intra-city network, usually including a fiber optic ring that linked multiple locations within a city. Each of our metro area networks connected to most carrier points of presence, major incumbent local exchange carriers, or ILECs, and competitive local exchange carriers, or CLECs, central offices, hotels, central and suburban business centers, data centers and co-location facilities in these areas. We also provided equipment co-location services that permitted Internet service providers to collocate modems, routers or network servers with our network equipment.
Network Services
We offered network services to other communications service providers and carriers. Our wholesale network services included a broad range of voice telephony products including domestic and international terminations, originating and terminating local access and national directory assistance. In addition, we provided wholesale data services ranging from dial up to Gigabit Ethernet Internet access.
Our wholesale network services primarily included:
Carrier Voice. These services consisted of our transmission services to carriers and other telecommunications companies. This primarily involved our selling access to and transporting minutes for long-distance telephone companies for intrastate, interstate and international long-distance traffic terminations.
Data Services. We provided services to Internet service providers, which we called our managed modem services that allowed the Internet service provider to deliver dial-up Internet service to customers in areas where our network was located. We provided the modems, offered dial-up and a variety of related services, including server hosting, direct access between our networks and the network of the Internet service provider, a customer-maintained user database, and end-user technical support services. We also offered various other data services, such as VoIP terminations, inbound local calling and toll-free calling. A portion of our data revenue was derived from reciprocal compensation. A Federal Communications Commission (“FCC”) order, described more thoroughly below under the caption “Regulation of Telecommunications Services,” regard ing this revenue stream negatively impacted our revenue beginning in the latter half of 2005.
Managed Services. We provided telephone services, as well as the infrastructure needed to offer local telephone service, to competitive local exchange carriers. This enabled the carriers to offer telephone services to their customers using our networks, including a local dial tone, local telephone features, long-distance switching and calling cards. We also provided access to a comprehensive national directory assistance service, which included local and long-distance directory assistance for listings in the United States. We also provided equipment co-location services that permitted Internet service providers to collocate modems, routers or network servers with our network equipment.
Industry
In recent years, regulatory developments have led to changes and increased competition, both intra-modal and inter-modal, in the communications industry. The Telecommunications Act of 1996 and its implementation through FCC regulations have broken down barriers between providers of different types of communications services. Companies that were effectively limited to providing one telecommunications service can now provide additional services with fewer regulatory restrictions or requirements.
We believed the industry was moving more towards an environment of inter-modal competition where both the cable television providers and the local telephone providers, and to some extent wireless service providers, would be competing head to head for local telephone, long distance, cable television or other video, and high speed data service. Advances in technology have furthered convergence in the industry by enabling delivery of cable television or video services, telephone services and broadband Internet services over different types of networks and making the delivery of more than one service over one broadband network, whether wireless or wireline, feasible and economical. The cable companies have introduced telephone services via Voice over Internet Protocol (“VoIP”) to residential customers, and the local telephone pro viders are investing large amounts of capital into new networks to offer television or video service using IP-enabled technologies in addition to their existing telephone and DSL services. Verizon Communications Inc. (“Verizon”) is constructing fiber-to-the-home networks and AT&T Inc. (“AT&T”) has begun serving customers via a fiber-to-the-curb network, in an effort to sell television over IP. Separately, advances in technology are enabling providers of wireless service to accommodate the transmission of video and other broadband applications. We competed against companies that had significant competitive advantages over us, including more years of experience, greater resources, significant mass marketing capabilities and broader name recognition.
We also competed with the growing availability of wireless high-speed Internet access, or Wi-Fi service, principally when offered by municipal authorities or authorized third parties in a particular geographic region. Wi-Fi services, particularly when combined with VoIP or other advanced IP-based applications, could enable users to communicate by phone, access the Internet, or engage in other broadband activities, typically at a minimal flat-rate charge.
We believed as the market continued to converge across product and market segments, communications providers would have to distinguish themselves from competitors by offering: high quality products, services, and applications across all service types; better pricing that reflected some of the operational efficiencies; and convenience to the customer in the form of a single bill and unified customer support. We believed that our ability to provide a tailored package of bundled services developed from a wide range of service options at competitive prices over one network system with a regional focus on Texas had been a key factor which enabled us to penetrate our markets.
Markets
The following table sets forth, in each of our markets, the marketable homes we passed.
| | | December 31, | |
Market Areas in Texas | | 2007 | | | 2008 | | | 2009 (1) | |
| | | | | | | | | | |
| Austin/San Marcos | | | 74,713 | | | | 75,327 | | | | 75,381 | |
| San Antonio | | | 63,800 | | | | 64,044 | | | | 64,104 | |
| Suburban Northwest Dallas | | | 57,317 | | | | 54,695 | | | | 52,854 | |
| Corpus Christi | | | 49,332 | | | | 49,620 | | | | 49,722 | |
| Waco | | | 44,909 | | | | 45,154 | | | | 45,579 | |
| Midland/Odessa | | | 42,734 | | | | 44,589 | | | | 44,768 | |
| Houston | | | 7,253 | | | | 7,252 | | | | 7,263 | |
| Total | | | 340,058 | | | | 340,681 | | | | 339,671 | |
| (1) | Information presented for the year ended December 31, 2009 is as of September 13, 2009, the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement. |
Competition
The broadband communications industry is highly competitive. We competed primarily on the basis of the price, availability, reliability, variety, quality of our offerings, our employees, and on the quality of our customer service. Our ability to compete effectively depended on our ability to maintain high-quality services at prices generally equal to or below those charged by our competitors. Price competition in the retail services and broadband transport services markets generally was intense.
We were not the first provider of any one of our three principal bundled services in any of our markets. We competed with numerous other companies that provided services for longer periods of time in each of our markets, and we often had to convince consumers to switch from other companies to us. Some of our competitors had significant competitive advantages over us, such as more years of experience, greater resources, significant mass marketing capabilities and broader name recognition. Our primary competitors included:
for video services: Time Warner Cable, Cable One Inc. (“Cable One”), Suddenlink Communications, Comcast Corporation (“Comcast”), Charter Communications Inc. (“Charter”), DIRECTV Holdings LLC (“DIRECTV”), DISH Network Corporation (“DISH Network”), AT&T, Verizon and others;
for HSD services: AT&T, Time Warner Cable, Time Warner Telecom, Verizon, Comcast, Charter, Cable One, Suddenlink Communications, CenturyTel Inc. (“CenturyTel”), Clearwire Corporation (“Clearwire”) and others;
for long-distance telephone services: AT&T, Verizon, Sprint, Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage Holdings Corp (“Vonage”) and others;
for local telephone services: AT&T, Verizon, CenturyTel, Birch Telecom Inc. (“Birch Telecom”), Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage and others.
Advances in communications technology as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. In certain areas of our markets, we competed for local and long distance services against the VoIP offerings of certain of our competitors. In addition to terrestrial competition, we saw consumers choose to eliminate a second line, their long distance, and/or their primary landline and use wireless telephone service instead. This dynamic is more prevalent in younger, more transient households such as MDUs in which students or young adults tend to move every twelve to eighteen months. Advances in technology also are leading to changes in video distribution platforms, making downloadable, on-demand video content accessible in both traditional wireline and wireless mobile viewing devices. These and other developments required us, as a traditional communications providers, to regularly rethink the model for successfully marketing and providing video, voice and HSD content and services to consumers.
Bundled Services
We believed that, among our existing competitors, incumbent cable providers, ILECs, CLECs and satellite television providers represented our primary competitors in the delivery of a bundle of two or more video, voice and HSD services. In some of our markets, our competitors also offered wireless service.
Video. Our video service competed with the incumbent cable television provider in all of our markets except in certain private-development subdivisions and MDUs where we were the only cable provider. The incumbent cable providers in our markets had significantly greater resources and operating history than we did. We also competed with satellite television providers such as DIRECTV, as well as other cable television providers, broadcast television stations and wireless cable services. We faced additional competition from private satellite master antenna television systems that serve condominiums, apartment and office complexes and private residential developments, and these systems generally are free of any regulation by state or local government authorities.
Legislative and regulatory developments may lead to additional competition in the cable and video market. The Cable Television Consumer Protection and Competition Act of 1992 contains provisions, which the FCC has implemented through regulations, to enhance the ability of competitors to cable to purchase and make available to consumers certain satellite-delivered cable programming at competitive costs. The Telecommunications Act of 1996 eliminated many of the restrictions on local telephone companies that offer cable programming, and we faced increased competition from such companies. Major local telephone companies now provide cable television or similar video services to homes and competed with us to the extent they modify or overbuild their networks to sell these services to the same homes we served.
We obtained our cable programming by entering into arrangements or contracts with cable programming suppliers. A programming supplier that delivers its programming terrestrially (as opposed to by satellite) may be able to enter into an exclusive arrangement with one of our cable competitors for the delivery of certain programming, which would have created a competitive disadvantage for us by restricting our access to that programming. This generally involves local and regional programming, such as news and sporting events.
Some of our competitors could purchase programming at more advantageous rates due to their size and the availability of volume discounts. We purchased a large portion of our programming using the services of a national cooperative that seeks to obtain more favorable pricing on behalf of smaller cable providers nationwide.
The FCC and Congress have adopted laws and policies that provided in some cases a more favorable operating environment for new and existing technologies that competed with our various video distribution systems. These technologies included, among others, direct broadcast satellite service in which signals are transmitted by satellite to receiving facilities located on customer premises. In the future, these technologies could include, among others, video distribution systems that provide service to mobile phones or other hand-held devices.
We also faced competition from a number of different sources, including companies that deliver movies, television shows and other video programming over broadband Internet connections as well as online order services with mail delivery, and video stores and home video services. Increasingly, content owners are utilizing Internet-based delivery of content directly to consumers, often without charging a fee for access to the content. Furthermore, due to consumer electronics innovations, consumers will over time be more readily able to watch such Internet-delivered content on television sets. In addition to multi-channel video providers, we competed with all other sources of news, information and entertainment, including over-the-air television broadcast reception, live events, movie theaters and the Internet.
Voice. Our principal competitor for local services was the incumbent carrier in the particular market, which was AT&T in a large majority of our market areas. Incumbent carriers enjoyed substantial competitive advantages arising from their historical monopoly position in the local telephone market, including pre-existing customer relationships with all or virtually all end-users. We also faced competition from alternative service providers, including competitive providers and other CLECs, many of which already had established local operations in our markets. Cable service providers had also entered the voice communication market in some of our service areas. Certain competing cable service providers were offering a VoIP telephony product in their service areas, some of which overlapped with ours. Other VoIP providers such as Vonage and Skype have also entered the telephony market.
We faced significant competition for long-distance telephone services from incumbent long-distance providers such as AT&T, Verizon and Sprint, which together accounted for the majority of all U.S. long-distance revenues. The major long-distance service providers benefited from established market share, both in traditional direct-dial services as well as in prepaid and dial-around products, and from established trade names through nationwide advertising. We regarded our long-distance service as a complementary service rather than a principal source of revenues. However, certain incumbents, including AT&T, Verizon and Sprint, also viewed their long-distance service in a similar way and were able to offer local services in their markets using their existing network. We believed that additional new threats could present themselves i f incumbent carriers continued to acquire or merge with other large providers of telecommunications services.
We also faced competition in the local and long-distance telephone market from wireless carriers. Wireless service generally is more expensive than traditional telephone service and is priced on a usage-sensitive basis. However, the rate differential between wireless and traditional telephone service began to decline and was expected to decline further and lead to more competition between providers of wireline and wireless telephone services. We believed that expansion of IP technology in the wireless industry could be expected to further narrow the historic price differential. Although customers generally continued to subscribe to their landline telephone service, we believed that wireless service could become an even bigger threat to the traditional telephone market as usage rates for wireless service continued to decline and “b uckets” of nationwide wireless telephone minutes were offered for flat monthly rates. We also believed that younger consumers viewed wireless as a substitute, rather than a supplement to terrestrial wireline services.
We also faced competition from businesses, including incumbent cable providers, offering long-distance services through VoIP. These businesses could enjoy a significant cost advantage because they generally do not pay carrier access charges although interconnected VoIP providers are now required to pay federal universal service fees. As explained more fully below under the caption “Legislation and Regulation,” the regulatory status of VoIP service, including their obligation to pay access charges, continues to be considered by the FCC, various states and reviewing courts. While the FCC has made some preliminary determinations about VoIP already, a number of important regulatory issues have not yet been resolved fully, including inter-provider compensation for VoIP traffic. The conclusions reached by federal and st ate agencies and courts largely will determine the viability and profitability of VoIP service, and, possibly, the success of our competitors offering this service.
HSD Services. The Internet access market is extremely competitive and highly fragmented. Providing broadband Internet services is a rapidly growing business and competition was increasing in each of our markets. Some of our competitors benefited from stronger name recognition and greater resources, experience and marketing capabilities. For HSD services, we competed primarily with AT&T, Time Warner Cable, Verizon, Suddenlink Communications, Cable One, Comcast, Charter CenturyTel and Clearwire. Other competitors included traditional dial-up Internet service providers, providers of satellite-based Internet services, other local and long-distance telephone companies and cable television companies. We also competed with providers of wireless high-speed Internet access, or Wi-Fi service, principally when offered by municipal authorities or a uthorized third parties in a particular geographic region. New technologies, such as Access Broadband over Power Line, continue to emerge as well.
Broadband Transport Services
We had a wide range of competitors in the provisioning of broadband transport services. We generally competecompeted with communications companies that havehad fiber in the markets where we havehad our metro and long-haul facilities.
Network Services
We havehad a wide range of competitors in the provisioning of network services. We competecompeted with virtually all communications companies that own their own network equipment.
Legislation and Regulation
The cable television industry is primarily regulated by the FCC as well as state and local governments, although in Texas, Grande currently iswe were subject only to state rather than local government franchising requirements. Telecommunications services are regulated by the FCC and state public utility commissions, including the Public Utility Commission of Texas (PUCT). Internet service, including high-speed access to the Internet, generally is not subject to significant regulation although this may change in the future. Common carriers are exempt from regulation by the Federal Trade Commission (FTC). However, to the extent entities provide non-common carrier services, including Internet access services and interconnected VoIP services, such entities may be subject to FTC jurisdiction, especially with respect to advertised claims regarding suc h services. Legislative and regulatory proposals under consideration by Congress, federal agencies and the Texas legislature may materially affect theGrande Operating’s provision, cost and profitability of video, voice and HSD services. Future changes to regulation may make it harder for Grande Operating’s cable television and telecommunications operations to compete effectively in their markets, may increase their operating costs and reduce their profitability, and may confer advantages on certain of their competitors. Set forth below is a brief summary of significant federal laws and regulations affecting the growth and operation of the cable television and telecommunications industries and a description of certain state and local laws.
Regulation of Cable Services
Federal Regulation of Cable Services
The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated regulations covering many aspects of cable television operations pursuant to federal laws governing cable television. The FCC may enforce its regulations through the imposition of fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses, permits and authorization. A brief summary of certain federal regulations follows.
Rate Regulation. The Cable Television Consumer Protection and Competition Act of 1992 authorized rate regulation for certain cable communications services and equipment in communities where the cable operator is not subject to effective competition. Pursuant to the Telecommunications Act of 1996, as of April 1, 1999, only the basic tier of cable television service, which does not include the expanded basic tier of cable television service, and equipment used to receive the basic tier of cable television service remain subject to rate regulation. BasicThe basic rates of operators not subject to effective competition are subject to limited regulation by local franchising authorities that choose to regulate these rates.
The Cable Television Consumer Protection and Competition Act of 1992 requires local franchising authorities that choose to regulate basic service rates to certify with the FCC before regulating such rates. TheIn addition, the FCC’s rate regulations do not apply where a cable operator demonstrates that it is subject to effective competition. The Company meetsareas which we served satisfied the FCC definition ofFCC’s requirements demonstrating effective competition in the areas that we currently serve.competition. In Texas, Grande’sGrande Operating’s cable service operates under a state-issued franchise and is not subject to separate regulation of rates by municipalities.
Tier buy-through. The tier buy-through prohibition of the Cable Television Consumer Protection and Competition Act of 1992 generally prohibits cable operators from requiring subscribers to purchase a particular service tier, other than the basic service tier, in order to obtain access to video programming offered on a per-channel or per-program basis. In general, a cable television operator has the right to select the channels and services that are available on its cable system. With the exception of certain channels, such as local broadcast television channels, that are required to be carried by federal law as part of the basic tier, as discussed below, the cable operator has broad discretion in choosing the channels that will be available and how those channels will be packaged and marketed to subscribers. In order to maximize the number of subscribers, the cable operator selects channels that are likely to appeal to a broad spectrum of viewers. If the Congress or the FCC were to place more stringent requirements on how cable operators package their services, it could have an adverse effect on Grande Operating’s future profitability.
Carriage of Broadcast Television Signals. The Cable Television Consumer Protection and Competition Act of 1992 established broadcast signal carriage requirements. These requirements allow commercial television broadcast stations that are local to a cable system to elect every three years whether to require the cable system to carry the station (“must-carry”) or whether to require the cable system to negotiate for consent to carry the station (“retransmission consent”). The most recent must-carry/retransmission consent elections by broadcasters became effective on January 1, 2009.2009, and remain effective through December 31, 2011. Stations generally are considered local to a cable system where the system is located inwithin the station’s Nielsen designated marketm arket area. Cable systems must obtain retransmission consent for the carriage of all distant commercial broadcast stations, except for certain superstations, which are commercial satellite-delivered independent stations such as WGN. We carrycarried many stations pursuant to retransmission consent agreements.
Local non-commercial television stations also are given mandatory carriage rights, subject to certain exceptions, within a limited radius. Non-commercial stations are not given the option to negotiate for retransmission consent.
The FCC has adopted rules for the carriage of digital broadcast signals, but has declined to adopt rules that would require cable systems to carry both the analog and digital signals of television stations entitled to must-carry rights during those stations’ transition to full digital operations. The FCC also has declined to adopt rules that would require cable television systems to carry more than a single programming stream from any particular television broadcaster that has converted to a digital format. If these decisions are modified in the future and the FCC adopts “dual carriage” andor “multicasting” requirements, are adopted, we,Grande Operating, like other cable operators, may have to discontinue or forego the opportunity to transmit other channels of programming due to the capacity of our systems.its systems, to satisfy such new regulatory requirements. The immediate past Chairman of the FCC as well as some members of Congress have also recently stated that they believebelieved the FCC should consider whether consumerscable operators should be permittedrequired to purchaseoffer channels individually for purchase by subscribers on an a-la-carte basis. The cable industry is strongly opposed to this suggestion.such requirements. If it were adopted, it could materially and adversely impact the financial condition of all cable companies, including Grande.
By statute, cable operators must make local broadcasters’ primary video and program-related material viewable by all of their subscribers. The FCC adopted rules to ensure that all cable subscribers, including those with analog sets, can view broadcast television after the transition to digital television occurs. The transition to digital television currently is scheduled to occur onwas completed by June 12, 2009.2009, when full-power television stations nationwide were required to broadcast exclusively in a digital format. Cable operators were given two options for compliance with viewability requirements, which extend to February 2012 and2012: (1) carry the digital signals in analog format, or (2) carry signals only in digital format, provided that all subscribers possess the necessary equipment to view the broadcast content. The FCC has committedcommit ted to review the requirements during the final year of this period. We expectexpected to be able to comply with viewability requirements but our implementation may behave been flawed, or circumstances beyond our control may makehave made it impossible for us to comply in a timely fashion, in which case we could bewould have been subject to investigations and potential fines and penalties.
As the marketplace for the programming and distribution of broadcast television evolves,continued to evolve, so too maydid our rights and obligations as a provider of cable service, particularly in connection with the programming we purchasepurchased from broadcast television networks and other programmers. For instance, when the FCC consented to the purchase of DIRECTV by News Corp., the owner of the Fox television network, making News Corp. a vertically-integrated broadcast television network and nationwide multi-channel video programming distributor, the FCC did so subject to certain conditions. Some of these conditions could affecthave affected our ability to carry or purchase programming. For instance, with respect to News Corp.’s Fox television network:
Cable operators may submit disputes with a News Corp. broadcast television station over the terms and conditions of a retransmission consent negotiation to commercial arbitration. While the arbitration is pending, the News Corp. station may not deny its continued carriage as long as it is not a first time request for carriage. An aggrieved cable operator may seek review of an arbitrator’s decision by the FCC.
A cable operator with fewer than 400,000 total subscribers may appoint a bargaining agent to bargain collectively on its behalf in negotiating with News Corp.’s broadcast television stations for retransmission consent.
If the pending merger of NBC and Comcast is approved, there may be conditions to the regulatory consents that may affect the ability of providers of cable and other video services to carry or purchase certain programming.
Nonduplication of Network Programming. Cable television systems that have 1,000 or more subscribers must, upon the appropriate request of a local television station, delete or “black out” the simultaneous or non-simultaneous network programming of a distant same-network station when the local station has contracted for such programming on an exclusive basis.
Deletion of Syndicated Programming. Cable television systems that have 1,000 or more subscribers must, upon the appropriate request of a local television station, delete or “black out” the simultaneous or non-simultaneous syndicated programming of a distant station when the local station has contracted for such programming on an exclusive basis.
Registration Procedures and Reporting Requirements. Prior to commencing operation in a particular community, all cable television systems must file a registration statement with the FCC listing the broadcast signals they will carry and certain other information. Additionally, cable operators periodically are required to file various informational reports with the FCC.
Exclusive Service Agreements with MDUs. In May 2009, the US Court of Appeals for the District of Columbia upheld a November 2007 the FCC issued an order prohibiting arrangements between MDUs and cable providers that provide a single cable provider with exclusive access to the MDU for the provision of video services ("cable exclusivity clauses"). The order, which applies to all such agreements, existing and future, was intended to bring more choice and competitive pricing for cable services to MDU residents. Under the FCC’s order, AT&T and Verizon would beare allowed to provide competing video service to all MDUs, if the order is upheld in the courts. Several legal actions to challenge the order have been filed, focusing primarily on the retroactive application of the prohibition to existing contracts. The appeal is scheduled for oral argument in early 2009 before the U.S. Court of Appeals for the District of Columbia; however, the FCC order has not been stayed and is in effect while the appeals are considered.MDUs. Since Grande haswe had cable exclusivity clauses with several MDUs, itsGrande Operating’s market share of those cable systems in those properties could significantly drop if the order is upheld and other video/cable providers enter the properties. On the other hand, Grande iswe were no longer prevented from competing in an even morelarger number of MDU properties that have cable exclusivity clauses with the incumbent cable provider, so it is also possible that Grande Operating would be able to acquire additional cable subscribers in these properties if the order is upheld. The limiting factor in such a scenario would be availability of the capital required to extend Grande’sGrande Operating’s network into the MDUs and the ability to successfully compete against companies that have significant competitive advantages over us,Grande Operating, including more years of experience, greater resources, significant mass marketing capabilities and broader name recognition.
15The FCC had initiated a rulemaking examining the enforceability of bulk billing and exclusive marketing arrangements between cable television operators and MDU property owners. The FCC had sought comment on whether it should ban such arrangements. However, in February 2010, the Commission issued an order declining to place restrictions on such arrangements. As a result, established cable operators serving MDUs that have such arrangements in place may have an advantage over second and later entrants seeking to serve such MDUs in competition with the established providers.
Technical Requirements. Historically, the FCC has imposed technical standards applicable to the cable channels on which broadcast stations are carried and has prohibited franchising authorities from adopting standards which were in conflict with or more restrictive than those established by the FCC. The FCC has applied its standards to all classes of channels that carry downstream National Television System Committee video programming. The FCC also has adopted standards applicable to cable television systems including Grande, using frequencies in certain bands in order to prevent harmful interference with aeronautical navigation and safety radio services and also has established limits on cable system signal leakage. Operators are required to conduct tests and to file with the FCC results of those cumulativec umulative leakage-testing measurements. Operators that fail to make this filing or exceed the FCC’s allowable cumulative leakage index risk being prohibited from operating in those frequency bands and risk incurring monetary fines or other sanctions.
The Cable Television Consumer Protection and Competition Act of 1992 requires the FCC to update periodically its technical standards. Pursuant to the Telecommunications Act of 1996, the FCC adopted regulations to assure compatibility among televisions, VCRs and cable systems, leaving all features, functions, protocols and other product and service options for selection through open competition in the market. The Telecommunications Act of 1996 also prohibits states or franchising authorities from prohibiting, conditioning or restricting a cable system’s use of any type of subscriber equipment or transmission technology. The FCC also has adopted technical standards in connection with cable systems’ carriage of digital television signals.
Franchise Authority. The Cable Communications Policy Act of 1984 affirmed the right of franchising authorities to award franchises within their jurisdictions and prohibited non-grandfathered cable systems from operating without a franchise in such jurisdictions. The Cable Television Consumer Protection and Competition Act of 1992 encouraged competition with existing cable systems in several areas, including by:
allowing municipalities to operate their own cable systems without franchises;
preventing franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system’s service area; and
prohibiting, with limited exceptions, the common ownership of cable systems and co-located multi-channel multipoint distribution or satellite master antenna television systems, which prohibition is limited by the Telecommunications Act of 1996 to cases in which the cable operator is not subject to effective competition.
The Telecommunications Act of 1996 exempted telecommunications services provided by a cable operator or its affiliate from cable franchise requirements, although municipalities retain authority, subject to state law, to regulate the manner in which a cable operator uses public rights-of-way to provide telecommunications services.
Franchising authorities also may not require a cable operator to provide telecommunications service or facilities, other than institutional networks, as a condition of a franchise grant, renewal, or transfer. Similarly, franchise authorities may not impose any conditions on the provision of such service.
The State of Texas passed a law in late 2005 allowing cable operators to file for a state-issued certificate of franchise authority (SICFA) for the provision of cable television and video services in any service area footprint within the state of Texas rather than negotiate with each individual municipality for such a right. On October 25, 2005, the Public Utility Commission of Texas (PUCT) approved Grande’sour application for a SICFA to provide cable television service in twenty-seven municipalities and in eleven unincorporated areas of Texas. When Grande’sour SICFA was approved, all of Grande’sour municipal cable television franchises were terminated. Since that time, Grande haswe applied for and had approved amendments to the SICFA adding to and modifying the footprint of itsthe service areas.areas in which our cable television systems were permitted to operate.
Under its SICFA, Grande makeswe made quarterly franchise fee payments to each municipality in which it providesour cable television systems provided cable television service in the amount of five percent of gross cable service revenues, and Grande reports itswe reported our subscriber count in each municipality. In cities where the incumbent cable TV provider is still subject to a municipal franchise, the municipalities then notifynotified Grande Operating of its quarterly Public, Educational and Government (PEG) obligation based on Grande’sits share of total subscribers multiplied by the total PEG contribution that the incumbent cable TV provider made in the quarter. In cities where the incumbent provider’s municipal franchise has expired and the incumbent has obtained a SICFA, Grande Operating and the incumbent paypaid the city a PEG fee equal to one percent of their gross cable service revenues or at the city’s option, a flat per subscriber monthly fee that was required by the city before the incumbent’s franchise expired. Grande Operating also continuescontinued to provide free cable television service to public facilities and INet fiber connectivity to cities that were in place when the SICFA was approved. Under the SICFA, Grande continuesOperating continued to provide carriage of all PEG channels that were carried prior to October 25, 2005, and all municipalities retainretained control and police powers over their public rights of way.rights-of-way.
Congress separately has considered legislation that would create a national framework for the issuance of cable television franchises. Various proposals for national franchises have been introduced and are pending. Although these proposals would not likely affect ourGrande Operating’s operations given ourtheir regional focus, a national franchise law could enable ourtheir competitors, principally AT&T and Verizon, who are planning to deploy cable television or other video services in multiple jurisdictions within their large service areas, to enter the market for video services more quickly, much like they can today in Texas under their SICFA. This, in turn, could enhance their ability to compete against usGrande Operating in ourtheir markets.
Franchise Transfer. The Telecommunications Act of 1996 repealed most of the anti-trafficking restrictions imposed by the Cable Television Consumer Protection and Competition Act of 1992, which prevented a cable operator from selling or transferring ownership of a cable system within 36 months of acquisition. However, a local franchise nevertheless may require the prior approval of the franchising authority for a transfer or sale. The Cable Television Consumer Protection and Competition Act of 1992 requires franchising authorities to act on a franchise transfer request within 120 days after receipt of all information required by FCC regulations and the franchising authority. Approval is deemed granted if the franchising authority fails to act within such period. It is uncertain at thist his time whether any of the national franchising proposals being considered in Congress would affect such franchise transfer issues.
Program Access and Exclusivity. The Cable Television Consumer Protection and Competition Act of 1992 and the FCC’s rules generally prohibit cable operators and vertically-integrated satellite programmers from entering into agreements that have the purpose or effect of preventing or substantially hindering the ability of multi-channel video programming distributors from providing satellite programming to their subscribers. The rules specifically prohibit vertically integrated cable operators from entering into exclusive distribution agreements with satellite programmers in which they have an attributable interest. The rules were set to expire in October 2007, but were extended by the FCC to October 2012. In March 2010, The U.S. Court of Appeals for the D.C. Circuit upheld the Commission’s decision to extend the rules at least through October 2012, finding the FCC sufficiently justified its decision that the marketplace was not sufficiently competitive to warrant lifting the prohibition.
The program access rules currently do not restrict a vertically integrated cable operator from offering terrestrially delivered programming on an exclusive basis. If vertically integrated competitors obtain exclusive programming agreements, they may gain competitive advantages that adversely affect the ability to grow our business.
The FCC’s Order consenting to the DIRECTV-News Corp. merger prohibits News Corp. from offering any existing or future national and regional programming services on an exclusive or discriminatory basis. News Corp. also is prohibited from unduly or improperly influencing any of its affiliated programming services in the sale of programming to unaffiliated cable operators. Additionally, as noted above, News Corp. is subject to certain conditions regarding its ownership of numerous regional sports programming networks.
Channel Set-Asides. The Cable Communications Policy Act of 1984 permits local franchising authorities to require cable operators to set aside certain channels for PEG access programming. It also requires cable television systems with 36 or more activated channels to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. The Cable Television Consumer Protection and Competition Act of 1992 requires leased access rates to be set according to a FCC-prescribed formula.
Ownership. The Telecommunications Act of 1996 eliminated the Cable Communications Policy Act of 1984’s general prohibition on the provision of video programming by local exchange carriers to customers within their local exchange telephone service areas. Under the Telecommunications Act of 1996, local exchange carriers may, subject to certain restrictions described below, provide video programming by radio-based systems, common carrier systems, open video systems, or cable systems, subject to regulations applicable to each type of service. Technological developments have enabled local exchange carriers to provide video programming over broadband connections to the Internet as well. The degree to which such carriers must comply with the rules governing cable systems, including franchising requirements, has not yet been addressed by regulators.
The Telecommunications Act of 1996 prohibits a local telephone company or its affiliate from acquiring more than a 10% financial or management interest in any cable operator providing cable television service in its telephone service area. It also prohibits a cable operator or its affiliate from acquiring more than a 10% financial or management interest in any local telephone company providing telephone service in its franchise area. A local telephone company and cable operator whose telephone service area and cable franchise area are in the same market may not enter into a joint venture to provide telecommunications services or video programming. There are exceptions to these limitations for rural facilities, very small cable systems and small local telephone companies in non-urban areas, and such restrictions do not apply to local exchangeexch ange carriers that were not providing local telephone service prior to January 1, 1993.
Internet Access via Cable Modem. The FCC has determined in the Cable Modem Access NOPR that cable modem service is an information service and thus is not subject to local regulation as a cable service and thus is not subject to the payment of franchise fees. This regulatory classification has been upheld by the Supreme Court.
Pole Attachments. The Telecommunications Act of 1996 requires utilities, defined to include all local exchange telephone companies and public utilities except those owned by municipalities and co-ops, to provide cable operators and telecommunications carriers (other than incumbent local exchange carriers) with nondiscriminatory access to utility poles, ducts, conduit and rights-of-way. The right to mandatory access iswas beneficial to facilities-based providers such as Grande.Grande Operating. The Telecommunications Act of 1996 also establishes principles to govern the pricing of such access. TelecommunicationsUnder the rules adopted by the FCC to implement the pricing standards in the statute, telecommunications providers are charged a higher rate than cable operators for pole attachments. Companies that providepr ovide both cable and telecommunications services over the same facilities, such as us, may beGrande Operating, are required to pay the higher telecommunications rate; but the Supreme Court has confirmed that commingling high-speed Internet access with cable or telecommunications attachments does not change the pole attachment rate. At this time, we believeWe believed the rental rate at which utility pole owners can charge cable operators offering VoIP services was unclear because the FCC has declined to resolve the question of whether VoIP services are telecommunications services or information services. The FCC has a pending rulemaking proceeding in which it is unclear.considering the adoption of a regulation requiring each utility to establish unitary pole attachment rates for all providers of broadband services enabling subscribers to establish broadband connections to the Internet, regardless of whether they otherwise provide telecommunications service, cable service, both, or neither. Whether the FCC will adopt such a regu lation and when it might due so and what formula would apply to such a unitary rate – and therefore whether the pole attachment rates that cable service providers will increase, decrease, or stay the same – cannot be ascertained at this time.
Inside Wiring of Multiple Dwelling Units. The FCC has adopted rules to promote competition among multichannel video program distributors in multiple family dwelling units, or MDUs. The rules provide generally that, in cases where the program distributor owns the wiring inside an MDU but has no right of access to the premises, the MDU owner may give the program distributor notice that it intends to permit another program distributor to provide service there. The rules provide, generally, that the current program distributor then must elect whether to remove the inside wiring, sell the inside wiring to the MDU owner at a price not to exceed the replacement cost of the wire on a per-foot basis or abandon the inside wiring.
Privacy. The Cable Communications Policy Act of 1984 imposes a number of restrictions on the manner in which cable system operators can collect and disclose data about individual system customers. The statute also requires that the system operator periodically provide all customers with written information about its policies regarding the collection and handling of data about customers, their privacy rights under federal law and their enforcement rights. In the event that a cable operator is found to have violated the customer privacy provisions of the Cable Communications Policy Act of 1984, it could be required to pay damages, attorneys’ fees and other costs. Under the Cable Television Consumer Protection and Competition Act of 1992, the privacy requirements were strengthenedstrengthen ed to require that cable operators take such actions as are necessary to prevent unauthorized access to personally identifiable information. Congress and the FCC are considering, and in the future may again consider, additional restrictions intended to safeguard consumer privacy. The extent to which these laws and regulations, if promulgated, will affect ourGrande Operating’s cable television operations is not clear at this time.
Copyright. Cable television systems are subject to federal compulsory copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of the royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried and the location of the cable system with respect to over-the-air television stations. Adjustments in copyright royalty rates are made through an arbitration process supervised by the U.S. Copyright Office.
Various bills have been introduced in Congress in the past several years that would eliminate or modify the cable television compulsory license. Without the compulsory license, cable operators might need to negotiate rights from the copyright owners for each program carried on each broadcast station retransmitted by the cable system.
Internet Service Providers. A number of Internet service providers have requested that the FCC and state and local officials adopt rules requiring cable operators to provide unaffiliated Internet service providers with direct access to the operators’ broadband facilities on the same terms as the operator makes those facilities available to affiliated Internet service providers. To date, the FCC has rejected these equal access proposals, but a number of local franchising authorities outside our service territory have in the past sought to impose this type of requirement on cable operators and may try to do so again in the future. Some cable operators, including Grande haveOperating, agreed to open their systems to competing Internet service providers or have beenwere required to do so as a condition of a merger. The FCC has more recently indicated that such requirements may no longer be necessary so long as consumers are able to have unrestricted access to alternative providers once the consumer accesses the Internet.
Both Congress and the FCC have considered measures that, if enacted, would impose “net neutrality” obligations on Internet access providers to not interfere or discriminate against consumers’ use of broadband services, especially regarding access to Internet applications and content of their choice. Some proposals have taken the additional step of effectively restricting the ability of broadband providers to offer users additional service quality or service prioritization. The FCC found in 2008 that Comcast had “unduly interfered” with Internet users’ right to access the lawful content and other applications of their choice – in the particular case under review, BitTorrent’s peer-to-peer traffic – in violation of a FCC 2005 Internet policy statement. The FCC particularlypart icularly faulted Comcast for not being transparent with subscribers in disclosing its Internet management practices. The order has been appealed. However, if upheld on appeal, the decision is likely to lead to more case-by-case investigations and adjudications of Internet access providers’ network management practices. In addition, legislation requiring the FCC to consider adoption of such net neutrality requirements currently is under consideration by Congress as part of a national economic stimulus package.
If the FCC’s Comcast order is overturned, there may be renewed calls for legislation of such management practices and the Commission’s authority to regulate such practices without Congressional action may be cast into doubt. 19
In addition, in October 2009, the FCC initiated a rulemaking proceeding proposing to codify as rules, subject to reasonable network management, the four principles of its 2005 Internet policy statement, and proposed adding two more rules, one requiring broadband Internet service providers to treat lawful content, applications, and services in a nondiscriminatory manner and the other requiring broadband Internet service providers to disclose such information concerning network management and other practices reasonably required for users and content, application, and service providers to enjoy the protections of the other five rules. That rulemaking remains pending, but if requirements similar to those being proposed are adopted, they would increase the operating and administrative costs of cable television operators, may create a competitive disadvantage for Grande Operating’s systems relative to other providers, and may expose Grande Operating to liability if they do not properly interpret and apply the new regulations.
Regulatory Fees and Other Matters. The FCC requires payment of annual regulatory fees by the various industries it regulates, including the cable television industry. Fees are also assessed for other FCC licenses often used by cable television operators, including licenses for business radio, cable television relay systems and earth stations.
FCC regulations affecting cable television operators also address:
local sports programming;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts;
customer service standards;
limitations on advertising contained in non-broadcast children’s programming; and
Regulation of Telecommunications Services
OurGrande Operating’s telecommunications services are subject to varying degrees of federal, state and local regulation. Pursuant to the Communications Act of 1934, as amended by the Telecommunications Act of 1996, the FCC generally exercises jurisdiction over the facilities of, and the services offered by, telecommunications carriers that provide interstate or international communications services. State regulatory authorities generally retain jurisdiction over the same facilities and other services to the extent that they are used to provide intrastate and local communications services. Many municipalities regulate the access of facilities-based telecommunications providers to the public rights-of-way.
Federal Regulation of Telecommunications Services
Tariffs and Licensing. The CompanyGrande Operating is classified as a non-dominant long distance carrier and as a competitive local exchange carrier by the FCC. The FCC requiresprohibits non-dominant long distance companies to detarifffrom filing tariffs for their interstate long distance domestic and international services. The FCC permits but does not require competitive local exchange carriers to file tariffs for the access charges they sell to interstate long distance companies subject to certain rate benchmarks. The FCC also permits competitive local exchange carriers to either (1) detariff the interstateprovide their access services that they sell to interstate long distance companies pursuant to contracts entered into between the parties. It is an open issue whether competitive local exchange carriers are entitled to payment for inters tate access services if they have neither a tariff on file with the FCC or (2) maintain tariffs but complya contract with certain rate caps. long distance companies.
Prior to the FCC adopting a mandatory detariffing weregime for non-dominant long distance companies, Grande Operating filed tariffs with the FCC to govern ourtheir relationship with most long-distance customers and companies. The detariffing process requires uscurrent regulatory regime required Grande Operating to, among other things, post on their website the rates, terms, and conditions formerly in our tariffs on our website instead of filing them at the FCC. Because detariffing precludes usprecluded Grande Operating from filing their tariffs for our tariffslong distance services at the FCC, weGrande Operating may no longer be subject to the “filed rate doctrine,” which stands for the proposition that for services that are or must be tariffed, the tariff controls all contractual disputes between a carrier and its customers. ThisDepending on how Grande Operating’s service contracts for long di stance service anticipate situations that have arisen and may in the future arise with their customers, the absence of a tariff may expose usthem to certain legal liabilities and costs, as wethey can no longer rely on thisthe filed rate doctrine to settle disputes with customers.customers they serve under contract. The FCC still requires long distance telecommunication carrier companies such as usGrande Operating to obtain licenses under Section 214 of the Communications Act of 1934, as amended, to provide international long-distance calling service. We holdGrande Operating holds such international authority from the FCC. The FCC also requires long distance telecommunication carrier companies to obtain approvals or to comply with other filing requirements in the case of assignments or transfers of control.
Interconnection. The Telecommunications Act of 1996 establishes local telephone competition as a national policy. This Act preempts laws that prohibit competitionor have the effect of prohibiting competitive entry for local telephone services (as well as telecommunications services generally) and establishes uniformnational requirements and standards for local network interconnection, unbundling and resale. Interconnection, unbundling and resale standardsregulations were developed initially by the FCC and have been, and will continue to be, implemented by both the FCC and the states in numerous proceedings.
In August 1996, the FCC adopted a wide-ranging decision regarding the interconnection obligations of local telephone carriers. This Interconnection Order specified, among other things, which network elements (and combinations of elements) incumbent carriers must unbundle and provide to competitive carriers on a nondiscriminatory basis. The FCC’s initial list of network elements and combinations was affirmed by the Supreme Court, but has since been subject to further review by the FCC and, after several rounds of review by the courts, has been pared significantly. In June 2006, the D.C. Circuit approved the FCC’s fourth attempt to implement the unbundling provisions of the Telecommunications Act of 1996. Some incumbent local exchange companies, most notably Qwest and Verizon, have applied for relief in certain of th eir major markets from the unbundling requirements, invoking the FCC’s authority to forbear, provided certain conditions are met, from enforcing provisions of Title II of the Communications Act of 1934, including the Telecommunications Act of 1996, for certain carriers, classes of carriers, services, or classes of services. In limited instances, the FCC has granted such relief, although not, at this time, in any of the markets in which Grande Operating currently operates. While Grande Operating expects the major ILECs to continue to file similar petitions covering other markets, AT&T, the ILEC in a majority of Grande Operating’s markets, committed not to seek additional forbearance of unbundling or other requirements with respect to any of its markets prior to June 29, 2010, as a condition to FCC approval of its merger with BellSouth. Changes to the list of network elements and combinations and to incumbent local exchange carriers’ obligations to offer them at total element l ong run incremental cost have had, and may continue to have, a significant impact on the industry and, to a lesser extent, the Company.Grande Operating.
The FCC’s Interconnection Order also established pricing principles, for use by the states, to determine rates for unbundled network elements and discounts.discounts, namely requiring that such elements be offered under a total element long run incremental cost standard. These pricing principles also are undergoing further review by the FCC and may change, which could have a significant impact on the industry and on the Company.Grande Operating.
The Telecommunications Act of 1996 requires incumbent local telephone carriers to enter into mutualreciprical compensation arrangements with other local telephone companies for transport and termination of local calls on each other’s networks. The FCC has concluded that calls to ISPs are jurisdictionally interstate and the exchange of ISP-bound traffic is not subject to the reciprocal compensation requirements of the Communications Act, although the FCC’s classification of this traffic is the subject of an appeal to the U.S. Court of Appeals for the District of Columbia.Act.
The FCC has a pending rulemaking to consider a comprehensive rewrite of the rules governing intercarrier compensation, including switched access charge rate structures, switched access rate levels, certain interconnection rules that relate to intercarrier compensation arrangements, and compensation for the transport and termination of IP-enabled traffic. (See “Voice-over-Internet Protocol,” below.) Several proposals for how the FCC’s intercarrier compensation rules should be structured also have been submitted to the FCC by industry groups and coalitions. We cannot predict how the FCC will act in response to these proposals, whether there will be new proposals that the Commission will consider adopting, or, more generally, in connection with itswhat will be the ultimate result of the intercarrier compensation proceeding.proceeding . FCC rulings in this area will affect a large number of carriers and providers and could have a significant impact on the industry and the Company.Grande Operating.
The FCC has also initiated an investigation of IP-Enabled Services intended to provide comprehensive guidance on the appropriate regulatory treatment of a broad array of services, including VoIP. Whether IP-Enabled Services shouldwill be classified as telecommunications services prospectively (as many incumbent local exchange carriers believe that VoIP telephony is properly classified today) and madebe subject to switched access charge assessment,charges, or another form of intercarrier compensation, or will be classified as information services (as many VoIP providers and competitive local exchange carriers believe is the case today) is a key issue presented in that proceeding. (See “Voice-over-Internet Protocol,” below.) The outcome of both the Intercarrier Compensation and IP-Enabled Service dockets, or other proceedings that examine the r egulatory classification of VoIP services, could have a material impact on ourGrande Operating’s business. We are not able to predict what that outcome may be or when such orders might be issued.
Additional Requirements. The Communications Act and the FCC imposesrules impose additional obligations on all telecommunications carriers, including obligations to:
interconnect with other carriers and not to install equipment that cannot be connected with the facilities of other carriers;
offer service provider local number portability;
ensure that their services are accessible and usable by persons with disabilities;
comply with verification procedures in connection with changing a customer’s carrier;
pay annual regulatory fees to the FCC;
contribute to the federal Universal Service Fund based on end user interstate telecommunications revenues; and
contribute to the Telecommunications Relay Services Fund, as well as funds to support universal service, telephone numbering administration and local number portability.
Forbearance. The Telecommunications Act of 1996 permits the FCC to forbear from requiring telecommunications carriers to comply with certain regulations.regulations under certain conditions. Specifically, the Act permits the FCC to forbear from applying statutory provisions or regulations if the FCC determines that:
enforcement is not necessary to protect consumers;
enforcement is not necessary to ensure a carrier’s terms arewill be reasonable and nondiscriminatory;
forbearance is in the public interest; and
forbearance will promote competition.
TheDecisions by the FCC has exemptedto forbear from enforcing certain rules or requirements for certain services or against certain carriers from reporting requirements pursuant to this provision of the Telecommunications Act of 1996. The FCC may take similar action in the future to reduce or eliminate other requirements. Such actions could free usGrande Operating from regulatory burdens but also might increase the pricing and general flexibility of ourtheir competitors.
Collocation. The FCC has adopted rules designed to improve competitor access to incumbent local telephone carriers’ collocation space and to reduce the delays and costs associated with collocation, but wecollocation. We cannot be sure that these rules will not change or otherwise inure to the advantage of incumbent carriers in the future.future or to Grande Operating’s disadvantage in comparison with their competitors.
Multiunit Premise Access. In June 2007, the FCC released an order clarifying that incumbent local exchange carriers are required to provide direct access at the terminal block to permit a competitor’s technician to cross connect in order to access the incumbent’s sub-loop to reach end user customers at multiunit premises. The ruling is based on an incumbent local exchange carriers’ statutory obligation to permit interconnection at “any technically feasible point.” As a result of this clarification, Grande mayOperating could have had opportunities to access multiunit premises in a more direct and less costly manner assuming capital is available to extend its network facilities to reach the minimum point of entry at these properties.pr operties. The FCC recentlyhas also issued an order prohibiting telecommunications carriers from entering into exclusive telecommunications contracts in residential multi-tenant environments and prohibiting enforcement of pre-existing agreements between carriers and building owners. This decision will haveIn 2000, the Commission had entered a similar order prohibiting carriers form entering into exclusive agreements with commercial multi-tenant environments, and from enforcing existing exclusivity arrangements. These decisions had no impact on Grande Operating regarding its Texas operations because Texas PUC regulations already prohibited such exclusive arrangements.
Broadband Services. Section 706 of the Telecommunications Act of 1996 requires the FCC to encourage the deployment of advanced telecommunications capabilities to all Americans through the promotion of local telecommunications competition. The FCC had in the past taken steps to facilitate competitors’ access to lines connecting customer premises to the operator for purposes of digital subscriber line deployment. But the FCC more recently has declined to take similar steps in connection with more advanced, newly constructed transmission facilities such as fiber-to-the-home. In the TRROTriennial Review Remand proceeding, the FCC held that incumbent local exchange carriers such as AT&T need not make available to unaffiliated carriers access to most high-capacity local loops and transportt ransport facilities; and the FCC has more recently determined that facilities-based wireline broadband services such as DSL are “information services” and thus are subject to minimal regulation. Separately, Congress has periodically considered initiatives proposing to deregulate the advanced services offerings of incumbent carriers. If one of these initiatives becomes law, or if the FCC’s rulings are upheld on appeal, the use of incumbent carrier facilities forHowever, the deployment of competing high-capacity services by carriers such as Grande may be adversely affected. This, however,Operating is not a material part of ourGrande Operating’s business since wethey typically provide these services over ourtheir own network. Relying upon definitions in the Communications Assistance for Law Enforcement Act (CALEA) rather than the Telecommunications Act of 1996, the FCC now requires broadband networks to cooperate with law enforcement as required by CALEA.
The Commission staff recently, on March 16, 2010, released a National Broadband Plan that recommends that the Commission, the National Telecommunications and Information Administration, and the Congress consider taking numerous steps to promote greater broadband deployment and availability to consumers, businesses, and other organizations than is the case today. The FCC is expected to initiate proceedings or complete pending ones in an effort to advance the objectives of greater broadband deployment and availability. We cannot predict when such proceedings will be completed or what new regulations will be adopted, but such proceedings have the potential of increasing the competitive pressure that Grande Operating experiences, may introduce requirements that will increase Grande Operating’s cos ts, and may otherwise adversely affect them.
Voice-over-Internet Protocol. VoIP is an application that manages the delivery of voice information across data networks, including the Internet, using Internet Protocol. VoIP sends voice information in digital form using discrete packets that are routed in the same manner as data packets. VoIP is widely viewed as a more cost-effective, feature-rich alternative to traditional circuit-switched telephone service. Because VoIP can be deployed by carriers in various capacities, and because it is widely considered a next-generation communication service, its regulatory classification—and, thus, its long-term revenue potential—is unclear. Several petitions seeking guidance on the regulatory classification of VoIP service have been filed at the FCC andover the past five-plus year s, but the FCC has resolved only a few of them, either through the issuance of narrowly-tailored declaratory rulings or through broader regulatory pronouncements, depending on the issue.
In one case, in 2004, the FCC held that a computer-to-computer VoIP application provided by Pulver.com is an unregulated information service, in part because it does not include a transmission component, offers computing capabilities, and is free to its users. In another case, also in 2004, the FCC reached a different conclusion, holding that AT&T’s use of VoIPIP to transmit the long-haul portion of certain voice calls constitutesdoes not make AT&T’s transport of such calls an information service. Rather, the Commission found, the service is a telecommunications service thus subjecting itand is subject to regulation,switched access charges, because the calls are interexchange in nature, use ordinary customer premises equipment with no enhanced functionality, originate and terminate on the public switched telephone network, and undergo no net protocol conversion and provide no enhanced functionality to end users. In a third case, the FCC ruled that certain prepaid calling card services are telecommunications services rather than information services. An earlier case, which involved the VoIP application of Vonage, the FCC preempted the authority of the State of Minnesota (and presumably all other states) and ruled that Vonage’s VoIP application, and others like it, was an interstate service subject only to Federal regulation, thus preempting the authority of the Minnesota commission to require Vonage to obtain state certification. The FCC, however, refused to speak beyond prior rulings involving enhanced services as to whether Vonage’s VoIP application is a telecommunications service or an information service, thus leaving open the question of the extent to which the service might be regulated. The Eighth Circuit Court of Appeals in March 2007 denied several petitions seeking review of the FCC’s decision to classify Vonage’s VoIP application as interstate rather than intrastate in nature.
On a broader level, while not resolving the issue of whether VoIP is a telecommunications service or an information service, the FCC has held that providers of interconnected VoIP service must provide law enforcement officials with access to their networks pursuant to CALEA and, separately, that providers of interconnected VoIP service also must comply with specific E-911 and other requirements to enable their customers to access public safety officials. The FCC has also ruled as noted above that interconnected VoIP is an offering of telecommunications and that providers of interconnected VoIP must contribute to the federal universal service fund andUniversal Service Fund. Finally, the Commission has ruled that interconnected VoIP providers are subject to certain requirements relating to telephone number portability and protection of the privacy of customercus tomer proprietary information.
The FCC separately has initiated a more generic proceeding, the IP-Enabled Services NOPRNPRM to address the many other regulatory issues raised by the development and growth of IP services, including VoIP service and also including the extent to which the governance of VoIP will reside at the Federal level.level (See “Interconnection” above.) The FCC has expressly reserved the right to reconsider some of its earlier rulings in thethat generic rulemaking proceeding.
The FCC currently has before it a series of petitions for declaratory ruling requesting clarification on whether VoIP traffic is subject to switched access charge assessment, which parties are interexchange carriers for purposes of access charge liability on any IP-enabled traffic subject to access charges, whether interexchange carriers not directly connected to local exchange carriers can be subject to access charges, and whether intermediate, terminating local exchange carriers can rely on certification by their customers that traffic is enhanced services traffic in making decisions regarding the routing and access charge assessment for VoIP traffic. For example, Grande Operating filed its own petition at the FCC in 2005 seeking a declaratory ruling regarding the proper treatment of traffic terminated to end users of interconnectedinterc onnected ILECs through CLECs, like Grande, which traffic wholesale customers of Grande Operating have certified as originating in VoIP format. The petition asks the FCC to rule that a CLEC properly may rely on its customer’s self-certification; that the ILECs, receiving certified traffic over local interconnection trunks from the CLEC, are to treat the traffic as local traffic for intercarrier compensation purposes and may not assess access charges against certified traffic unless the FCC decides otherwise in the IP-Enabled Services or Intercarrier Compensation Rulemakings or in another proceeding. This petition is still pending, and we cannot predict how or when it might be decided. In addition, two forbearance petitions relating to the treatment of VoIP traffic for purposes of intercarrier compensation were filed in 2007 by other companies. One of these petitions recently was denied, but the other remains pending and we cannot predict how it will be decided. The regulatory classification of VoIP traffic, including the applicability of access charges to such traffic, also is an important issue under consideration in ongoing FCC rulemakings concerning IP-Enabled Services and intercarrier compensation reform. Future rulings in connection with VoIP, including whether accessacce ss charges apply and whether they can be assessed retroactively, likely will have a significant impact on us, ourGrande Operating, their competitors and the communications industry.
Consumer Privacy. The Communications Act and the FCC’s rules specify the circumstances under which carriers can share consumer call data, or Customer Proprietary Network Information (CPNI), with their affiliates and unrelated third parties. Grande Operating must make annual certifications to the FCC regarding its use and treatment of CPNI consistent with the regulations. Congress and the FCC are in the process of reviewing these rules and may adopt further restrictions to further prevent the disclosure of CPNI and related information by carriers. This could affect ourGrande Operating’s ability, and the ability of ourtheir competitors, to market services.
State Regulation of Telecommunications Services
Traditionally, states have exercised jurisdiction over intrastate telecommunications services, and the Telecommunications Act of 1996 largely upholds that traditional state authority. To the extent necessary to advance competition in the telecommunications industry, however, the Telecommunications Act of 1996 does place limits on state authority; for example, the statute contains provisions that prohibit states and localities from adopting or imposing any legal requirement that may prohibit, or have the effect of prohibiting, market entry by new providers of the provision of any interstate or intrastate telecommunications services. The FCC is required to preempt any such state or local requirement to the extent necessary to enforce the Telecommunications Act of 1996’s open market entry requirements. Affected parties have a private right of action to challenge a ny state or local regulations which they believe violate the statutory proscription. States and localities may, however, continue to regulate the provision of intrastate telecommunications services and require carriers to obtain certificates or licenses before providing service.
We areGrande Operating was certified as a CLEC in Arkansas, Florida, Georgia, Indiana, Oklahoma and Texas and as an interexchange service provider (IXC) in Arkansas, Florida, Georgia, Indiana, North Carolina, Oklahoma, Washington and Texas. If we expandGrande Operating expands to provide similar telecommunications services in new states, wethey will likely be required to obtain certificates of authority to operate and be subject to ongoing regulatory requirements in those states as well.
Although we areGrande Operating was authorized to provide telecommunications services in several states, the majority of ourits telecommunications end user customers arewere located in Texas. Since 1995, Texas law has provided a regulatory framework for competitive carriers such as us to provide telecommunications services in Texas. A major revision to Texas’ telecommunications law was adopted by the Texas Legislature in 2005 (“SB5”). These amendments to PURA require the PUCT to deregulate markets that meet certain standards and to consider deregulating certain other markets. The PUCT was also directed to undertake several important studies including whether Universal Service Funds should be continued or whether the program should be changed. The amendments also included additional competitive market safeguards. Like the Federal TelecommunicationsTe lecommunications Act of 1996, Texas law is intended to promote competition in the local exchange market, as well as in the intrastate interexchange market. The PUCT is responsible for an evolving regulation of these markets, and the PUCT plays a key role in promulgating rules and policies and by arbitrating interconnection agreements between carriers in the local market. For example, the PUCT has adopted substantive rules that permit any competing carrier to install its own telecommunications equipment at an MDU or commercial property in order to provide telecommunications services to a requesting tenant. The PUCT also has adopted substantive rules prohibiting exclusive arrangements to provide telecommunications services at multiple dwelling units (MDUs)MDUs and at commercial properties. The rules, policies and decisions of the PUCT are influenced by a variety of factors, and future regulatory and legislative developments in Texas could have a significant impact on us.Grande Operating.
Among the PUCT’s regulatory responsibilities is the review of AT&T’s performance in its provision of wholesale telecommunications services to competitive carriers such as us through a comprehensive set of performance measurements and a performance remedy plan. This performance remedy plan is in the interconnection agreement between Grande Operating and AT&T and requires AT&T to pay certain fines when it fails to meet its prescribed performance benchmarks. Although the performance remedy plan is intended to provide AT&T with incentive to provide timely wholesale service to competitive carriers on a nondiscriminatory basis, AT&T holds considerable market power in Texas and may be able to use that market power to the detriment of the competitive telecommunications market, and, in turn, carriers such as us.Grande Operating.
Telecommunications carriers in Texas are subject to numerous state policies, the application of which could affect ourGrande Operating’s business. These policies include, but are not limited to, the Texas Universal Service Fund and broadband initiatives such as the state’s DSL and advanced services in rural areas initiatives. Telecommunications carriers also are subject to various consumer protection regulations, such as prohibitions relating to slamming (changing an end user’s service provider without appropriate authorization), cramming (adding charges to an end user’s account without appropriate authorization) and telemarketing. All carriers are required to comply with a Code of Conduct for marketing, which has been adopted by the PUCT. Grande mustOperating was required to comply with these and other regulations or riskri sk significant fines and penalties.
SB 5 also contained an amendment to PURA, which requires municipally-owned utilities, which are exempt from the federal pole attachment laws, to equalize pole attachment fees as between telecom and cable service providers. This is intended to eliminate any artificial competitive advantage that might arise from the nature of the wires platform. This iswas a significant benefit to Grande Operating since Grande’sits two largest markets arewere served by municipally-owned utilities.
Texas has long been involved in both federal and state initiatives relating to homeland security, defense and disaster recovery. These initiatives sometimes require telecommunications carriers to, among other things,things; maintain certain network security procedures and monitoring systems. The growing emphasis on homeland security at the federal and state level and the recent experience with hurricane disasters on the Gulf Coast of Texas may cause usGrande Operating to incur unforeseen expenses relating to the security and protection of telecommunications networks.
Local Regulation
Occasionally, we areGrande Operating was required to obtain street use and construction permits to install and expand ourits interactive broadband network using state, city, county or municipal rights-of-way. The Telecommunications Act of 1996 and Chapter 66 of PURA, which was adopted in 2005, require municipalities to manage public rights-of-way in a competitively neutral and non-discriminatory manner.
Employees and Changes in Management
As a result of December 31, 2008, we had 785 full-time employees, other than temporarythe recapitalization transactions the only officers of Holdings are Michael L. Wilfley and W.K.L. “Scott” Ferguson and Holdings has no employees. NoneIn connection with the closing of our employees are subjectthe recapitalization transactions, on September 14, 2009, the following changes in management were made:
(1) Roy H. Chestnutt resigned as Chairman, Chief Executive Officer and President and as a director of Holdings and as Chairman, Executive Officer and President and as a member of the Board of Directors of Grande Operating.
(2) Jared Benson resigned as Vice President of Enterprise and Wholesale Services of Holdings and as Vice President of Enterprise and Wholesale Services of Grande Operating.
(3) Kay Stroman resigned as Vice President of Human Resources of Holdings and as Vice President of Human Resources of Grande Operating.
(4) Michael L. Wilfley resigned as Chief Financial Officer and Secretary of Grande Operating.
(5) W.K.L. “Scott” Ferguson, Jr. resigned as Chief Operating Officer of Holdings and Grande Operating.
(6) John C. Hockin resigned from his position as a member of the Board of Directors of Grande Operating.
(7) David C. Hull, Jr. resigned from his position as a member of the Board of Directors of Grande Operating.
(8) William Laverack, Jr. resigned from his position as a member of the Board of Directors of Grande Operating.
(9) Richard W. Orchard resigned from his position as a member of the Board of Directors of Grande Operating.
(10) Paul Walsh resigned from his position as a member of the Board of Directors of Grande Operating.
On September 14, 2009, the board of Holdings appointed Mr. Wilfley to collective bargaining agreements. We believe that our relations with our employees are good.replace Mr. Chestnutt as Chief Executive Officer and President of Holdings and Walter K.L. “Scott” Ferguson, Jr. was appointed to replace Mr. Wilfley as secretary of Holdings. On September 17, 2009, the board of Holdings appointed Michael L. Wilfley to replace Mr. Chestnutt as a director of Holdings and appointed Mr. Wilfley to serve as Treasurer of Holdings. On September 17, 2009, Duncan T. Butler, Jr. was appointed as Chairman of the Board of Directors of Holdings.
WHERE YOU CAN FIND MORE INFORMATION
We filePrior to the filing of our Form 15 in January 2010, we filed annual, quarterly, current and special reports, and other information with the SEC, in accordance with the Exchange Act. You may read and copy any document we filefiled or furnishfurnished with the SEC at the following public reference room:
Public Reference Room
100 F Street, N.E.
Room 1580
Washington, D.C. 20549
1-800-SEC-0330
Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. Our reports and other information filed with the SEC are also available to the public over the Internet at the SEC’s World Wide Web site at http://www.sec.gov.
RISKS RELATING TO OUR BUSINESS
Holdings may not have enough cash on-hand to meet future expenses.
As a result of the closing of the recapitalization transaction, Holdings does not have any operations or material assets other than the ownership of its 24.7% interest common equity interest in Ultimate Parent and cash of approximately $0.9 as of December 31, 2009. Although Holdings has no operations it does continue to expect to incur certain expenses and given Holdings’ limited resources it may not be able to meet such future expense obligations. Our projections indicate that we have sufficient funds on hand to meet our existing obligations.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. Because of our limited cash and employee resources, we may be unable to timely comply with Section 404 which could have a materially adverse impact on Holdings.
We are required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 with respect to the year ended December 31, 2009. Section 404 requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Management’s report is not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report on Form 10-K. We may be required to hire an outside consulting firm to work with Holdings in assessing our internal controls. During the course of our ongoing evaluation and integration of the internal control over financial reporting, we may identify areas requiring improvement, and we m ay have to design enhanced processes and controls to address issues identified through this review. We believe that the out-of-pocket costs and resource demand caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant as compared to our very limited activity. After filing this annual report on Form 10-K, we will no longer be subject to the requirements of Section 404 for so long as our reporting obligations under the Exchange Act remain suspended.
Our stock is not publicly traded, listed or quoted on a national securities exchange, so you may be unable to sell our stock.
Our stock is not publicly traded, listed or quoted on a national securities exchange, so you may be unable to sell our Common Stock, Preferred Stock or convertible securities. There is no existing market for our stock, and we do not expect any such market to develop. No class or series of our equity securities are registered under the Securities Act and may not be resold unless registered or unless an exemption from registration is available. Even if our stock is registered under the Securities Act or is exempt from registration, state securities laws may prohibit or limit its transferability in some jurisdictions. Further, in connection with the recapitalization transactions, certain requisite stockholders of Holdings approved the Sixth Amended and Restated Investor Rights Agreement. Prior to this amendment and restatement, the investor rights agreement provided for a broad range of registration rights with respect to the equity securities of Holdings, together with certain information rights and related obligations of Holdings. In recognition of the changes resulting from the recapitalization transactions, the requisite parties to the investor rights agreement expressly waived all such registration rights and obligations in the Sixth Amended and Restated Investor Rights Agreement. In addition to the existing transfer restrictions contained in the prior investor rights agreement, the Sixth Amended and Restated Investor Rights Agreement includes, among other things, additional transfer restrictions requiring the approval of Holdings for any transfer of its equity securities that would (1) increase the number of record holders of any class of Holdings’ equity securities, (2) require registration of such equity securities under the Securities Act, (3) subject Holdings to the periodic reporting requirements of the Exchange Act, or (4) subject Holdings to the registration requirements of, or limit the availability of any exemptions from registration under, the Investment Company Act of 1940, as amended. Due to these conditions, you may not be able to sell your shares if you need money or otherwise desire to liquidate your shares.
RISKS RELATING TO OUR BUSINESSWe have not, and currently do not anticipate, paying dividends on our stock.
We have a history of net lossesnever declared or paid any cash dividends on our capital stock and maydo not be profitableanticipate paying cash dividends on our capital stock in the foreseeable future.
As Future declaration and payment of December 31, 2008, we had an accumulated deficit of $491.1 million. We expect to continue to incur net losses in the future. Our ability to generate profits and positive cash flow from operating activities will depend in large part on our ability to increase our revenues by increasing customer penetration in the markets we currently serve, expanding our revenue from commercial business, broadband transport and network services to offset the costs of operating our network and providing services. If we cannot achieve operating profitability or positive cash flow from operating activities, our business, financial condition and operating resultsdividends, if any, will be adversely affected.determined based on whether Rio GP receives any distributions from Ultimate Parent, Holdings’ expenses and capital needs, and other factors the board of directors deems relevant.
The current turmoildeclaration of dividends is within the discretion of our board of directors and subject to the limitations set forth in the credit markets and poor economic conditions could negatively impact our business by squeezing demand for our products and the availability of capital and increasing our cost of credit.
The current turmoil in the credit markets could limit demand for our products, and affect the overall availability and cost of credit. Our operations are affected by local and national economic conditions, which have recently deteriorated significantly and may remain depressed for the foreseeable future. The consequences of a prolonged recession may include a lower level of economic activity and changes in demand for the services we provide in our markets, which may adversely affect our revenues, liquidity and future growth. Current economic conditions may be exacerbated by insufficient financial sector liquidity leading to potential increased unemployment, which may adversely impact remittances from our customers, increase customer bankruptcies, and may lead to increased bad debt. It is expected that commercial and wholesale customers will be impacted first with residential customers following, if such circumstances occur. Customer collections are our primary source of cash. While we believe we have a diversified customer base and no concentration of credit risk with any single customer, if the current market conditions continue to deteriorate, our ability to attract customers, maintain or increase subscription revenue will be negatively impacted and we may experience increased churn in our customer base, which could also have a material adverse effect on our liquidity.
Instability in the financial markets, as a result of recession or otherwise, also may affect the cost of capital and our ability to raise capital. At this time, it is unclear whether and to what extent the actions taken by the U.S. government, including, without limitation, the passageChapter 78 of the Emergency Economic Stabilization ActNevada Revised Statutes. Pursuant to our articles of 2008, the American Recovery and Reinvestment Act of 2009 and other measures currently being implemented or contemplated, will mitigate the effects of the crisis. The impact of the current crisis on our ability to obtain financing in the future, and the cost and terms of same, is unclear. No assurances can be given that the effects of the current crisis will not have a material adverse effect on our business, financial condition and results of operations.
We may require additional funding to cover the costs to grow the business or to cover shortfalls or unforeseen changes, for which funding may not be available.
When we expand our networks within our existing markets, introduce new products or services or enter new markets, we project the capital expenditures that will be required based in part on the amount of time necessary to complete the construction of the networks or the introduction of the services and the difficulty of such projects. We may need more funds to cover the costs associated with delays or difficulties in connection with the build-out, maintenance or technical upgradesincorporation, holders of our networks or for other unanticipated reasons. Such financing, if necessary, may not be available on favorable terms or at all. If we cannot obtain additional funds when needed or if cash flow from operations is less than expected, our business and financial condition may be adversely affected.
Changes in demand for our services could harm our business.
We could be affected by changes in demand for the services we provide in our markets. Our plan could be unsuccessful due to:
competition, especially from incumbent telephone and cable providers, which offer bundled services and from new technologies such as VoIP service;
regulatory uncertainties;
downturns in economic conditions in our markets;
operating and technical difficulties; or
unsuccessful sales and marketing.
Any downturn in demand for our services will harm our business and our prospects for growth and profitability.
Competition from other cable television, telephone and broadband Internet service providers could have an adverse effect on our growth and revenues.
Wepreferred stock are not the first provider ofentitled to any one of our three principal bundled services in any of our markets. We compete with numerous other companies that have long-standing customer relationships with the residents in these markets, and we typically have to convince consumers to switch from other companies to Grande. Some of our competitors have significant competitive advantages over us, including greater experience, resources, marketing capabilities and name recognition.
for video services: Time Warner Cable, Cable One, Suddenlink Communications, Comcast, Charter, DIRECTV, DISH Network, AT&T, Verizon and others;
for HSD services: AT&T, Time Warner Cable, Time Warner Telecom, Verizon, Comcast, Charter, Cable One, Suddenlink Communications, CenturyTel, Clearwire and others;
for long-distance telephone services: AT&T, Verizon, Sprint, Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage and others;
for local telephone services: AT&T, Verizon, CenturyTel, Birch Telecom, Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage and others.
As the incumbent local telephone company, and a major provider of long-distance telephone services, AT&T is a particularly strong competitor in telephone and data services and competes for video services as well. With respect to cable television services, Time Warner Cable is the incumbent provider in the majority of our markets. Several of these competitors offer more than one service, such as telephone companies and cable providers offering broadband Internet services. Some of our competitors offer all three services; in particular, Time Warner Cable and other cable operators have begun providing digital phone services through VoIP technology. In some of our markets, AT&T and Verizon, which are upgrading their networks and providing video services, provide all three services as well and each also control a nationwide wireless service provider. We can expect that competition at MDUs also will increase if the FCC’s November 2007 order prohibiting exclusive cable service arrangements between MDUs and cable providers is upheld in the courts. We also compete with wireless telephone carriers for both local and long distance services. Many of our competitors are larger than we are, and we anticipate that the trend toward business combinations and alliances in the telecommunications industry will continue, making some of our competitors even larger. We expect these business combinations and the level of competition to continue to increase in the future. If we fail to compete successfully in our markets and grow our customer base, our business and financial condition will be harmed.
Restrictive covenants under our indebtedness may limit our ability to grow and operate our business.
The indenture governing our 14% senior secured notes due April 1, 2011 (“senior notes”), by and between Grande and U.S. Bank National Association, as Indenture Trustee, dated March 23, 2004 (“the Indenture”), contains, among other things, covenants imposing significant financial and operating restrictions on our business. These restrictions may affect our ability to manage and operate our business, may limit our ability to take advantage of potential business opportunities as they arise and may adversely affect the conduct or management of our current business. These restrictions limit our ability to, among other things:
incur additional indebtedness, issue disqualified capital stock (as defined in the Indenture) and, in the case of our restricted subsidiaries, issue preferred stock;
create liens on our assets;
pay dividends on, redeem or repurchase our capital stock or make other restricted payments;
make investments in other companies;
enter into transactions with affiliates;
enter into sale and leaseback transactions;
sell or make dispositions of assets;
place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
engage in certain business activities; and
merge or consolidate with other entities.
In addition, the Indenture contains a covenant restricting certain capital expenditures if such expenditures would result in us having less than $20 million in cash and cash equivalents after giving effect to such expenditures. Cash and cash equivalents at December 31, 2008 was approximately $27.0 million. This covenant could adversely affect the Company’s ability to make planned capital expenditures.
These limitations may affect our ability to finance our future operations or to engage in other business activities that may be declared from time to time by our board of directors on a pari passu basis with any dividend on our common stock (payable other than in our best interest. Also, since we are a holding company with no assetscommon stock or other than our ownershipsecurities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of our subsidiary, we will be dependentcommon stock), on the receipt of funds from our subsidiaryan as-converted to pay the interest and principal on the senior notes, and these limitations could adversely affect our ability to make such payment on the senior notes.common stock basis. Such dividends are not cumulative.
The amount of debt we have could harm our business.
As of December 31, 2008, we had approximately $209.1 million of indebtedness and capital lease obligations outstanding, including the carrying value of our senior notes of $189.3 million, all of which was secured. Further, the Indenture allows us to incur additional indebtedness under certain circumstances. Our significant indebtedness could adversely affect our business in a number of ways, including the risks that:
we will use a substantial portion of our cash flow from operations to pay principal and interest on our debt, thereby reducing the funds available for acquisitions, working capital, capital expenditures and other general corporate purposes;
our degree of leverage may limit our ability to obtain additional capital, through equity offerings or debt financings, for working capital expenditures or refinancing of indebtedness;
our degree of leverage limits our ability to withstand competitive pressure and reduces our flexibility in responding to changes in business and economic conditions; and
our degree of leverage may hinder our ability to adjust rapidly to changing market conditions and could make us more vulnerable to downturns in the economy or in our industry.
If we cannot generate sufficient cash flow from operations to meet our obligations, we may be forced to reduce or delay capital expenditures, sell assets, restructure our debt, or seek additional equity capital. We cannot assure that these remedies would be available or satisfactory. Our cash flow from operations will be affected by prevailing economic conditions, financial, business and other factors, which may be beyond our control.
The costs associated with the provision of our services may increase and we may not be able to pass any cost increases on to our customers.
In recent years, the cable industry has experienced increases in the cost of programming, which is one of the most significant costs of operating a cable system, and we expect these increases to continue. Because we have a relatively small base of subscribers, we cannot obtain programming costs comparable to those of the larger cable providers with which we compete despite using the services of a national cooperative that seeks to obtain better pricing on behalf of smaller cable providers nationwide. We may also see increases over time in other costs; such as the fees we pay utility companies for space on their utility poles. If we are unable to pass any programming or other cost increases on to our customers, our results of operations could be adversely affected.
Future technologies and capital deployment from competitors may hurt our business or increase our cost of operations.
The development of future technologies may result in new competition in one or more of the services we offer. Other developments may give our competitors a cost advantage or other features we cannot readily match, or require us to make expensive and time-consuming upgrades to our networks to remain competitive. In addition, we may select one technology or one technology provider over another, while our competitors may select different technologies or providers. If we do not choose the technology that turns out to be the most efficient, economic or appealing to customers, our business could be adversely affected.
Failure to maintain existing state cable television franchises could adversely affect our ability to grow our business.
We provide video service over our networks generally pursuant to a statewide cable franchise in Texas. Our ability to grow our business depends on the terms of our cable franchise, including payment obligations. Litigation over the constitutionality of the Texas statewide franchise law is pending. In early September 2005, the Texas Cable and Telecommunications Association (“TCA”) filed a lawsuit in U.S. District Court, Western District of Texas, Austin division, to challenge a 2005 Texas statute providing for a state-issued cable/video franchise authority and implementing a transition plan to end the need for individual municipal franchises. The lawsuit contends that the new state law discriminates against incumbent cable operators in violation of the U.S. Constitution, discriminates against incumbent cable operators in violation of the Federal Communications Act, violates the federal prohibition on exclusive franchises, and violates the Cable Act prohibition against redlining. In September 2006, U.S. Federal District Judge Yeakel dismissed TCA’s complaint without prejudice. TCA subsequently filed an appeal of the dismissal in the Fifth Circuit Court of Appeals. The Fifth Circuit granted the appeal, overturned the dismissal of TCA’s challenge and remanded the case to the district court for further proceedings. Both AT&T and Verizon filed petitions for rehearing, which the Fifth Circuit Court of Appeals overruled. AT&T filed a petition for the U.S. Supreme Court to review the Fifth Circuit’s ruling, which has been denied. On April 30, 2008, TCA filed an amended complaint, adding Time Warner Cable Inc. as a plaintiff. Cross motions for summary judgment are currently pending. We cannot predict the outcome of the litigation. Several outcomes are possible which could raise various levels of uncertainty about the nature of franchise authority. Certain outcomes could harm our business.
Our cable franchises are required by federal law to be non-exclusive. Our market areas currently are served by at least one incumbent provider. In addition, under federal law, municipal entities can operate cable television systems without franchises. New competitors in our existing markets or changes to franchise terms could adversely affect our business and financial condition.
If we are not able to manage our growth, our business will be harmed.
Our ability to grow will depend, in part, upon our ability to:
successfully implement our strategy for offering bundled broadband services;
construct network facilities;
obtain and maintain on favorable terms any required government authorizations and interconnection agreements;
secure any needed financing; and
hire and retain qualified personnel.
In addition, as we increase our service offerings and expand within our targeted markets, we will have additional demands on our customer support, sales and marketing, administrative resources and network infrastructure. If we cannot effectively manage our growth, our business and results of operations will be harmed.
Our business could be hurt in the event of a network outage.
Our success depends on the efficient and uninterrupted operation of our communications services. Our networks are attached to poles and other structures in our service areas. A natural disaster, including tornado, hurricane, flood or other natural catastrophe, or things unforeseen as our network gets older in one of these areas could damage our networks, interrupt our service and harm our business in the affected area.
We could be hurt by future regulation of our industry.
Legislation and implementing regulations in the telecommunications and cable areas continue to be quite complex, and regulation of carrier and Internet services may increase. Future actions by the United States Congress, the FCC, the Federal Trade Commission, state legislatures, state utility commissions, local municipalities and other regulators may adversely impact our business. For example, if a regulation or interpretative ruling increases the costs associated with a particular service, such as an increase in the cost of terminating telecommunications traffic or future rulings in connection with VoIP, including whether access charges apply and whether they can be assessed retroactively, our business may be adversely impacted. Additionally, if the FCC order prohibiting exclusive cable service arrangements between MDUs and cable providers were upheld in the courts, our competitors, some of who have significant competitive advantages over us, would be allowed to provide competing video service to all MDUs.
Expanding into additional markets, either through internal growth or acquisitions, will require additional funding and numerous approvals.
Although currently we do not intend to enter any new markets, we may expand into other attractive markets if the right opportunities arise. However, expansion into additional markets will require significant additional capital, as well as numerous authorizations and approvals, which could include franchises, construction permits, pole attachment agreements, interconnection agreements and others. Expansion markets may not have the same economics or operating metrics as we have experienced in our existing markets, and may involve more difficult competitive situations or other hurdles.
During a liquidation, our obligations to the holders of shares of our preferred stock must be satisfied before any payments are made to the holders of our common stock.
If we are liquidated, the holders of our preferred stock will be entitled to be paid in full before any payments are made to the holders of our common stock. Our outstanding preferred stock has an aggregate liquidation preference of $597.4$584.3 million. Refer to the consolidated balance sheets included in the accompanying consolidated financial statements for the detail of liquidation preference by series of stock. Any funds used to pay the holders of our preferred stock will restrict our ability to use such funds for operationsto cover expenses and must be paid before any amounts may be paid to the holders of our common stock. See footnote No. 9, “Stockholder’s Equity”
The performance of Ultimate Parent is not in our control and is subject to the Notesmanagement and control of ABRY.
Holdings’ most significant asset is its ownership, through Rio GP, in Ultimate Parent. Since we do not have control over Ultimate Parent, its performance will be solely dependent on its majority holder, ABRY, and the management of Ultimate Parent and Grande Operating. Accordingly, our investment in Ultimate Parent will be subject to the risk that ABRY or the management of Ultimate Parent and Grande Operating may make business, financial or management decisions with which we do not agree or may take risks or otherwise act in a manner that does not serve our Consolidated Financial Statements included in this annual report on Form 10-K for a descriptionbest interests. If any of the foregoing were to occur, the value of our preferred stock.
RISKS RELATING TO OUR SENIOR NOTESinvestment in Ultimate Parent could decrease and our financial condition, results of operations and cash flow could suffer as a result.
RightsFuture contingencies may reduce the distributions that would otherwise be made to Rio GP upon the sale of holdersUltimate Parent.
In June 2009, the Universal Service Administration Company (“USAC,”) which administers the Universal Service Fund (“USF”) on behalf of the senior notesFederal Communications Commission, provided an initial draft of findings in an audit of Grande Operating’s contributions to the collateralUSF program based on its 2004, 2005 and 2006 revenues. The draft audit report was subsequently finalized in October 2009 and concluded that Grande Operating underreported or misclassified certain telecommunications service revenues, resulting in a total contribution shortfall of $4.2 million for the 2005, 2006 and 2007 reporting years. Grande Operating disagrees with the majority of the USAC audit report and believes it has meritorious defenses for the prior USF filings and intends to vigorously defend them during the dispute process, appellate p rocess and through litigation in courts, as necessary.
Pursuant to the terms of the recapitalization agreement, liabilities in connection with the USAC Audit and certain other regulatory liabilities of Grande Operating, if not repaid by Holdings prior to the sale of Ultimate Parent will reduce the distributions that would otherwise be made to Rio GP on its Class A Common Units in such sale. In the event the results of the USAC Audit have not been finally determined and any related appeal has not been resolved by the time of a sale of Ultimate Parent and the acquiror in such sale requires Grande Operating or any of its affiliates to indemnify such acquiror and/or Grande Operating for liability in connection with the USAC Audit arising from any period prior to September 14, 2009 that exceeds the amount of liability accrued at September 14, 2009 and any amount reimbursed or refunded to Grande Operating in connection with the USAC Audit, Rio GP agreed to provide such indemnification in an amount not to exceed Rio GP’s net cash proceeds in connection with such sale, and agreed that a portion of such proceeds in an amount sufficient to satisfy such indemnification obligation may be adversely affected by the failureplaced in escrow to create or perfect security interests in certain collateral on a timely basis or at all, or by the failure of our existing subsidiary or any future subsidiary guarantors to guarantee the senior notes.
We have agreed to secure the senior notes and the guarantees by granting first priority liens on substantially all of our property and our existing subsidiary’s and any future subsidiary guarantor’s property, subject to certain exceptions, and to take other steps to assist in perfecting the security interests granted in the collateral. Certain property will be excluded from the collateral secured for the benefit of the noteholders.
Not all of the security interests in the collateral attached on the issue date of the outstanding senior notes. If we or our subsidiary guarantor or future subsidiary guarantors were to become subject to a bankruptcy proceeding, any liens recorded or perfected after the issue date would face a greater risk of being invalidated than if they had been recorded or perfected on the issue date. Liens recorded or perfected after the issue date, may be treated under bankruptcy law as if they were delivered to secure previously existing indebtedness. In bankruptcy proceedings commenced within 90 days of lien perfection, a lien given to secure previously existing debt is materially more likely to be avoidedserve as a preference by the bankruptcy court than if delivered and promptly recorded on the issue date. Accordingly, if we or our subsidiary guarantor orsource for payment of any future subsidiary guarantor were to file for bankruptcy protection and the liens had been perfected less than 90 days before commencement of such bankruptcy proceeding, the liens securing the senior notes may be especially subject to challenge as a result of having been delivered after the issue date. To the extent that such challenge succeeded, senior noteholders would lose the benefit of the security that the collateral was intended to provide. In the unlikely event that a senior noteholder is determined to be an “insider” of Grande Communications Holdings, Inc., the preference look-back period is one year, rather than 90 days, for the purposes of the risks described in this paragraph.indemnification obligation.
Because certainHoldings and Rio GP have guaranteed the full and timely payment of lease payments on leases entered into by Grande Operating.
In connection with the closing of the outstanding senior notes were issuedRecapitalization Agreement, Grande Operating entered into the First Amendment to Lease to that certain Lease Agreement, dated August 7, 2003, with original issue discount, U.S. holders of such senior notes will be requiredrespect to include such discountcertain premises located in gross income for U.S. federal income tax purposes before such amounts are received in cash.
CertainCorpus Christi, Texas, Odessa, Texas, San Marcos, Texas and Waco, Texas with GRC (TX) Limited Partnership to modify certain provisions of the outstanding senior notes were issued at a discount from their stated principal amount. As a result, the discount on such senior notes is subjectLease Agreement to the special tax rules applicable to original issue discount. Under these rules, the original issue discount generally must be included in the gross income of U.S. holders for U.S. federal income tax purposes in advance of the receipt of the cash payments on the senior notes to which such income is attributable.
Due to events that are beyond our control, we may not be able to generate sufficient cash flow to make interest payments under the senior notes.
Our ability to make payments on and to refinance our indebtedness, including the senior notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Provided that we meet our cash flow projections in our current business plan and current economic market conditions do not continue to deteriorate, we expect that our available cash and cash equivalents and cash generated from operations will be sufficient to fund our existing operations, planned capital spending and other commitments over the next twelve months through December 31, 2009. However, we cannot provide any assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. A significant reduction in operating cash flow would likely increase the need for alternative sources of liquidity. If we are unable to generate sufficient cash flow to make payments on the senior notes or our other indebtedness, we will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing the senior notes or such other indebtedness, selling assets or raising equity. We cannot provide any assurances that any of these alternatives could be accomplished on satisfactory terms or that they would yield sufficient funds to repay the senior notes and our other indebtedness.
Ifpermit a change of control occurs, we may not have sufficient fundsof the tenant group and certain other related transactions (the “August 2003 Lease Amendment”). In addition, Grande Operating entered into a First Amendment to repurchase senior notes.
Upon specified changeLease to that certain Lease Agreement dated June 24, 2004 with respect to certain premises located in San Marcos, Texas with GRC-II Limited Partnership to modify certain provisions of control events, senior noteholders may require usthe Lease Agreement to repurchase all or a portion of their senior notes. However, ifpermit a change of control occurs, we may not be able to pay the price for all of the senior notes submitted for repurchase. Future credit agreements ortenant group and certain other agreements relating to debt may contain provisions prohibiting us from purchasing any senior notes until we have repaid all of such debt. We may not be able to securerelated transactions (the “June 2004 Lease Amendment” and together with the consent of such future lenders to repurchaseAugust 2003 Lease, the senior notes or refinance the borrowings that prohibit us from repurchasing the senior notes. In addition, certain significant corporate events would not constitute a change of control under the Indenture.“Lease Amendments”).
We depend upon dividends from our subsidiaryAs a condition to meet our debt service obligations.
Grande Communicationsentering into the Lease Amendments, Rio GP was added as an additional guarantor under each of the existing Guaranty and Suretyship Agreement originally given by Holdings Inc. is a holding company and conducts all of its operations through a subsidiary. Our ability to meet our debt service obligations depends upon our receipt of dividends from our subsidiary. Subjectpursuant to the restrictions contained inFirst Amendment to Guaranty and Suretyship Agreement by and between GRC (TX) Limited Partnership, GRC-II (TX) Limited Partnership, Holdings, and Rio GP. Holdings was also required to enter into the IndentureFirst Amendment to Guaranty and our other outstanding debt, future borrowings by our subsidiary could contain restrictions or prohibitions on the payment of dividends by our subsidiary to us. In addition, under applicable law, our existing subsidiary and any future subsidiary guarantors could be limited in the amounts that they are permitted to pay us as dividends on their capital stock.
Federal and state statutes may allow courts to void or subordinate guarantees.
The senior notes will be guaranteed by our existing subsidiary and certain of our future subsidiary guarantors, if any. If a bankruptcy case or lawsuit is initiatedSuretyship Agreement with respect to both Leases (each a guarantor,“Guarantee” and, together, the debt represented by“Guarantees”). The guarantees are for the guarantee entered into by that guarantor may be reviewed under federal bankruptcy lawfull and comparable provisionstimely payment of state fraudulent transfer laws. Under these laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinatedlease payments pertaining to certain obligations of a guarantor, if, among other things, such guarantor, at the time it entered into the guarantee, received less than fair consideration for entering into the guarantee and either it was insolvent or rendered insolvent by reason of entering into the guarantee, it was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital or it intended to incur, or believed that it would incur, debts or contingent liabilities beyond its ability to pay such debts or contingent liabilities as they became due. If one or more of the guarantees is voided, holders of the senior notes would be solely creditors of ours and of the guarantors that have validly guaranteed the senior notes; if one or more guarantees is subordinated, the other creditors of such guarantor would be entitled to be paid in full before any payment could be made on the senior notes. We cannot assure senior noteholders that after providing for all prior claims there would be sufficient guarantor assets remaining to satisfy the claims of the holders of the senior notes.
Bankruptcy laws may limit the ability of the senior noteholders to realize value from the collateral.
The right of the collateral agent to repossess and dispose of the collateral upon the occurrence of an event of default under the Indenture is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the collateral agent repossessed and disposed of the collateral. Upon the commencement of a case for relief under Title 11 of the United States Code, a secured creditor, such as the collateral agent, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval. Moreover, the bankruptcy code permits the debtor to continue to retain and use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security if and at such times as the court in its discretion determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. A bankruptcy court may determine that a secured creditor may not require compensation for a diminution in the value of its collateral if the value of the collateral exceeds the debt it secures.
In view of the lack of a precise definition of the term “adequate protection”August 2003 Lease Amendment and the broad discretionary powers of a bankruptcy court, it is impossible to predict:
how long payments under the senior notes could be delayed following commencement of a bankruptcy case;
whether or when the collateral agent could repossess or dispose of the collateral;
the value of the collateral at the time of the bankruptcy petition; or
whether or to what extent holders of the senior notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of “adequate protection.”
In addition, the Indenture requires that, in the event of a bankruptcy, the trustee and the collateral agent not object to a number of important matters following the filing of a bankruptcy petition. After such filing, the value of the collateral could materially deteriorate and senior noteholders would be unable to raise an objection. The right of the holders of obligations secured by first priority liens on the collateral to foreclose upon and sell the collateral upon the occurrence of an event of default also would be subject to limitations under applicable bankruptcy laws if we or our existing subsidiary or any of our future subsidiaries become subject to a bankruptcy proceeding. Any disposition of the collateral during a bankruptcy case would also require permission from the bankruptcy court. Furthermore, in the event a bankruptcy court determines the value of the collateral is not sufficient to repay all amounts due on the senior notes, the holders of the senior notes would hold secured claims to the extent of the value of the collateral to which the holders of the senior notes are entitled and unsecured claims with respect to such shortfall. The majority of bankruptcy courts have found that the bankruptcy code only permits the payment and accrual of post-petition interest, costs and attorney’s fees to a secured creditor during a debtor’s bankruptcy case to the extent the value of its collateral is determined by the bankruptcy court to exceed the aggregate outstanding principal amount of the obligations secured by the collateral.
The senior notes are not listed on any securities exchange, which could make it more difficult for senior noteholders to sell their senior notes and could affect adversely the price of their senior notes.
The liquidity of the trading market in the senior notes and the market price quoted for the senior notes may be affected adversely by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the prospects for companies in the telecommunications industry generally. As a result, a senior noteholder cannot be sure that an active trading market will continue for the senior notes.
We will not list the senior notes on any securities exchange and we cannot assure senior noteholders of a continued market for or of the liquidity of any market for the senior notes.
The Indenture permits the formation of a holding company that would be permitted to take actions that may not be consistent with the best interests of the senior noteholders.
The Indenture permits the formation of a separate holding company that would be the parent company of Grande Communications Holdings, Inc. and its existing subsidiary and any future subsidiary. If such a holding company were formed, some of the restrictive covenants contained in the Indenture would apply only to Grande Communications Holdings, Inc. and its existing subsidiary and any future subsidiary and not to the holding company. As a result, the holding company could take actions, such as using cash for purposes unrelated to debt service, which may not be consistent with the best interests of the senior noteholders.June 2004 Lease Amendment.
| ITEM 1B. | | UNRESOLVED STAFF COMMENTSCOMMENTS |
None.
We lease 47 facilities including 29 technical and 18 non-technical real estate facilities, encompassing 97,920 and 253,472 square feet respectively, to support our operations. We primarily lease the real property sites in each of our markets upon which our network equipment is located, including sites for our head-ends where programming is received via satellite, hubs, network equipment and points of presence. We have rights of way, licenses or other access rights to the real property over which our network fiber crosses, generally under our franchise agreements or contractual agreements with third parties. With respect to our long-haul network, we lease the real property sites where our switches, network equipment including collocation facilities and points of presence are situated.None.
We are subject to litigation in the normal course of our business. However, thereThere are no pending proceedings, which are currently anticipated to have a material adverse effect on our business, financial condition or results of operations.
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The re-election of Roy H. Chestnutt and Richard W. Orchard and the election of director nominee, Paul V. Walsh, Jr., as Class I directors to serve on the Company’s board of directors for a three-year term expiring in 2011 was submitted to a vote of and approved by the stockholders at the 2008 annual meeting of stockholders held on January 12, 2009. The directors whose terms of office as directors continued after the meeting were: Duncan T. Butler, Jr., William Laverack, Jr., John C. Hockin and David C. Hull, Jr. There were no other matters voted upon at the 2008 annual stockholders meeting. As of December 16, 2008, the record date for holders of the Company's capital stock entitled to vote at the 2008 annual meeting, there were 452,311,583 shares of capital stock issued and outstanding. A total of 307,746,061 shares of our capital stock were present or represented by proxy at the 2008 annual meeting, representing more than 68% of our shares of capital stock issued and outstanding as of the record date. The following votes were cast at the 2008 annual meeting regarding the election of nominated directors:
Nominee nameITEM 4. | Votes for | Votes withheld |
| | |
Roy H. Chestnutt | 307,746,061 | — |
Richard W. Orchard | 307,746,061 | — |
Paul V. Walsh, Jr. | 307,746,061 | — |
PART II
| MARKET FOR REGISTRANT’S COMMONCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range for Common Stock
Our stock is not traded on any stock exchange or quoted on any established trading market. No market makers currently make a market in our stock and we do not plan to engage a market maker. Therefore, there is no established public trading market and no high and low bid information or quotations available. As of March 15, 2009,31, 2010, we had 12,784,07212,104,072 shares of common stock outstanding held by 200 holders of record.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future. It is the current policy of our board of directors to retain earnings for debt service and to finance the expansion of our operations. Future declaration and payment of dividends, if any, will be determined based on the then-current conditions, including our earnings, operations,whether Rio GP receives any distributions from Ultimate Parent, Holdings’ expenses and capital requirements, financial condition,needs, and other factors the board of directors deems relevant. In addition, our ability to pay dividends is limited by the terms of the Indenture.
The declaration of dividends is within the discretion of our board of directors and subject to the limitations set forth in the Delaware General Corporation Law.Chapter 78 of the Nevada Revised Statutes. Pursuant to our restated certificatearticles of incorporation, holders of our preferred stock are entitled to any dividends that may be declared from time to time by our board of directors on a pari passu basis with any dividend on our common stock (payable other than in our common stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of our common stock), on an as-converted to common stock basis. Such dividends are not cumulative.
Issuance of Unregistered Securities
During 2008,On September 17, 2009, Holdings’ predecessor corporation—Grande Communications Holdings, Inc., a Delaware corporation—was merged with and into Holdings, solely for the Company issued 108,132purpose of reincorporating in Nevada. As a result, shares of both common stock in connection with the exercise of options with a weighted average exercise price of $0.05 per share, and grants were awarded for options to purchase 1,058,000 shares of common stock with an exercise price of $0.05 per share that vest over four years and have a ten year life. No shares of Series H preferred stock of the predecessor corporation were issued during 2008. Wecancelled in exchange for like shares in Holdings. In issuing these securities, we relied on the exemption set forth in Section 4(2) ofexception to registration provided by Rule 145 promulgated under the Securities Act of 1933, as amended, in issuing these securities.Act.
| SELECTED FINANCIAL DATADATA |
The data set forth below should be read in conjunction with our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and other financial information appearing elsewhere in this annual report on Form 10-K. As a result of the transactions contemplated by the Recapitalization Agreement discussed in Part I Item 1—Business, on September 14, 2009, Holdings deconsolidated its wholly owned subsidiary, Grande Operating. For 2009, certain statement of operations data and other financial data presented below includes the results of Grande Operating for the period of January 1, 2009 through September 13, 2009.
| | | For the Year Ended December 31, | |
| | | | | | | | | | | | | | | | |
| | | (in thousands, except per share data) | |
| Statement of operations data: | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 194,731 | | | $ | 189,867 | | | $ | 197,146 | | | $ | 205,271 | | | $ | 143,953 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues (excluding depreciation and amortization) | | | 72,515 | | | | 63,931 | | | | 68,348 | | | | 69,798 | | | | 49,394 | |
| Selling, general and administrative (1) | | | 90,730 | | | | 94,312 | | | | 90,416 | | | | 92,486 | | | | 63,282 | |
| Provision for doubtful accounts (1) | | | 5,262 | | | | 3,514 | | | | 3,301 | | | | 3,363 | | | | 2,019 | |
| Depreciation and amortization | | | 59,507 | | | | 56,037 | | | | 56,752 | | | | 59,385 | | | | 43,037 | |
| Total operating expenses | | | 228,014 | | | | 217,794 | | | | 218,817 | | | | 225,032 | | | | 157,732 | |
| Operating loss | | | (33,283 | ) | | | (27,927 | ) | | | (21,671 | ) | | | (19,761 | ) | | | (13,779 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Gain on deconsolidation of Grande Operating | | | — | | | | — | | | | — | | | | — | | | | 49,198 | |
| Net gain on sale/disposal of assets | | | 431 | | | | 2,353 | | | | 76 | | | | 764 | | | | 304 | |
| Interest income | | | 709 | | | | 1,546 | | | | 1,670 | | | | 728 | | | | 50 | |
| Interest expense, net of capitalized interest | | | (18,801 | ) | | | (23,970 | ) | | | (29,012 | ) | | | (31,042 | ) | | | (22,260 | ) |
| Loss on extinguishment of debt | | | — | | | | — | | | | — | | | | — | | | | (7,139 | ) |
| Equity in loss from investee | | | — | | | | — | | | | — | | | | — | | | | (1,414 | ) |
| Other income (expense) | | | 750 | | | | — | | | | (472 | ) | | | 53 | | | | 242 | |
| Goodwill impairment | | | (39,576 | ) | | | (93,639 | ) | | | — | | | | — | | | | — | |
| Total other income (expense) | | | (56,487 | ) | | | (113,710 | ) | | | (27,738 | ) | | | (29,497 | ) | | | 18,981 | |
| Income (loss) before income tax expense | | | (89,770 | ) | | | (141,637 | ) | | | (49,409 | ) | | | (49,258 | ) | | | 5,202 | |
| Income tax expense | | | — | | | | — | | | | (1,123 | ) | | | (1,102 | ) | | | (865 | ) |
| Net income (loss) | | $ | (89,770 | ) | | $ | (141,637 | ) | | $ | (50,532 | ) | | $ | (50,360 | ) | | $ | 4,337 | |
| Basic and diluted net income (loss) per share | | $ | (7.21 | ) | | $ | (11.30 | ) | | $ | (4.01 | ) | | $ | (3.94 | ) | | $ | 0.01 | |
| | | For the Year Ended December 31, | |
| | | | | | | | | | | | | | | | |
| | | (in thousands, except per share data) | |
| Statement of operations data: | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 179,045 | | | $ | 194,731 | | | $ | 189,867 | | | $ | 197,146 | | | $ | 205,271 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues (excluding depreciation and amortization) | | | 66,754 | | | | 72,515 | | | | 63,931 | | | | 68,348 | | | | 69,798 | |
| Selling, general and administrative (1) | | | 88,414 | | | | 90,730 | | | | 94,312 | | | | 90,416 | | | | 92,486 | |
| Provision for doubtful accounts (1) | | | 5,119 | | | | 5,262 | | | | 3,514 | | | | 3,301 | | | | 3,363 | |
| Depreciation and amortization | | | 57,292 | | | | 59,507 | | | | 56,037 | | | | 56,752 | | | | 59,385 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 217,579 | | | | 228,014 | | | | 217,794 | | | | 218,817 | | | | 225,032 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating loss | | | (38,534 | ) | | | (33,283 | ) | | | (27,927 | ) | | | (21,671 | ) | | | (19,761 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 762 | | | | 709 | | | | 1,546 | | | | 1,670 | | | | 728 | |
| Interest expense, net of capitalized interest | | | (15,189 | ) | | | (18,801 | ) | | | (23,970 | ) | | | (29,012 | ) | | | (31,042 | ) |
| Other income (expense) | | | — | | | | 750 | | | | — | | | | (472 | ) | | | 53 | |
| Net gain on sale/disposal of assets | | | 64 | | | | 431 | | | | 2,353 | | | | 76 | | | | 764 | |
| Loss on extinguishment of debt | | | (2,145 | ) | | | — | | | | — | | | | — | | | | — | |
| Goodwill impairment | | | — | | | | (39,576 | ) | | | (93,639 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total other income (expense) | | | (16,508 | ) | | | (56,487 | ) | | | (113,710 | ) | | | (27,738 | ) | | | (29,497 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Loss before income tax expense | | | (55,042 | ) | | | (89,770 | ) | | | (141,637 | ) | | | (49,409 | ) | | | (49,258 | ) |
| Income tax expense | | | — | | | | — | | | | — | | | | (1,123 | ) | | | (1,102 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (55,042 | ) | | $ | (89,770 | ) | | $ | (141,637 | ) | | $ | (50,532 | ) | | $ | (50,360 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted net loss per share | | $ | (4.49 | ) | | $ | (7.21 | ) | | $ | (11.30 | ) | | $ | (4.01 | ) | | $ | (3.94 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Other financial data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities (2) | | $ | 9,957 | | | $ | 14,795 | | | $ | 9,687 | | | $ | 11,741 | | | $ | 13,095 | | |
| Net cash provided by operating activities | | | $ | 14,795 | | | $ | 9,687 | | | $ | 11,741 | | | $ | 13,095 | | | $ | 18,931 | |
| Net cash used in investing activities | | (71,161 | ) | | (28,389 | ) | | (26,387 | ) | | (33,589 | ) | | (28,936 | ) | | | (28,389 | ) | | | (26,387 | ) | | | (33,589 | ) | | | (28,936 | ) | | | (42,227 | ) |
| Net cash provided by (used in) financing activities (2) | | 60,153 | | | (882 | ) | | 33,929 | | | 26,038 | | | (5,309 | ) | |
| Net cash provided by (used in) financing activities | | | | (882 | ) | | | 33,929 | | | | 26,038 | | | | (5,309 | ) | | | (2,776 | ) |
| Cash and cash equivalents, end of year | | 41,195 | | | 26,719 | | | 43,948 | | | 48,138 | | | 26,988 | | | | 26,719 | | | | 43,948 | | | | 48,138 | | | | 26,988 | | | | 916 | |
| | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other operating data: | | | | | | | | | | | | | | | | |
| Other operating data (2): | | | | | | | | | | | | | | | | |
| Marketable homes passed (3) | | | 308,913 | | | | 331,173 | | | | 337,025 | | | | 340,058 | | | | 340,681 | | | | 331,173 | | | | 337,025 | | | | 340,058 | | | | 340,681 | | | | 339,671 | |
| Customers | | | 126,736 | | | | 136,109 | | | | 137,542 | | | | 145,675 | | | | 146,210 | | | | 136,109 | | | | 137,542 | | | | 145,675 | | | | 146,210 | | | | 143,104 | |
| Connections (4): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Video | | | 83,098 | | | | 89,417 | | | | 93,778 | | | | 99,453 | | | | 101,864 | | | | 89,417 | | | | 93,778 | | | | 99,453 | | | | 101,864 | | | | 98,681 | |
| Voice | | | 110,360 | | | | 114,621 | | | | 116,229 | | | | 114,303 | | | | 114,512 | | | | 114,621 | | | | 116,229 | | | | 114,303 | | | | 114,512 | | | | 108,216 | |
| HSD and other | | | 56,184 | | | | 72,104 | | | | 85,117 | | | | 95,125 | | | | 101,502 | | | | 72,104 | | | | 85,117 | | | | 95,125 | | | | 101,502 | | | | 101,544 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total connections | | | 249,642 | | | | 276,142 | | | | 295,124 | | | | 308,881 | | | | 317,878 | | | | 276,142 | | | | 295,124 | | | | 308,881 | | | | 317,878 | | | | 308,441 | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| Selected balance sheet data: | | | | | | | | | | | | | | | |
| Current assets | | $ | 47,926 | | | $ | 63,012 | | | $ | 67,798 | | | $ | 46,125 | | | $ | 988 | |
| Property, plant and equipment, net | | | 297,183 | | | | 271,939 | | | | 249,310 | | | | 223,034 | | | | — | |
| Total assets | | | 450,538 | | | | 345,041 | | | | 326,243 | | | | 277,435 | | | | 23,795 | |
| Current liabilities | | | 41,552 | | | | 42,831 | | | | 48,048 | | | | 49,462 | | | | 15 | |
| Capital lease obligations, net of current portion | | | 14,365 | | | | 16,634 | | | | 13,592 | | | | 13,380 | | | | — | |
| Long term debt, net of current portion | | | 129,056 | | | | 160,797 | | | | 189,994 | | | | 189,629 | | | | — | |
| Stockholders’ equity | | | 260,207 | | | | 118,960 | | | | 69,004 | | | | 19,028 | | | | 23,780 | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| Selected balance sheet data: | | | | | | | | | | | | | | | |
| Current assets | | $ | 84,866 | | | $ | 47,926 | | | $ | 63,012 | | | $ | 67,798 | | | $ | 46,125 | |
| Property, plant and equipment, net | | | 303,536 | | | | 297,183 | | | | 271,939 | | | | 249,310 | | | | 223,034 | |
| Total assets | | | 538,516 | | | | 450,538 | | | | 345,041 | | | | 326,243 | | | | 277,435 | |
| Current liabilities | | | 40,734 | | | | 41,552 | | | | 42,831 | | | | 48,048 | | | | 49,462 | |
| Capital lease obligations, net of current portion | | | 13,940 | | | | 14,365 | | | | 16,634 | | | | 13,592 | | | | 13,380 | |
| Long term debt, net of current portion | | | 128,237 | | | | 129,056 | | | | 160,797 | | | | 189,994 | | | | 189,629 | |
| Stockholders’ equity | | | 349,944 | | | | 260,207 | | | | 118,960 | | | | 69,004 | | | | 19,028 | |
| (1) | The Company has reclassified provision for doubtful accounts for the annual periods ended December 31, 2004, 2005, 2006, and 2007.2007 was reclassified. In prior periods, these amounts were included in the line item selling, general and administrative. |
| (2) | The Company has reclassified the operating and financing portion of the cash flows attributable to negative book cash balances related to our zero-balance accounts for the annual period ended December 31, 2004. In prior periods, these cash flows were reported within the change in accounts payable in cash flows from operating activities, and have been reclassified to cash flows from financing activities. The effect on cash flows from operating activities was $0.8 millionInformation presented for the year ended December 31, 2004. This revision did not have any affect on2009 is as of September 13, 2009, the Company’s cash balances, compliance with debt covenants, working capital, or operations.final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement. |
| (3) | Marketable homes passed arewere the number of residential and business units, such as single residence homes, apartments and condominium units, passed by our networks. |
| (4) | Because we deliverdelivered multiple services to our customers, we reportreported the total number of connections for video, voice and HSD service in addition to the total number of customers. We countcounted each video, voice and HSD service purchase as a separate connection. For example, a single customer who purchasespurchased video, voice and HSD services would count as three connections. We dodid not record the purchase of long distance telephone service by a local telephone customer or the purchase of digital cable services by an analog cable customer as additional connections. However, we dodid record each purchase of an additional telephone line by a local telephone customer as an additional connection. More detailed information is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Marketable Homes Passed, Customers and Connections.” |
Non-GAAP Financial Measures
We use EBITDA and Adjusted EBITDA to measure our operating performance on net income (loss), the most directly comparable GAAP financial measure, before interest income, interest expense, income taxes, franchise taxes, depreciation and amortization, referred to as “EBITDA.” Adjusted EBITDA is equal to EBITDA plus non-cash compensation expense, other expense (income), loss on extinguishment of debt and goodwill impairment. EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We believe EBITDA and Adjusted EBITDA are a useful measure of a company’s operating performance and is a significant basis used by our management to measure the operating performance of our business.
Because we have funded the build-out of our networks by raising and expending large amounts of capital, our results of operations reflect significant charges for depreciation, amortization, and interest expense. EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues of our businesses. EBITDA is frequently used as a basis for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not purport to represent operating loss or cash flow from operating activities, as those terms are defined under GAAP, and should not be considered as an alternative to those measurements as an indicator of our performance.
| | | For the Year Ended December 31, | |
| | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| Reconciliation of EBITDA/Adjusted EBITDA: | | | | | | | | | | | | | | | |
| Net loss, as reported | | $ | (55,042 | ) | | $ | (89,770 | ) | | $ | (141,637 | ) | | $ | (50,532 | ) | | $ | (50,360 | ) |
| Add back non-EBITDA/Adjusted EBITDA items included in net loss: | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | (762 | ) | | | (709 | ) | | | (1,546 | ) | | | (1,670 | ) | | | (728 | ) |
| Interest expense, net of capitalized interest | | | 15,189 | | | | 18,801 | | | | 23,970 | | | | 29,012 | | | | 31,042 | |
| Income tax expense | | | — | | | | — | | | | — | | | | 1,123 | | | | 1,102 | |
| Franchise tax expense (benefit) | | | 221 | | | | 125 | | | | 300 | | | | (268 | ) | | | — | |
| Depreciation and amortization | | | 57,292 | | | | 59,507 | | | | 56,037 | | | | 56,752 | | | | 59,385 | |
| | | | | | | | | | | | | | | | | | | | | |
| EBITDA | | | 16,898 | | | | (12,046 | ) | | | (62,876 | ) | | | 34,417 | | | | 40,441 | |
| Stock based compensation expense | | | — | | | | — | | | | 377 | | | | 573 | | | | 378 | |
| Other expense (income) | | | — | | | | — | | | | — | | | | 489 | | | | (53 | ) |
| Loss on extinguishment of debt | | | 2,145 | | | | — | | | | — | | | | — | | | | — | |
| Goodwill impairment | | | — | | | | 39,576 | | | | 93,639 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | 19,043 | | | $ | 27,530 | | | $ | 31,140 | | | $ | 35,479 | | | $ | 40,766 | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a discussion of our consolidated financial condition and results of operations for the years ended December 31, 2006, 2007, 2008, and 20082009 and other factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read together with our consolidated financial statements and related notes beginning on page F-1 of this annual report on Form 10-K. As a result of the closing of the recapitalization transaction, as of September 14, 2009, Holdings does not have any operations or material assets other than the ownership of its 24.7% common equity interest in Ultimate Parent, through its wholly-owned subsidiary Rio GP and only has two persons serving as officers, Michael L. Wilfley and Walter K.L. “Scott” Ferguson, Jr., and no employees. The discussion in t his Management Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated operations through September 13, 2009, transactions on September 14, 2009 as a result of the closing of the recapitalization transactions, Holdings’ equity in earnings (loss), through Rio GP, of the minority interest in Ultimate Parent, and general expenses subsequent to September 14, 2009.
Overview
Grande’sOn September 14, 2009, we closed the transactions contemplated by that certain Recapitalization Agreement. Refer to Part I Item 1—Business for a detail of the transactions completed pursuant to the terms of the Recapitalization Agreement.
On September 17, 2009, Grande Communications Holdings, Inc. merged with and into its wholly-owned subsidiary, Rio Holdings, Inc., a Nevada corporation, for the purpose of changing Holdings’ state of incorporation from Delaware to Nevada. The Reincorporation was accomplished pursuant to an Agreement and Plan of Merger, dated September 2, 2009, which was approved by the requisite Grande Communications Holdings, Inc. stockholders by written consent. The Reincorporation did result in the change of name of Grande Communication Holdings, Inc. to Rio Holdings, Inc. The Reincorporation did not result in any further change in the business, management, fiscal year, office locations, assets, liabilities, or employees of Holdings beyond those that resulted from the recapitalization transactions.
All of the outstanding Holdings senior notes have been redeemed or repurchased and the indenture that governed the terms of the Holdings senior notes was discharged. As a result of these transactions, we recognized a $7.1 million loss on early extinguishment of the Holdings senior notes.
All of the outstanding shares of common stock and preferred stock of Holdings continue to remain outstanding. As a result of the closing of the recapitalization transaction, Holdings does not have any operations or material assets other than the ownership of its general partner interest of Ultimate Parent, through its wholly-owned subsidiary, Rio GP. Further, Holdings only has two persons serving as officers, Michael L. Wilfley and Walter K.L. “Scott” Ferguson, Jr., and no employees.
In connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, after October 9, 2009, we had no outstanding options to purchase any equity of Holdings.
In January 2010, Holdings filed a Form 15 with the SEC to suspend its reporting obligations under the Exchange Act. As a result of filing the Form 15, Holdings’ obligation to file certain reports and forms including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K has been suspended. We expect that this Annual Report on Form 10-K for the year ended December 31, 2009 will be the last filing made by Holdings under the Exchange Act.
Prior to the closing of the recapitalization transaction on September 14, 2009, the primary business isof Holdings and its then consolidated subsidiary, Grande Operating was providing a bundled package of video, voice, and HSD and other services to residential and business customers in Texas. We provideprovided these services in seven markets in the state of Texas using local broadband networks that we acquired and/or constructed. We referreferred to the homes and businesses that our network iswas capable of providing services to as “marketable homes passed”. We believe that an important measure of our growth potential is the number of marketable homes passed by our networks and the marketable homes we are able to pass in the future in the markets in which we currently operate.passed.” Marketable homes passed arewere the number of residential and business units, such as single residential homes, apartment units and condominium units, passed by our networks. Since 2001, we havehad grown our marketable homes passed through acquisitions and the construction of our networks. The expansion of our networks has,had, in turn, allowed us to pursue a retail strategy of offering bundled video, voice and HSD services to residential and business customers. As of December 31, 2007 and 2008, we had the ability to market services to 340,058 and 340,681, respectively, distinct homes and businesses over our networks and had 145,675 and 146,210, respectively, residential and business customers. Our operating revenues were $189.9 million, $197.1 million and $205.3 million in 2006, 2007 and 2008, respectively.
GrandeHoldings was founded in November 1999 to pursue a retail strategy of constructing broadband networks in order to offer bundled video, voice, and HSD services to customers. Operating revenues from bundled services were $146.1 million, $155.0 million and $168.4 million in 2006, 2007 and 2008, respectively. We have continued to grow our bundled services to commercial business customers, which totaled $16.3 million, $19.6 million and $24.2 million during 2006, 2007 and 2008, respectively, and increase of 20% during 2007 and 23% during 2008.
We have derived an increasing percentage of our revenues from our bundled services and we expect this trend to continue. Because of our local networks and existing fixed infrastructure, we believe we can continue to grow our business within the markets in which we currently operate.
In addition, we havehad leveraged our retail metro network build-out with the 2003 acquisition of a long haul fiber optic network to allowwhich allowed us to provide broadband transport services to medium and large enterprises and communications carriers. Operating revenues for broadband transport services were $8.6 million, $9.4 million and $12.3 million in 2006, 2007 and 2008, respectively.
In July 2000, when our network construction was still in a very early stage, we acquired substantially all of the assets of Thrifty Call, which had an established telephone and data network that served as the platform for the provisioning of residential voice and HSD services and iswas also the platform that providesprovided wholesale network services to medium and large enterprises and communications carriers in the wholesale market. Operating revenues for network services were $35.2 million, $32.7 million and $24.6 million in 2006, 2007 and 2008, respectively.
31
Our network services are primarily provided using our existing infrastructure and personnel. By leveraging our brand, communications infrastructure, voice and data volume, and personnel that predominantly support our core retail business and its products, we have gained efficiencies
On January 18, 2008, we issued a press release announcing that our board of directors has authorized the Company to explore all of its strategic alternatives to enhance stockholder value. The board of directors will work with the Company’s management team and its legal and financial advisors to evaluate the Company’s available alternatives. We have engaged Waller Capital Partners LLC to assist us in exploring strategic alternatives. There can be no assurance that the exploration of strategic alternatives will result in the Company adopting or approving any strategic alternative. We undertake no obligation to make any further announcements regarding the exploration of strategic alternatives unless and until a final decision is made.
We have incurred net losses for the past five years and, now that we have no operations, expect to continue to incur net losses in the future.
The recapitalization transactions, which closed on September 14, 2009, included the conversion of Grande Operating from a corporation to a limited liability company. Such conversion should be treated for federal income tax purposes as a liquidation of Grande Operating. Grande Operating should generally be deemed for federal income tax purposes to have distributed its assets on the liquidation in the following order: (1) to creditors in satisfaction of indebtedness, and (2) to its sole shareholder. However, we had positive Adjusted EBITDA duringon the past five years. See “Non-GAAP Financial Measures”date of such liquidation, Grande Operating was indebted to Holdings in an amount exceeding the highest estimate of the net fair market value of the assets of Grande Operating. Since the net fair market value of the assets of Grande Operating was less than the outstanding debt of Grande Operating to Holdings, there were no assets remaining for distribution in exchange for the stock of Grande Operating after satisfying such debt.
Grande Operating should recognize gain or loss on the deemed transfer of its assets to Holdings in partial satisfaction of the intercompany debt. The net fair market value of the assets of Grande Operating was not sufficient to satisfy its intercompany debt to Holdings. Accordingly, to the extent that the amount of such debt exceeds the net fair market value of the assets received by Holdings on the liquidation, Grande Operating should recognize cancellation of indebtedness income equal to such amount and Holdings should recognize an offsetting bad debt deduction for the same amount. Since Holdings did not receive any payment for its stock in Grande Operating, Holdings should not succeed to or take into account the consolidated net operating losses attributable to Grande Operating. Holdings, ho wever, should recognize a substantial worthless stock ordinary loss deduction for its stock in Grande Operating, which may be available to offset future income of Holdings.
The recapitalization transactions included the contribution by Holdings of all the outstanding membership interests of Grande Operating to Ultimate Parent in return for general partnership interests of Ultimate Parent. Prior to such contribution, but after the conversion discussed above, Grande Operating should be treated as a disregarded entity for federal income tax purposes. In this situation, the contribution of membership interests by Holdings should be treated as if Holdings contributed all of the assets of Grande Operating to Ultimate Parent in exchange for a discussionpartnership interest in Ultimate Parent. Holdings should not recognize any gain or loss on such deemed contribution, and Holdings’ federal income tax basis in the partnership interest in Ultimate Parent should include its basis in the as sets deemed contributed to Ultimate Parent. Alternatively, although less probable, the transfer by Holdings of all of the outstanding membership interests in Grande Operating to Parent could potentially be treated as if Holdings sold an approximate 75.3% interest in each of the assets of Grande Operating to Grande Manager and, immediately thereafter, Holdings and Grande Manager contributed their respective undivided interests in the assets of Grande Operating to Ultimate Parent in exchange for partnership interests in Ultimate Parent. Under this non-GAAP measureview, (1) the deemed sale by Holdings to Grande Manager should result in a recognition event for federal income tax purposes and Holdings should recognize gain or loss, if any, from such deemed sale; (2) Holdings should not recognize any gain or loss upon the post-sale contribution of our operating performance as well as our use of Adjusted EBITDA.
Our financial results depend upon many factors that significantly affect our results of operations including, without limitation:
general economic conditions, includingits undivided interest in the availability of,assets to Ultimate Parent; and our ability to obtain additional funding, if necessary,
our ability to obtain and retain enough customers for our services to offset(3) Holdings’ basis in the costs of operating our networks,
our ability to compete effectively depends on our ability to keep pace with advancespartnership interest in technology and maintain high-quality services at prices generallyUltimate Parent should be equal to or below those chargedHoldings&# 8217; basis in Holdings’ approximate 24.7% share of the assets that are deemed contributed by our competitors, andHoldings to Ultimate Parent.
increasing programming and other costs.
Availability of Capital
As described more fully under “Liquidity and Capital Resources” below, we expect that current principal sources of capital going forward will primarily be cash on hand and cash flow from operations. If we do not continue to increase the number of customers and the average prices received for our services, cash flow from operations may be adversely effected and cash on hand may decline. If our cash position falls below the $20 million required by the covenant set forth in the Indenture, we will be prohibited from making certain capital expenditures. Cash and cash equivalents at December 31, 2008 was approximately $27.0 million. Provided that we meet our cash flow projections in our current business plan and current economic market conditions do not continue to deteriorate as described under Part I, Item 1A. “Risk Factors” above, we expect that our available cash and cash equivalents and cash generated from operations will be sufficient to fund our existing operations, planned capital spending and other commitments over the next twelve months through December 31, 2009.
Marketable Homes Passed, Customers and Connections
We reportreported marketable homes passed as the number of residential and business units, such as single family residence homes, apartments and condominium units, passed by our networks. As of December 31, 20072008 and 2008,September 13, 2009 (the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement), we had the ability to market services to 340,058340,681 and 340,681,339,671, respectively, distinct homes and businesses over our networks and had 145,675146,210 and 146,210,143,104, respectively, residential and business customers.
Because we deliverdelivered multiple services to our customers, we reportreported our total number of connections for video, voice, HSD and other services in addition to our total number of customers. We countcounted each video, voice, HSD and other service purchase as a separate connection. For example, a single customer who purchasespurchased video, voice and HSD service would count as three connections. Similarly, a single customer who purchasespurchased our HSD service and our voice service would count as two connections. We dodid not record the purchase of long distance telephone service by a local telephone customer or digital cable services by an analog cable customer as additional connections. However, we dodid record each purchase of an additional telephone line by a local telephone customer as an additional connection. As of December 31, 20072008 and 2008,September 13, 2009 ( the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement), we had 308,881317,878 and 317,878308,441 connections, respectively.
Competition
The broadband communications industry is highly competitive. We compete primarily on the basis of the price, availability, reliability, variety, quality of our offerings, our employees, and on the quality of our customer service. Our ability to compete effectively depends on our ability to maintain high-quality services at prices generally equal to or below those charged by our competitors. Price competition in the retail services and broadband transport services markets generally has been intense and is expected to continue, although cable rates increase annually. The continuing trend toward business combinations and alliances in the telecommunications industry will create significant new competitors. As a result of these business combinations and the introduction of VoIP offerings, we anticipate that the competitive environment will continue to intensify. In addition to terrestrial competition, we continue to see consumers choose to eliminate a second line, their long distance, and/or their primary landline and use wireless telephone service instead. This dynamic is more prevalent in younger, more transient households such as MDUs in which students or young adults tend to move every twelve to eighteen months. Advances in technology also are leading to changes in video distribution platforms, making downloadable, on-demand video content accessible in both traditional wireline and wireless mobile viewing devices. These and other developments are requiring traditional communications providers such as us to regularly rethink the model for successfully marketing and providing video, voice and HSD content and services to consumers.
Operating Revenues
We derivePrior to the transactions contemplated by the Recapitalization Agreement, we derived our operating revenues primarily from monthly charges for the provision of video, voice, HSD and other services to residential and business customers. In addition, we derivederived operating revenues by providing broadband transport services to medium and large enterprises and communications carriers as well as providing network services by offering telecommunications and HSD products to medium and large enterprises and communications carriers within wholesale markets. These services arewere a single business provided over a unified network. However, since our different products and services generally involveinvolved different types of charges and in some cases different billing methods, we have presented information on our revenues from each major product line.
Bundled services revenues—video, voice, HSD and other. We typically provideprovided video, voice, HSD and other services on a bundled basis for fixed monthly fees billed in advance, with the amount of the monthly fee varying significantly depending upon the particular bundle of services provided. We also chargecharged usage-based fees for additional services, such as pay-per-view movies that involveinvolved a charge for each viewing and long-distance services that involveinvolved charges by the number of minutes of use. We generally billbilled for these usage-based services monthly in arrears. We also generategenerated revenues from one-time charges for the installation of premises equipment. Most of our bundled offerings includeincluded fees for equipment rental, although in some instances we sellsold modems to customers. RevenueR evenue generated from equipment sales iswas an insignificant portion of our total revenues. We also chargecharged monthly or one-time fees for additional services, including advertising. We collectcollected from our cable customers and includeincluded in our gross revenues the fees payable to cable franchise authorities, which arewere usually approximately 5% of our revenues from cable subscriptions. We began offering security services as part of our bundle in June 2004. We discontinued actively marketing our security services in 2006. However, we continued to provide service to our existing customer base. The security revenue is included in HSD and other.
Broadband transport services revenues. Our revenues from broadband transport services, which consistconsisted of access to our metro area networks and point-to-point circuits on our long-haul fiber network, involveinvolved fixed monthly fees billed in advance, where the amount charged variesvaried with the amount of capacity, type of service and whether any customized capacity or services arewere provided. Our revenues also includeincluded non-recurring charges for construction, installation and configuration services, which can rangeranged significantly depending upon the customer’s needs.
Network services revenues. Our revenues from network services consistconsisted primarily of revenues from switched carrier services and managed modem services. We billbilled for most of our network services monthly in arrears based on actual usage. However, some network services, particularly our managed modem services, involveinvolved fixed monthly charges billed in advance. Some network services includeincluded non-recurring fees for installation or other work needed to connect the customer to our networks. There arewere monthly charges or negotiated fees for other services such as VoIP terminations, directory assistance, web hosting, database, collocation, and technical support.
Subsequent to the transactions contemplated by the Recapitalization Agreement, Holdings had no operating revenues.
Costs and Expenses
Cost of Revenues
CostPrior to the transactions contemplated by the Recapitalization Agreement, cost of revenues includesincluded those expenses that arewere directly related to the generation of operating revenues and hashad fixed and variable components, however it does not include depreciation or amortization. Our network supportssupported the products and services that we provideprovided to customers, and due to a common network infrastructure and many of the same resources and personnel being used to generate revenues from the various product and service categories it iswas difficult to determine cost of revenues by product.
Our cost of revenues includeincluded the following:
Video costs. Programming costs historically have been the largest portion of the cost of providing our video services and we expect this trend to continue.services. We have entered into contracts for cable programming through the National Cable Television Cooperative and directly with programming providers to provide programming to be aired on our networks. We paypaid a monthly fee for these programming services based on the average number of subscribers to the program, although some fees arewere adjusted based on the total number of subscribers to the system or the system penetration percentage. Since programming cost is based on numbers of subscribers, it will increase as we add more subscribers. It will also increase to the extent costs per channel increase over time, and may change depending upon the mix of channels we offer in each market from time to time. Our cable costs also includeincluded retransmission fees for local programming and fees payable to cable franchise authorities, which arewere usually approximately 5% of our revenues from cable subscriptions.
Voice costs. Our cost of revenues associated with delivering voice services to residential and business customers consistconsisted primarily of transport costs, which includeincluded amounts for fiber lease maintenance, and also includeincluded access and other fees that we paypaid to other carriers to carry calls outside of our networks. Transport costs arewere largely fixed so long as we dodid not need to procure additional equipment or lease additional capacity. Transport costs are expected to increase when new network facilities need to be obtained. The access fees arewere generally usage-based and, therefore, variable.
HSD and other costs. Our cost of revenues associated with delivering HSD and other services to residential and business customers consistsconsisted primarily of transport costs and fees associated with peering arrangements we havehad with other carriers. Transport costs and peering fees for this service arewere largely fixed as long as we dodid not need to procure additional equipment or lease additional capacity, but transport costs and peering fees may increase when new facilities for connecting to the Internet need to be obtained.capacity. Our security-related costs arewere primarily related to system monitoring with a third-party provider.
Broadband transport services costs. Our cost of revenues associated with delivering broadband traffic consistsconsisted primarily of fixed transport costs, which includeincluded amounts for fiber lease maintenance, and also includeincluded access and other fees that we paypaid to other carriers to carry traffic outside of our networks. These costs arewere mostly fixed in nature. There arewere some variable costs associated with external fiber lease maintenance and with private line services, which cancould have a component that requiresrequired us to pay other carriers for a portion of the private line. Broadband transport services costs also includeincluded non-recurring costs for construction, installation and configuration services, which cancould vary significantly depending upon the customer’s needs.
Network services costs. Our cost of revenues associated with delivering traffic consistsconsisted primarily of transport costs, which includeincluded amounts needed for fiber lease maintenance, and access and other fees that we paypaid to other carriers to carry traffic outside of our networks. These costs arewere primarily fixed with respect to the monitoring of the traffic we carrycarried on our networks, although there arewere variable components associated with external fiber lease maintenance costs and other items. The access and other carrier fees arewere variable and usage-based.
Subsequent to the transactions contemplated by the Recapitalization Agreement, Holdings had no costs of revenues.
Selling, general and administrative expenses
OurPrior to the transactions contemplated by the Recapitalization Agreement, our selling, general and administrative (“SG&A”) expenses includeincluded all of the expenses associated with operating and maintaining our networks that arewere not cost of revenues. These expenses primarily includeincluded employee compensation and departmental costs incurred for network design, monitoring and maintenance. They also includeincluded employee compensation and departmental costs incurred for customer disconnection and reconnection and service personnel, customer service representatives and management and sales and marketing personnel. Other included items arewere advertising expenses, promotional expenses, corporate and subsidiary management, administrative costs, bad debt expense, customer invoice processingproc essing and billing platform expenses, professional fees, property taxes, insurance and facilities costs. Subsequent to the transactions contemplated by the Recapitalization Agreement, our SG&A expenses primarily included professional fees incurred as a result of continuing SEC filing requirements and board of director fees.
Depreciation and amortization
Depreciation and amortization expenses includeincluded depreciation of our broadband networks and equipment and other intangible assets. Subsequent to the transactions contemplated by the Recapitalization Agreement, Holdings had no depreciation and amortization.
Operating Data —Bundled Services
| | | Years Ended December 31, | |
| | | | | | | | | | |
| Marketable homes passed | | | 340,058 | | | | 340,681 | | | | 339,671 | |
| Customers | | | 145,675 | | | | 146,210 | | | | 143,104 | |
| Number of connections: | | | | | | | | | | | | |
| Video | | | 99,453 | | | | 101,864 | | | | 98,681 | |
| Voice | | | 114,303 | | | | 114,512 | | | | 108,216 | |
| HSD and other | | | 95,125 | | | | 101,502 | | | | 101,544 | |
| Total connections | | | 308,881 | | | | 317,878 | | | | 308,441 | |
| Average monthly revenue per: | | | | | | | | | | | | |
| Customer – bundled services | | $ | 90.64 | | | $ | 95.82 | | | $ | 94.05 | |
| Video connection | | | 55.78 | | | | 57.96 | | | | 57.92 | |
| Voice connection | | | 40.34 | | | | 41.02 | | | | 37.93 | |
| HSD and other connection | | | 32.27 | | | | 34.94 | | | | 35.11 | |
| (1) | Information presented for the year ended December 31, 2009 is as of September 13, 2009, the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement and in the case of average monthly revenue, which is for the period from January 1, 2009 through September 13, 2009. |
Operating Data —Bundled Services
| | | Years Ended | |
| | | | |
| | | | | | | | | | |
| Operating Data: | | | | | | | | | |
| Marketable homes passed | | | 337,025 | | | | 340,058 | | | | 340,681 | |
| Customers | | | 137,542 | | | | 145,675 | | | | 146,210 | |
| Number of connections: | | | | | | | | | | | | |
| Video | | | 93,778 | | | | 99,453 | | | | 101,864 | |
| Voice | | | 116,229 | | | | 114,303 | | | | 114,512 | |
| HSD and other | | | 85,117 | | | | 95,125 | | | | 101,502 | |
| | | | | | | | | | | | | |
| Total connections | | | 295,124 | | | | 308,881 | | | | 317,878 | |
| | | | | | | | | | | | | |
| Average monthly revenue per: | | | | | | | | | | | | |
| Customer – bundled services | | $ | 89.00 | | | $ | 90.64 | | | $ | 95.82 | |
| Video connection | | | 52.40 | | | | 55.78 | | | | 57.96 | |
| Voice connection | | | 40.18 | | | | 40.34 | | | | 41.02 | |
| HSD and other connection | | | 31.90 | | | | 32.27 | | | | 34.94 | |
Results of Operations (in millions)
| | | Years Ended December 31, | |
| | | 2006 | | | Percent of Operating Revenues | | | 2007 | | | Percent of Operating Revenues | | | 2006 to 2007 Variance | | | 2008 | | | Percent of Operating Revenues | | | 2007 to 2008 Variance | |
| Consolidated Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Video | | $ | 57.4 | | | | 30 | % | | $ | 64.2 | | | | 32 | % | | $ | 6.8 | | | $ | 70.3 | | | | 34 | % | | $ | 6.1 | |
| Voice | | | 57.6 | | | | 30 | | | | 56.1 | | | | 28 | | | | (1.5 | ) | | | 56.6 | | | | 28 | | | | 0.5 | |
| HSD and other | | | 31.1 | | | | 16 | | | | 34.7 | | | | 18 | | | | 3.6 | | | | 41.5 | | | | 20 | | | | 6.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bundled services | | | 146.1 | | | | 76 | | | | 155.0 | | | | 78 | | | | 8.9 | | | | 168.4 | | | | 82 | | | | 13.4 | |
| Broadband transport services | | | 8.6 | | | | 5 | | | | 9.4 | | | | 5 | | | | 0.8 | | | | 12.3 | | | | 6 | | | | 2.9 | |
| Network services | | | 35.2 | | | | 19 | | | | 32.7 | | | | 17 | | | | (2.5 | ) | | | 24.6 | | | | 12 | | | | (8.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating revenues | | | 189.9 | | | | 100 | | | | 197.1 | | | | 100 | | | | 7.2 | | | | 205.3 | | | | 100 | | | | 8.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues (excluding depreciation and amortization) | | | 63.9 | | | | 34 | | | | 68.3 | | | | 35 | | | | 4.4 | | | | 69.8 | | | | 34 | | | | 1.5 | |
| Selling, general and administrative | | | 94.3 | | | | 50 | | | | 90.4 | | | | 46 | | | | (3.9 | ) | | | 92.5 | | | | 45 | | | | 2.1 | |
| Provision for doubtful accounts | | | 3.5 | | | | 2 | | | | 3.3 | | | | 1 | | | | (0.2 | ) | | | 3.4 | | | | 2 | | | | 0.1 | |
| Depreciation and amortization | | | 56.1 | | | | 29 | | | | 56.8 | | | | 29 | | | | 0.7 | | | | 59.4 | | | | 29 | | | | 2.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 217.8 | | | | 115 | | | | 218.8 | | | | 111 | | | | 1.0 | | | | 225.1 | | | | 110 | | | | 6.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating loss | | | (27.9 | ) | | | (15 | ) | | | (21.7 | ) | | | (11 | ) | | | 6.2 | | | | (19.8 | ) | | | (10 | ) | | | 1.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 1.5 | | | | 1 | | | | 1.7 | | | | 1 | | | | 0.2 | | | | 0.7 | | | | — | | | | (1.0 | ) |
| Interest expense, net of capitalized interest | | | (24.0 | ) | | | (13 | ) | | | (29.0 | ) | | | (15 | ) | | | (5.0 | ) | | | (31.0 | ) | | | (15 | ) | | | (2.0 | ) |
| Other income (expense) | | | — | | | | — | | | | (0.5 | ) | | | — | | | | (0.5 | ) | | | — | | | | — | | | | 0.5 | |
| Net gain on sale/disposal of assets | | | 2.4 | | | | 1 | | | | 0.1 | | | | — | | | | | | | | | | | | | | | | | |
| | | | (2.3 | ) | | | 0.8 | | | | 1 | | | | 0.7 | | | | | | | | | | | | | | | | | |
| Goodwill impairment | | | (93.6 | ) | | | (49 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total other income (expense) | | | (113.7 | ) | | | (60 | ) | | | (27.7 | ) | | | (14 | ) | | | 86.0 | | | | (29.5 | ) | | | (14 | ) | | | (1.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss before income tax expense | | | (141.6 | ) | | | (75 | ) | | | (49.4 | ) | | | (25 | ) | | | 92.2 | | | | (49.3 | ) | | | (24 | ) | | | 0.1 | |
| Income tax expense | | | — | | | | — | | | | (1.1 | ) | | | (1 | ) | | | (1.1 | ) | | | (1.1 | ) | | | (1 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (141.6 | ) | | | (75 | ) % | | $ | (50.5 | ) | | | (26 | )% | | $ | 91.1 | | | $ | (50.4 | ) | | | (25 | ) % | | $ | 0.1 | |
Results of Operations (in millions)
| | | Years Ended December 31, | |
| | | 2007 | | | Percent of Operating Revenues | | | 2008 | | | Percent of Operating Revenues | | | 2007 to 2008 Variance | | | 2009 | | | Percent of Operating Revenues | | | 2008 to 2009 Variance | |
| Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Video | | $ | 64.2 | | | | 32 | % | | $ | 70.3 | | | | 34 | % | | $ | 6.1 | | | $ | 52.3 | | | | 36 | % | | $ | (18.0 | ) |
| Voice | | | 56.1 | | | | 28 | | | | 56.6 | | | | 28 | | | | 0.5 | | | | 38.2 | | | | 27 | | | | (18.4 | ) |
| HSD and other | | | 34.7 | | | | 18 | | | | 41.5 | | | | 20 | | | | 6.8 | | | | 32.2 | | | | 22 | | | | (9.3 | ) |
| Bundled services | | | 155.0 | | | | 78 | | | | 168.4 | | | | 82 | | | | 13.4 | | | | 122.7 | | | | 85 | | | | (45.7 | ) |
| Broadband transport services | | | 9.4 | | | | 5 | | | | 12.3 | | | | 6 | | | | 2.9 | | | | 9.7 | | | | 7 | | | | (2.6 | ) |
| Network services | | | 32.7 | | | | 17 | | | | 24.6 | | | | 12 | | | | (8.1 | ) | | | 11.5 | | | | 8 | | | | (13.1 | ) |
| Total operating revenues | | | 197.1 | | | | 100 | | | | 205.3 | | | | 100 | | | | 8.2 | | | | 143.9 | | | | 100 | | | | (61.4 | ) |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues (excluding depreciation and amortization) | | | 68.3 | | | | 35 | | | | 69.8 | | | | 34 | | | | 1.5 | | | | 49.4 | | | | 34 | | | | (20.4 | ) |
| Selling, general and administrative | | | 90.4 | | | | 46 | | | | 92.5 | | | | 45 | | | | 2.1 | | | | 63.3 | | | | 44 | | | | (29.2 | ) |
| Provision for doubtful accounts | | | 3.3 | | | | 1 | | | | 3.4 | | | | 2 | | | | 0.1 | | | | 2.0 | | | | 1 | | | | (1.4 | ) |
| Depreciation and amortization | | | 56.8 | | | | 29 | | | | 59.4 | | | | 29 | | | | 2.6 | | | | 43.0 | | | | 30 | | | | (16.4 | ) |
| Total operating expenses | | | 218.8 | | | | 111 | | | | 225.1 | | | | 110 | | | | 6.3 | | | | 157.7 | | | | 109 | | | | (67.4 | ) |
| Operating loss | | | (21.7 | ) | | | (11 | ) | | | (19.8 | ) | | | (10 | ) | | | 1.9 | | | | (13.8 | ) | | | (9 | ) | | | 6.0 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain on deconsolidation of Grande Operating | | | — | | | | — | | | | — | | | | — | | | | — | | | | 49.2 | | | | 34 | | | | 49.2 | |
| Net gain on sale/disposal of assets | | | 0.1 | | | | — | | | | 0.8 | | | | 1 | | | | 0.7 | | | | 0.3 | | | | — | | | | (0.5 | ) |
| Interest income | | | 1.7 | | | | 1 | | | | 0.7 | | | | — | | | | (1.0 | ) | | | 0.1 | | | | — | | | | (0.6 | ) |
| Interest expense, net of capitalized interest | | | (29.0 | ) | | | (15 | ) | | | (31.0 | ) | | | (15 | ) | | | (2.0 | ) | | | (22.3 | ) | | | (15 | ) | | | 8.7 | |
| Loss on early extinguishment of debt | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7.1 | ) | | | (5 | ) | | | (7.1 | ) |
| Equity in loss from investee | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1.4 | ) | | | (1 | ) | | | (1.4 | ) |
| Other income (expense) | | | (0.5 | ) | | | — | | | | — | | | | — | | | | 0.5 | | | | 0.2 | | | | — | | | | 0.2 | |
| Total other income (expense) | | | (27.7 | ) | | | (14 | ) | | | (29.5 | ) | | | (14 | ) | | | (1.8 | ) | | | 19.0 | | | | 13 | | | | 48.5 | |
| Income (loss) before income tax expense | | | (49.4 | ) | | | (25 | ) | | | (49.3 | ) | | | (24 | ) | | | 0.1 | | | | 5.2 | | | | 4 | | | | 54.5 | |
| Income tax expense | | | (1.1 | ) | | | (1 | ) | | | (1.1 | ) | | | (1 | ) | | | — | | | | (0.9 | ) | | | (1 | ) | | | 0.2 | |
| Net income (loss) | | $ | (50.5 | ) | | | (26 | )% | | $ | (50.4 | ) | | | (25 | )% | | $ | 0.1 | | | $ | 4.3 | | | | 3 | % | | $ | 54.7 | |
Year Ended December 31, 2008 Compared to Year Ended December 31, 2009
Operating Revenues. Our operating revenues decreased $61.4 million, or 30%, during the year ended December 31, 2009. The decrease was primarily related to a partial year of operations during 2009 which comprises the period from January 1, 2009 through September 13, 2009 (the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement).
Operating revenues for our video services decreased $18.0 million, or 26%, during the year ended December 31, 2009. The decrease is primarily related to a partial year of operations during 2009 as well as a 3% decline in the number of connections, from 101,864 as of December 31, 2008 to 98,681 as of September 13, 2009 (the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement).
Operating revenues for our voice services decreased $18.4 million, or 33%, during the year ended December 31, 2009 due to a partial year of operations during 2009 as well as a 5% decline in the number of connections, from 114,512 as of December 31, 2008 to 108,216 as of September 13, 2009 (the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement).
Operating revenues for our HSD and other services decreased $9.3 million, or 22%, during the year ended December 31, 2009 primarily due to a partial year of operations during 2009 partially offset by a slight increase in the number of connections, from 101,502 as of December 31, 2008 to 101,544 as of September 13, 2009 (the final day of operations prior to the date of closing of the transactions contemplated by the Recapitalization Agreement).
Operating revenues for our broadband transport services decreased $2.6 million, or 21%, during the year ended December 31, 2009 as a result of a partial year of operations during 2009.
Operating revenues for our network services decreased $13.1 million, or 53%, during the year ended December 31, 2009 as a result of a partial year of operations during 2009.
Cost of Revenues. Our cost of revenues decreased $20.4 million, or 29%, during the year ended December 31, 2009 as a result of a partial year of operations during 2009 partially offset by an increase related to an accrual during the second quarter of 2009 for an estimated liability related to the initial audit findings from the Universal Service Administration Company (“USAC”) that administers the Universal Service Fund (“USF”) on behalf of the Federal Communications Commission.
Selling, General and Administrative Expense. Our selling, general and administrative expense decreased $29.2 million, or 32% during the year ended December 31, 2009 as a result of a partial year of operations during 2009. Additionally, during the first quarter of 2009, we implemented a company wide cost reduction initiative, which included a reduction in force and voluntary and involuntary unpaid employee furloughs as well as the suspension of certain elements of our compensation program such as our annual merit increase and matching of 401k contributions applicable to all employees of Grande Communications Networks, Inc. Also included in SG&A expenses are non-recurring expenses incurred in association with the exploration of strategic alternatives and the recapitali zation transactions of $1.7 million and $6.6 million during the years ended December 31, 2008 and 2009, respectively. Subsequent to the transactions contemplated by the Recapitalization Agreement, our SG&A expenses primarily included professional fees incurred as a result of continuing SEC filing requirements and board of director fees.
Depreciation and Amortization Expense. Our depreciation and amortization expense decreased $16.4 million, or 28%, during the year ended December 31, 2009 as a result of a partial year of operations during 2009 as well as decreases in depreciation expense related to sales and dispositions as well as certain assets that became fully depreciated during the year ended December 31, 2009.
Loss on early extinguishment of debt. As discussed above under the caption, Overview, Holdings entered into a note purchase agreement with the Requisite Bondholders and assigned such note purchase agreement to Grande Operating pursuant to which Grande Operating repurchased from these bondholders their Holdings senior notes upon consummation of the recapitalization transactions at a purchase price of 101.5% of the principal amount of such notes, plus accrued and unpaid interest thereon through the purchase date, which is 200 basis points lower than what would have otherwise been required under the redemption provisions of the Indenture. On the closing date of the recapitalization transactions, Holdings issued a mandatory redemption notice to all of the remainin g holders of the Holdings senior notes which were not subject to the note purchase agreement and Grande Operating redeemed such notes, at a purchase price equal to 103.5% of the principal amount of such notes, plus accrued and unpaid interest thereon to the redemption date. As a result of these transactions, we recognized a $7.1 million loss on early extinguishment of the Holdings senior notes. All of the outstanding Holdings senior notes have been redeemed or repurchased and the indenture that governed the terms of the Holdings senior notes was discharged.
Interest Expense. Interest expense, which includes interest incurred net of capitalized interest, decreased $8.7 million, or 28%, during the year ended December 31, 2009 due to a partial year of interest during 2009 resulting from the redemption and repurchase of all of the outstanding Holdings senior notes as discussed above under the caption loss on early extinguishment of debt.
Gain on deconsolidation of Grande Operating. On September 14, 2009 in connection with the closing of the transactions contemplated by the Recapitalization Agreement, we contributed all of the outstanding membership interests of our wholly-owned subsidiary, Grande Operating, to Grande Investment L.P in return for a noncontrolling general partner interest in Grande Investment L.P. representing approximately 24.7% of the common equity of Grande Investment L.P. As a result of the deconsolidation of Grande Operating from such transaction, we recorded a gain of $49.2 million. Such gain was determined based upon the fair value of our acquired 24.7% interest in Grande Investment L.P. and the carrying value of Holding’s investment in Grande Operating as of the date of the t ransactions.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2008
Operating Revenues. Our operating revenues increased $8.2 million, or 4%, during the year ended December 31, 2008. This increase was driven primarily by a $13.4 million and $2.9 million increase in bundled services revenues and broadband transport services revenues, respectively, partially offset by an $8.1 million decrease in revenues from network services.
Operating revenues for our bundled services increased $13.4 million, or 9%, during the year ended December 31, 2008. The increased revenues from bundled services were primarily due to a 3% growth in the number of connections, from 308,881 as of December 31, 2007 to 317,878 as of December 31, 2008, and from the cable rate increases described below. The additional connections and revenues resulted primarily from the continued increase in penetration of existing marketable homes, the growth of our commercial business revenue, and to a lesser extent, sales to new marketable homes built during 2008.
Operating revenues for our video services increased $6.1 million, or 10%, during the year ended December 31, 2008. Approximately 31% of the $6.1 million increase was due to our annual cable rate increase that occurred in January 2008, with the remainder due to increased connections and an increased number of customers adding premium services and advanced services, such as HD and DVR. Video services to our commercial business customers increased 33% to $1.2 million during the year ended December 31, 2008 from $0.9 million during the year ended December 31, 2007.
Operating revenues for our voice services increased $0.5 million, or 1%, during the year ended December 31, 2008 due to a 1% increase in average monthly revenue per telephone connection during 2008. Telephone connections to our residential customers decreased by 785, ending at 103,829 as of December 31, 2008 however, telephone connections to our commercial business customers increased by 994, ending at 10,683 as of December 31, 2008. Our voice services to commercial business customers increased 12% to $15.5 million during the year ended December 31, 2008 from $13.8 million during the year ended December 31, 2007.
Operating revenues for our HSD and other services increased $6.8 million, or 20%, during the year ended December 31, 2008 primarily due to a 9% increase in average monthly revenue per connection as customers chose higher speed service offerings. Operating revenues for our HSD and other services also increased due to a 7% growth in the number of connections, from 95,125 as of December 31, 2007 to 101,502 as of December 31, 2008. HSD and other services to our commercial business customers increased 53% to $7.5 million during the year ended December 31, 2008 from $4.9 million during the year ended December 31, 2007.
Operating revenues for our broadband transport services increased $2.9 million, or 31%, during the year ended December 31, 2008 as a result of an increase in construction revenue as well as moderate customer growth and an increase in volume from existing customers.
Operating revenues for our network services decreased $8.1 million, or 25%, during the year ended December 31, 2008. The decrease was primarily related to a $6.2 million decrease in revenue from transmission services to carriers and other telecommunications companies due to a decrease in volume, partially offset by an increase in rates per minute. Common carrier traffic routed to us for termination is largely dependent on traffic routed to our common carrier customers by their customers. Competitive pricing pressures, business consolidations, and changing consumer preferences for voice services continue to evolve in the markets served by our common carrier customers. If, as a result, our customers’ traffic is reduced, or if their competitors’ costs to terminate or originate traffic are reduced, our traffic will alsoals o likely be reduced. In addition, we’ve also experienced a decrease of $1.7 million in revenue from data services and a decrease of $0.4 million in revenue from national directory assistance service. Decreases in both data services and national directory assistance are the result of a decrease in customer volume. These decreases in network services were partially offset by an increase of $0.2 million in managed services due to an increase in customer volume.
Cost of Revenues. Our cost of revenues increased $1.5 million, or 2%, during the year ended December 31, 2008. Cost of revenues related to video services increased approximately $5.2 million during the year ended December 31, 2008. Other costs supporting broadband transport services, voice services, HSD and other services, and certain network services such as access fees and other fees that we pay to other carriers to carry calls outside our networks and HSD transport costs increased $2.6 million during the year ended December 31, 2008. These increases in costs of revenues were partially offset by decreases in costs associated with transmission services to carriers and other telecommunications companies and national directory assistance fees, which decreased $6.3 million during the year ended December 31, 2008. The increase in direct costs of video services is primarily due to programming costs increases, which havehad been increasing on an aggregate basis due to an increase in connections and on a per connection basis due to an increase in costs per channel. We expect this trend to continue and may not be able to pass these higher costs on to customers because of competitive factors, which could adversely affect our operations. The decrease or increase in access and other carrier fees related to costs that are variable usage-based costs that decrease or increase as customer usage varies.
Selling, General and Administrative Expense. Our selling, general and administrative expense increased $2.1 million, or 2% during the year ended December 31, 2008. Included in selling, general and administrative expenses during the year ended December 31, 2008 are non-recurring expenses of $1.7 million incurred in association with the exploration of strategic alternatives to enhance stockholder value. Other increases in selling, general and administrative expense during the year ended December 31, 2008 related to a reduction in the amount of indirect overhead costs capitalized to initial customer installations and internal construction projects, increases in employee and affiliate commissions related to revenue initiatives, employee health care costs, utilities and utilityutili ty pole rentals, software licensing and maintenance fees and other miscellaneous expenses that totaled approximately $4.9 million. These increases in selling, general and administrative expense were partially offset by decreases in employee compensation, legal and other professional services, excluding the strategic exploration costs discussed above, network repairs and maintenance, temporary labor costs, share based compensation and other miscellaneous expenses that totaled approximately $4.5 million.
During the year ending December 31, 2009, we expect our selling, general and administrative expense, excluding the strategic exploration costs discussed above, to decrease as a percentage of revenue as compared to the year ended December 31, 2008 as we continue to focus on cost reductions.
Depreciation and Amortization Expense. Our depreciation and amortization expense increased $2.6 million, or 5%, during the year ended December 31, 2008. The increase in depreciation expense was primarily related to property, plant and equipment additions, primarily for customer premise equipment, long haul fiber optic network upgrades and capitalized labor expenses as well as an extension to capital lease terms. Partially offsetting the increases related to these additions were decreases in depreciation expense related to sales and dispositions as well as certain assets that became fully depreciated during the year ended December 31, 2008.
During 2007 and 2008, we received sales tax refunds as a result of a review of vendor invoices in the years 2004, 2005 and 2006. Because a portion of the sales taxes associated with those invoices were capitalized as property and equipment and were partially depreciated, $0.7 million and $0.2 million of the refund was applied as a reduction of depreciation expense during 2007 and 2008, respectively.
Interest Expense. Interest expense, which includes interest incurred net of capitalized interest, increased $2.0 million, or 7%, during the year ended December 31, 2008. Our interest expense increased primarily due to the private placement of an additional $25.0 million of Holdings senior notes in the third quarter of 2007.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2007
Operating Revenues. Our operating revenues increased $7.2 million, or 4%, during the year ended December 31, 2007. This increase was driven primarily by a $8.9 million and $0.9 million increase in bundled services revenues and broadband transport services revenues, respectively, partially offset by a $2.5 million decrease in revenues from network services.
Operating revenues for our bundled services increased $8.9 million, or 6%, during the year ended December 31, 2007. The increased revenues from bundled services were primarily due to a 5% growth in the number of connections, from 295,124 as of December 31, 2006 to 308,881 as of December 31, 2007, and, to a lesser extent, from the cable rate increases described below. The additional connections and revenues resulted primarily from the continued increase in penetration of existing marketable homes, the growth of our commercial business revenue, and to a lesser extent, sales to new marketable homes built during 2007.
Operating revenues for our video services increased $6.8 million, or 12%, during the year ended December 31, 2007. Approximately 59% of the $6.8 million increase was due to our annual cable rate increase that occurred in January 2007, with the remainder due to increased connections and an increased number of customers adding premium services and advanced services, such as HD and DVR.
Operating revenues for our voice services decreased $1.5 million, or 3%, during the year ended December 31, 2007 due to a 2% decrease in average monthly revenue per telephone connection during 2007 compared to 2006 coupled with a 2% decrease in the number of connections during 2007 compared to 2006. Telephone connections decreased due to competitive pressures and changing consumer preferences, as more customers choose to adopt VoIP products or use their wireless phones as their primary phone line.
Operating revenues for our HSD and other services increased $3.6 million, or 12%, during the year ended December 31, 2007 primarily due to a 12% increase in connections related to residential high speed service and business Ethernet service.
Operating revenues for our broadband transport services increased $0.8 million, or 9%, during the year ended December 31, 2007 as a result of an increase in construction as well as moderate customer growth.
Operating revenues for our network services decreased $2.5 million, or 7%, during the year ended December 31, 2007. This decrease consisted of a $1.3 million decrease in revenues from data services as the result of a $0.9 million decrease in reciprocal compensation revenue partially due to a regulatory mandated reduction in such compensation as well as a decrease in volume from customers. In addition, there was a $0.8 million and $0.6 million decrease in revenues from national directory assistance service and carrier switched services, respectively, due to decreases in customer volume.
Cost of Revenues. Our cost of revenues increased $4.4 million, or 7%, during the year ended December 31, 2007. Cost of revenues as a percentage of revenues increased from 34% of revenues in 2006 to 35% of revenues in 2007. The increase in our cost of revenues was primarily due to an increase in bundled services video costs of approximately $5.8 million and an increase of $0.1 million in wholesale and bundled services voice and HSD costs that was partially offset by a $1.4 million decrease in other wholesale services costs.
Selling, General and Administrative Expense. Our selling, general and administrative expense decreased $4.1 million, or 4%, during the year ended December 31, 2007. Selling, general and administrative expense decreased as a percentage of revenues from 52% to 47%. Decreases in property tax, a 2006 nonrecurring early termination expense related to a property lease, reductions in contract labor charges as sales and customer service positions were brought in-house, as well as decreases in legal fees, provision for doubtful accounts, employee relocation, utilities and other administrative expenses totaled approximately $6.4 million, but such decreases were partially offset by increases related to compensation and employee benefits primarily related to the new sales and customer service positions described above, stock based compensation, and other miscellaneous expenses that totaled approximately $2.3 million.
Depreciation and Amortization Expense. Our depreciation and amortization expense increased $0.7 million, or 1%, during the year ended December 31, 2007. The increase in depreciation expense was primarily related to property, plant and equipment additions during the year ended December 31, 2007, primarily for customer premise equipment, network construction and capitalized labor expenses. During both 2006 and 2007, we received sales tax refunds as a result of a review of vendor invoices in the years 2004 and 2005. Because a portion of the sales taxes associated with those invoices were capitalized as property and equipment and were partially depreciated, $0.9 million and $0.7 million of the refund was applied as a reduction of depreciation expense during 2006 and 2007, respectively. The increases in depreciation expense were partially offset by a decrease in depreciation expense related to sales and dispositions as well as certain assets that became fully depreciated during the year ended December 31, 2007.
Interest Expense. Our interest expense, which includes interest incurred net of capitalized interest, increased $5.0 million, or 21%, during the year ended December 31, 2007. The increase in interest expense was primarily due to the private placement of an additional $25.0 million of senior notes in the third quarter of 2007. During the years ended December 31, 2006 and 2007, we had capitalized interest of $2.2 million and $0.6 million, respectively, a decrease of $1.6 million, or 73%.
Gain on Sale/Disposal of Assets. Our gain on sale/disposal of assets during the years ended December 31, 2006 and 2007 was $2.4 million and $0.1 million, respectively, a decrease of $2.3 million. The 2006 net gain was primarily due to the sale of certain off-net MDU assets during the first half of 2006 for net proceeds of $2.5 million. These assets were non-strategic in nature and were originally acquired in our October 2003 acquisition of Advantex. The net gain recognized during 2007 related primarily to amortization of deferred gains related to the sale and leaseback of Company land and buildings and customer premise equipment of approximately $0.4 million partially offset by the net loss on sale or disposal of certain communications plant, vehicles, network and other equipment.
Goodwill impairment. We performed our annual process to test the carrying value of goodwill as of October 1, 2005 and 2006 on our wholesale and retail reporting units, as determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142—Goodwill and Other Intangible Assets (“SFAS 142”). In 2006, the goodwill impairment test resulted in an impairment of $93.6 million, the entire amount of goodwill associated with the retail reporting unit. The retail reporting unit primarily included the assets, including a portion of the goodwill from the Thrifty Call acquisition and all of the goodwill associated with the ClearSource merger, liabilities and cash flows from bundled services and our broadband transport services. During 2006, management set projections in line with the current competitive environment and our liquidity position resulting in a downward revision to the future cash flow projections and a lower fair value of the retail reporting unit.
Income tax Expense. For the year ended December 31, 2007, our income tax expense was $1.1 million. Effective January 1, 2007, the state of Texas changed its method of taxation from a franchise tax, which was based on taxable capital, to a tax based on gross margin. This change resulted in a different financial statement presentation of the tax to the state of Texas. Prior to January 1, 2007, the Texas franchise tax expense was included as a component of selling, general and administrative expense in the accompanying condensed consolidated statements of operations. The gross margin tax is presented as income tax expense during the year ended December 31, 2007.
Non-GAAP Financial Measures
Adjusted EBITDA increased $5.3 million, or 15%, during the year ended December 31, 2008. The increase in Adjusted EBITDA was primarily due to a $8.2 million increase in operating revenues as well as a $0.7 million increase in net gain on sale/disposal of assets, partially offset by $1.7 million of non-recurring expenses incurred in association with the exploration of strategic alternatives to enhance stockholder value, a $0.2 million increase in selling, general and administrative expenses and provision for doubtful accounts, excluding stock-based compensation, franchise tax and strategic exploration costs, and a $1.5 million increase in costs of revenues.
Adjusted EBITDA increased $4.4 million, or 14% during the year ended December 31, 2007. The increase was primarily due to a $7.3 million increase in revenues as well as a $3.8 million decrease in selling, general and administrative expenses and provision for doubtful accounts, excluding stock-based compensation and franchise tax expense, partially offset by a $4.4 million increase in costs of revenues and a $2.3 million decrease in net gain on sale/disposal of assets.
The reconciliation of EBITDA/Adjusted EBITDA to net loss is as follows:
| | | | |
| | | | | | | | | | |
| | | (in thousands) | |
| Net loss, as reported | | $ | (141,637 | ) | | $ | (50,532 | ) | | $ | (50,360 | ) |
| Add back non-EBITDA/Adjusted EBITDA items included in net loss: | | | | | | | | | | | | |
| Interest income | | | (1,546 | ) | | | (1,670 | ) | | | (728 | ) |
| Interest expense, net of capitalized interest | | | 23,970 | | | | 29,012 | | | | 31,042 | |
| Income tax expense | | | — | | | | 1,123 | | | | 1,102 | |
| Franchise tax expense (benefit) | | | 300 | | | | (268 | ) | | | — | |
| Depreciation and amortization | | | 56,037 | | | | 56,752 | | | | 59,385 | |
| | | | | | | | | | | | | |
| EBITDA | | | (62,876 | ) | | | 34,417 | | | | 40,441 | |
| Stock-based compensation expense | | | 377 | | | | 573 | | | | 378 | |
| Other expense (income) | | | — | | | | 489 | | | | (53 | ) |
| Goodwill impairment | | | 93,639 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Adjusted EBITDA (1) | | $ | 31,140 | | | $ | 35,479 | | | $ | 40,766 | |
(1) | Adjusted EBITDA includes net gain on sale/disposal of assets of $2.4 million in 2006, $0.1 million in 2007 and $0.8 million in 2008. |
Liquidity and Capital Resources
Sources and Uses of Funds
Since inception, we havehad been funded primarily with private equity investments, and issuance of debt securities.securities and cash provided by operating activities. Our current primary sourcessource of liquidity areis cash on hand andas we will not have any future cash flows from operating activities. As of December 31, 2008,2009, we had total cash and cash equivalents of $27$0.9 million and $209 million ofno long-term debt and capital lease obligations outstanding, including the current portion, and net of discounts and premiums of $3.7 million.
Provided that we meet our cash flow projections in our current business plan and current economic market conditions do not continue to deteriorate as described under Part I, Item 1A. “Risk Factors” above, we expect that our available cash and cash equivalents and cash generated from operations will be sufficient to fund our existing operations, planned capital spending and other commitments over the next twelve months through December 31, 2009. As of December 31, 2008, we had a net working capital deficit of $(3.3) million, compared to net working capital of $19.8 million as of December 31, 2007. The $23.1 million decrease in working capital resulted primarily from a $21.2 million decrease in cash. During the third quarter of 2007, we received gross proceeds of $26 million in a private placement of senior notes, which was used for capital expenditures and converted into long-term assets. We believe that we will manage our cash position above $20 million in accordance with the covenant set forth in the Indenture over the next twelve months through December 31, 2009.
As described under “Contractual Obligations and Commercial Commitments” below, the Indenture contains a covenant restricting certain capital expenditures if such expenditures would result in us having less than $20 million in cash and cash equivalents after giving effect to such expenditures. If our cash and cash equivalents fall below $20 million, we would not be permitted to make certain capital expenditures until such time as our cash and cash equivalents, including such proposed certain capital expenditures, increase above $20 million. If we made certain capital expenditures that would cause our cash and cash equivalents to fall below $20 million, we would be required to notify the Trustee of such default. If we receive notification from the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding senior notes, we would have 60 days to comply with the covenant. If after 60 days, we have not complied with the covenant, the senior notes may be declared due and payable immediately by notice from the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding senior notes. This covenant could adversely affect our ability to make planned capital expenditures.obligations.
Our current business plan is based onSubject to the risk factors set forth under Part I Item 1A—Risk Factors, we expect that our available cash and cash equivalents will be sufficient to fund our expenses over the next twelve months through December 31, 2010 assuming our estimates regarding expected future costs and expected revenues.is accurate. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds, which would require us to consider asset sales or seek additional financing to fund our operations, to undertake initiatives not contemplated by our business plan or obtain additional cushion against possible shortfalls. Future financings may include a range of different sizes or types of financing, including capital lease transactions and the sale of additional debt or equity securities. These financings could increase our level of indebtedness or result in dilution to our equity holders. Additionally, we can call our existing senior notes at any time giving us the near term ability to refinance our senior notes in the event better pricing and terms were available to us in the market.funds. However, we may not be able to raise additional funds on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions and the state of the credit markets; our success or lack of success in penetrating our markets and growing our overall income; our future creditworthiness; and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the Indenture.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $9.7 million, $11.7 million and $13.1 million for 2006, 2007 and 2008, respectively. Net cash provided by operating activities consisted of the following components:
| | | | | |
| | | | | | | |
| | | 2006 | | | 2007 | | | 2008 | | | | | | | | | | |
| | | (in thousands) | | | (in thousands) | |
| Cash collected from customers | | $ | 188,416 | | | $ | 193,449 | | | $ | 204,003 | | | $ | 193,449 | | | $ | 204,003 | | | $ | 142,273 | |
| Interest income received | | 1,546 | | | 1,631 | | | 691 | | | | 1,631 | | | | 691 | | | | 50 | |
| Other income received | | | | — | | | | — | | | | 241 | |
| Proceeds from sales tax refunds related to operating activities | | | — | | | 143 | | | 627 | | | | 143 | | | | 627 | | | | — | |
| Payments to vendors and employees | | (159,534 | ) | | (157,607 | ) | | (162,426 | ) | | | (157,607 | ) | | | (162,426 | ) | | | (107,727 | ) |
| Interest expense paid | | (20,741 | ) | | (25,875 | ) | | (28,701 | ) | | | (25,875 | ) | | | (28,701 | ) | | | (15,010 | ) |
| Income taxes paid | | | — | | | | — | | | | (1,099 | ) | | | — | | | | (1,099 | ) | | | (896 | ) |
| | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 9,687 | | | $ | 11,741 | | | $ | 13,095 | | | $ | 11,741 | | | $ | 13,095 | | | $ | 18,931 | |
The decrease in cash collected from customers in the year ended December 31, 2009 compared to the year ended December 31, 2008 is a result of a partial year of operations through September 14, 2009 creating a decrease in operating revenues and cash collections. The decrease in payments to vendors and employees in the year ended December 31, 2009 compared to the year ended December 31, 2008 is the result of a partial year of operations through September 14, 2009 creating a decrease in SG&A expenses requiring cash outlays and a decrease in cash payments as well as the decrease in cost of revenues.
Cash Flows from Investing Activities
Our net cash used in investing activities for 2006, 2007 and 2008 was $26.4 million, $33.6 million and $28.9 million, respectively. Net cash used in investing activities consisted of the following components:
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in thousands) | | | (in thousands) | |
| Purchases of property, plant and equipment | | $ | (30,886 | ) | | $ | (35,290 | ) | | $ | (29,766 | ) | | $ | (35,290 | ) | | $ | (29,766 | ) | | $ | (13,769 | ) |
| Cash transferred with deconsolidation of subsidiary | | | | — | | | | — | | | | (28,603 | ) |
| Proceeds from sale of assets | | 3,274 | | | 638 | | | 481 | | | | 638 | | | | 481 | | | | 278 | |
| Proceeds from sales tax refunds | | 922 | | | 1,130 | | | 349 | | |
| Maturities of short term investments | | 350 | | | | — | | | | — | | |
| Proceeds from sales tax refunds on prior purchases of equipment | | | | 1,130 | | | | 349 | | | | — | |
| Other investing activity | | | (47 | ) | | | (67 | ) | | | — | | | | (67 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
| Net cash used in investing activities | | $ | (26,387 | ) | | $ | (33,589 | ) | | $ | (28,936 | ) | | $ | (33,589 | ) | | $ | (28,936 | ) | | $ | (42,094 | ) |
The decrease in capital expenditures during the year ended December 31, 2009 compared to the year ended December 31, 2008 was primarily related to a partial year of operations in 2009 as well as a reduction in: purchases of customer premise equipment; initial customer installation costs; and network equipment. See “Capital Expenditures” below for a more detailed discussion of capital expenditures. The cash transferred with deconsolidation of subsidiary is the result of the transactions contemplated by the Recapitalization Agreement.
Cash Flows from Financing Activities
Our net cash provided by (used in) financing activities for 2006, 2007 and 2008 was $33.9 million, $26.0 million and $(5.3) million, respectively. Net cash provided by (used in) financing activities consisted of the following components:
| | | | |
| | | | | | | | | | |
| | | (in thousands) | |
| Net proceeds from borrowings (1) | | $ | 30,581 | | | $ | 30,054 | | | $ | — | |
| Proceeds from sale leaseback arrangement | | | 7,373 | | | | — | | | | — | |
| Payments of long-term debt and capital lease obligations | | | (3,193 | ) | | | (4,305 | ) | | | (4,989 | ) |
| Deferred financing costs | | | (86 | ) | | | (165 | ) | | | — | |
| Net borrowings (repayments) on zero-balance cash account | | | (758 | ) | | | 451 | | | | (326 | ) |
| Other financing activity | | | 12 | | | | 3 | | | | 6 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | $ | 33,929 | | | $ | 26,038 | | | $ | (5,309 | ) |
| | | | |
| | | | | | | | | | |
| | | (in thousands) | |
| Net proceeds from borrowings (1) | | $ | 30,054 | | | $ | — | | | $ | 123 | |
| Proceeds from sale leaseback arrangement (2) | | | — | | | | — | | | | 4,532 | |
| Payments of long-term debt and capital lease obligations | | | (4,305 | ) | | | (4,989 | ) | | | (5,329 | ) |
| Deferred financing costs | | | (165 | ) | | | — | | | | — | |
| Net borrowings (repayments) on zero-balance cash account | | | 451 | | | | (326 | ) | | | (2,095 | ) |
| Other financing activity | | | 3 | | | | 6 | | | | (7 | ) |
| Net cash provided by (used in) financing activities | | $ | 26,038 | | | $ | (5,309 | ) | | $ | (2,776 | ) |
| (1) | ConsistsThe year ended December 31, 2007 consists of the net proceeds from the private placement of an additional $32 million and $25 million in 2006 and 2007, respectively, in aggregate principal amount of senior notes. In addition to theHoldings senior notes in 2007, net proceeds from borrowings also includeas well as $4.1 million in proceeds from equipment financing. The year ended December 31, 2009 consists of the proceeds from vehicle financing. |
| (2) | During January 2009, Grande Operating sold various customer premise equipment for $4.5 million cash. Concurrent with the sale, Grande Operating leased the customer premise equipment back for a period of two years at a monthly rental of $0.2 million. As a result of the recapitalization transactions on September 14, 2009, this capital lease is no longer included in the accounts of Holdings. |
As a result of the recapitalization transactions on September 14, 2009, capital leases and equipment and vehicle financing are no longer included in the accounts of Holdings, and the outstanding Holdings senior notes were redeemed or repurchased by Grande Operating on September 14, 2009 and reflected by Holdings as a non-cash dividend to Holdings and the indenture that governed the terms of the Holdings senior notes was discharged.
Capital Expenditures
We had capital expenditures of approximately $30.9 million, $35.3 million, $29.8 million and $29.8$13.8 million, including capitalized interest, in 2006, 2007, 2008 and 2008,2009, respectively. These capital expenditures relaterelated to: network construction; initial installation costs; the purchase of customer premise equipment, such as cable set-top boxes and cable modems; corporate and network equipment, such as switching and transport equipment; and billing and information systems. The increasedecrease in capital expenditures during 2008 compared to 2007 was primarily due to capital equipment purchases related to our long haul fiber optic network upgrade. The decrease in capital expenditures during 2009 compared to 2008 primarily related to a partial year of operations during 2009 as well as a reduction in: purchases of customer premise equipment; initial customer installation costs; and network equipment.
As described under “Liquidity and Capital Resources—Sources and Uses of Funds”, the Indenture contains a covenant restricting certain capital expenditures if such expenditures would result in us having less than $20 million in cash and cash equivalents after giving effect to such expenditures. During the year ending December 31, 2009, the Company intends to manage its capital expenditures in accordance with the covenant set forth in the Indenture to ensure that cash is not less than $20 million.
Contractual Obligations and Commercial Commitments
We are obligated to make payments underAs a varietyresult of contractsthe September 14, 2009 recapitalization transactions and other commercial arrangements, including the following:
Long-term Debtassumption by the acquirer of all of Grande Operating’s outstanding contractual obligations and Equipment Financing. In March 2004, the Company completed a private placement offering for 136,000 units, with each unit consistingredemption or repurchase of (1) $1,000 ofthe Holdings senior notes, and (2) a warrant to purchase 100.336 shares of common stock. The senior notes mature on April 1, 2011 and accrue interest at the rate of 14% per annum with the interest payable semi-annually in cash in arrears on April 1 and October 1. In March 2006 and July 2007, we raised net proceeds of approximately $30.5 million and $25.8 million, respectively, in a private placement of an additional $32 million and $25 million, respectively, in aggregate principal amount of senior notes. These additional senior notes were issued under the Indenture and are part of the same series of senior notes as those issued in March 2004.
Our subsidiary, Grande Communications Networks, Inc. (the “Subsidiary Guarantor”),Holdings has unconditionally guaranteed, jointly and severally, the payment of the principal, premium and interest (including any additional interest on the senior notes) on a senior secured basis. The senior notes and the Subsidiary Guarantor’s guarantees thereof are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in substantially all of our subsidiary’s property and assets, including substantially all of its property, plant and equipment.
The senior notes may be redeemed, at our election, as a wholeno contractual obligations or from time to time in part at any time upon not less than 10 nor more than 60 days’ notice to each holder of senior notes to be redeemed, subject to the conditions and at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest and Liquidating Damages (as defined in the Indenture), if any, to the applicable redemption date.
| | | | |
| April 1, | | | |
| 2008 | | | 107.00 | % |
| 2009 | | | 103.50 | % |
| 2010 and thereafter | | | 100.00 | % |
If we experience specific kinds of change of control events, each holder of senior notes may require us to repurchase all or any portion of such holder’s senior notes at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest to the date of repurchase. The Indenture contains covenants that, among other things, limit our ability to:
incur additional indebtedness, issue disqualified capital stock (as defined in the Indenture) and, in the case of our restricted subsidiaries, issue preferred stock;
create liens on our assets;
pay dividends on, redeem or repurchase our capital stock or make other restricted payments;
make investments in other companies;
enter into transactions with affiliates;
enter into sale and leaseback transactions;
sell or make dispositions of assets;
place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; and
engage in certain business activities.
In addition, the Indenture contains a covenant restricting certain capital expenditures if such expenditures would result in us having less than $20 million in cash and cash equivalents after giving effect to such expenditures. This covenant could adversely affect our ability to make planned capital expenditures.
The Indenture also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness and material judgments and liabilities.
During 2007, we completed equipment financing of $4.1 million with a term of 24 months, which was utilized for the purchase of network equipment. During December 2008, the term of the equipment financing was extended 12 months through March 2010. The financing is secured by the network equipment purchased with the proceeds of the borrowing and bears interest at an effective annual rate of approximately 15.3% with monthly payments equal to 4.2% multiplied by the total amount borrowed. This financing is permitted under the Indenture governing the senior notes.
Capital Leases. We lease office and facilities space under leasing arrangements. We also have certain capital leases for customer premise equipment, telecom switching equipment, software, computers and office equipment.
Operating Leases. We lease office space, vehicles and other assets for varying periods. Leases that expire are evaluated for renewal based on operational necessity.
Maintenance Agreements. We have numerous agreements for the maintenance of leased fiber optic capacity.
Purchase Commitments. During January 2005, we entered into a minimum purchase agreement, as amended, with a vendor for the purchase of fiber optic equipment and installation and maintenance services through December 31, 2008. If we do not make the minimum purchases through the expiration or termination of this agreement, we will be required to pay a fee of 30% of the remaining unfulfilled amount. The balancecommercial commitments as of December 31, 2008 was $2.2 million. We are currently2009. See footnote No. 12, “Commitments and Contingencies” in the processNotes to our Consolidated Financial Statements included in this annual report on Form 10-K for a discussion of finalizing an extension of the purchase agreement through December 31, 2009.The following table represents the contractual obligations described above as of December 31, 2008: other commitments and contingencies.
| | | Payments Due by Period | | | | |
| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 & Beyond | | | Total | |
| | | (In thousands) | |
| Long-term debt and related interest obligations | | $ | 28,833 | | | $ | 27,353 | | | $ | 206,510 | | | $ | — | | | $ | — | | | $ | — | | | $ | 262,696 | |
| Capital lease obligations | | | 5,963 | | | | 2,926 | | | | 1,772 | | | | 1,748 | | | | 1,748 | | | | 16,899 | | | | 31,056 | |
| Operating lease obligations | | | 4,012 | | | | 2,902 | | | | 2,200 | | | | 1,948 | | | | 1,505 | | | | 7,442 | | | | 20,009 | |
| Maintenance obligations | | | 1,227 | | | | 1,046 | | | | 1,046 | | | | 1,046 | | | | 1,046 | | | | 7,279 | | | | 12,690 | |
| Purchase obligations | | | 2,215 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,215 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 42,250 | | | $ | 34,227 | | | $ | 211,528 | | | $ | 4,742 | | | $ | 4,299 | | | $ | 31,620 | | | $ | 328,666 | |
Our plans with respect to network construction and other capital expenditures are discussed above under the caption “Capital Expenditures.” We believe those planned expenditures do not constitute contractual obligations or binding commitments because, in general, we have the ability to accelerate or postpone construction of our networks depending upon cash availability, subject to the need to eventually complete the network in accordance with our single-family residential development agreements. We have also entered into several employment agreements with key executives of the Company. For a discussion surrounding the terms of these agreements, please refer to “Executive Compensation” under the caption “Employment Agreements, Severance Benefits and Change in Control Provisions”.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. To prepare these financial statements, we must make estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. We periodically evaluate our estimates and assumptions and base our estimates and assumptions on our best knowledge of current events and actions we may undertake in the future. Actual results may ultimately differ from these estimates. We believe that, of our significant accounting policies, the following may involve a higher degree of judgment and complexity.
Subsequent to the Transactions Contemplated by the Recapitalization Agreement:
Equity Investment
Investments in which Holdings has the ability to exercise significant influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. These investments are evaluated for impairment. An impairment loss would be recorded whenever a decline in the value of an equity investment or investment carried at cost below its carrying amount is determined to be other than temporary. In judging “other than temporary,” Holdings considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and Holdings’ long-term intent of retaining the investment in the investee.
Prior to the Transactions Contemplated by the Recapitalization Agreement:
Revenue Recognition
Revenue from residential and business customers iswas principally derived from bundled packages of video, voice, HSD and other services. Bundled services revenue consistsconsisted of fixed monthly fees and usage based fees for long distance service and iswas recorded as revenue in the period the service iswas provided. Our revenues areRevenues were recognized when services arewere provided, regardless of the period in which they arewere billed. Amounts billed in advance arewere reflected in the balance sheet as deferred revenue and arewere deferred until the service iswas provided. Installation revenues obtained from bundled service connections arewere recognized in accordance with ASC 922, Entertainment – Cable Television, formerly SFAS No. 51, Financial Reporting by Television Cable Companies, as the connections arewere completed since installation revenues recognized arewere less than the related direct selling costs. Installation costs arewere included in property, plant, and equipment and depreciated over the estimated life of communications plant. Local governmentalGovernmental authorities imposeimposed franchise fees on the majority of our franchises of up to a federally mandated maximum of 5% of annual gross revenues derived from the operation of the cable television system to provide cable television services, as provided in the franchise agreements.services. Such fees arewere collected on a monthly basis from our customers and periodically remitted to local franchise authorities. Franchise fees collected and paid of approximately $2.5 million, $2.9 million, $3.2 million and $3.2$2.4 million during the years ended December 31, 2006, 2007, 2008, and 2008,2009, respectively, arewere reported as revenues and cost of revenues, respectively. The Federal Communications Commission imposes a tax on interstate and international long distance calls to fund telephonetel ephone service for the poor, and to support telecommunications services for libraries, schools, and rural health care providers. Such taxes arewere collected on a monthly basis from our customers and periodically remitted to the Universal Service Fund (“USF”). Sales and other taxes imposed by governmental authorities arewere also collected on a monthly basis from our customers and periodically remitted to governmental authorities. Revenue is presented net of the applicable USF, sales and other taxes.
Revenue from broadband transport services iswas principally derived from providing medium and large enterprises and communication carriers with access to our metro area networks and point-to-point circuits on our long-haul fiber optic network. Revenue from network services iswas principally derived from switched carrier services and managed modem services. Broadband transport and network services revenue consistsconsisted of fixed monthly fees and usage based fees and iswas recorded as revenue in the period the service iswas provided. Amounts billed in advance arewere reflected in the balance sheet as deferred revenue and are deferred until the service iswas provided. Revenue also includesincluded upfront non-recurring fees for construction, installation and configuration services that arewere deferred and recognized over the relatedrel ated service contract period.
In instances where multiple deliverables arewere sold contemporaneously to the same counterparty, we follow the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Specifically,such as if the Company entersGrande Operating entered into sales contracts for the sale of multiple products or services, then the Company evaluatesan evaluation determined whether it hashad objective fair value evidence for each deliverable in the transaction. If the Company hasGrande Operating had objective fair value evidence for each deliverable of the transaction, then it accountsaccounted for each deliverable in the transaction separately, based on the revenue recognition policies outlined above. The residual method iswas used when no fair value iswas available for the deliverable. For example, this would occur when the Company entersGrande Operating entered into an agreement for service that includes the Companyincluded providing equipment in connection with the service and the subscriber paying an installation fee as well as monthly charges. Because the Company isGrande Operating was providing both a product and a service, revenue iswas allocated to the product and monthly subscription service based on relative fair value and revenue iswas allocated to installation services using the residual method. To date, product revenues have not been significant.
Classification of Various Direct Labor and Other Overhead Costs
Our business iswas capital intensive, and large portions of our financial resources arewere spent on capital activities associated with building our networks. We capitalizecapitalized costs associated with network construction, initial customer installations, installation refurbishments and the addition of network equipment necessary to enable provision of bundled or network services. Capitalized costs includeincluded materials, direct labor costs and certain indirect costs. We capitalizecapitalized direct labor costs associated with our personnel based upon the specific time devoted to construction and customer installation activities. Capitalized indirect costs arewere those relating to the activities of construction and installation personnel and overhead costs associated with the relevant support functions. Costs for repairs and maintenance, and disconnection and reconnection, arereco nnection, were charged to operating expense as incurred, while equipment replacement iswas capitalized.
Judgment is required to determine the extent to which indirect costs, or overhead, are incurred as a result of specific capital activities, and therefore should be capitalized. We allocateallocated overhead based upon the portion of indirect costs that contributecontributed to capitalizable activities using an overhead rate, based on an actual rate, applied to the amount of direct labor capitalized based upon our analysis of the nature of costs incurred in support of capitalizable activities. The primary costs that arewere included in the determination of overhead rates arewere (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, consisting primarily of installation and construction vehicle operating costs, (iii) the cost of support personnel, such as personnel who directly assistassisted with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities. For 2006, 2007, 2008 and 2008, $8.3 million,2009, $8.5 million, $7.6 million and $7.6$4.8 million of labor and overhead costs were capitalized, respectively. Capitalized costs arewere depreciated along with the physical assets to which they relate, which havehad lives of three to ten years depending on the type of asset.
Valuation of Long-Lived Assets and Intangible Assets
We evaluateevaluated the recoverability of property, plant and equipment for impairment when events or changes in circumstances indicateindicated that the net book value of an asset may not be recoverable. Such events or changes in circumstances could include such factors as loss of customers accounting for a high percentage of revenues from particular network assets, changes in technology, fluctuations in the fair value of assets, adverse changes in market conditions or poor operating results. When such factors and circumstances exist,existed, we comparecompared the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, iswas based on the excess of the carrying amount over the fair value of those assets and iswas recorded in the period in which the determination was made. While we believebelieved that our estimates of future cash flows arewere reasonable, different assumptions regarding such cash flows could materially affect our evaluation of asset recoverability.
Allowance for Doubtful Accounts
Accounts receivable arewere recorded at their net realizable values. The Company uses estimatesEstimates were used to determine the allowance for doubtful accounts and records an accounts receivable reserve was recorded for known collectibilitycollectability issues, as such issues relate to specific transactions or customer balances. These estimates arewere based on historical collection experience, current trends, credit policy and a percentage of the Company’s customer accounts receivable. In determining these percentages, the Company looksGrande Operating looked at historical write-offs of the receivables. The Company writesGrande Operating wrote off accounts receivable when it becomesbecame apparent based upon age or customer circumstances that such amounts willwould not be collected.
Stock Based Compensation
Prior to the adoption of SFAS 123(R),Compensation expense was measured and recognized based on January 1, 2006 we measured compensation costsestimated fair values for options issued or modified under our stock-based compensation plans using the intrinsic-value method of accounting. Under the intrinsic-value method, we recorded deferred compensation expense for stock options awardedall share-based awards made to employees and directors to the extent that the option exercise price was less than the fair market value of common stockbased on the date of grant.
On January 1, 2006 we adopted thegrant-date estimated fair value recognition provisions of SFAS 123(R). We apply the provisions of SFAS 123(R) to new stock option grants and to stock option grants that are modified, repurchased or cancelled subsequent to January 1, 2006 using the prospective method of transition.value. Compensation expense calculated under SFAS 123(R) iswas amortized to compensation expense on a straight-line basis over the vesting period of the underlying stock option grants. We will continue to apply the intrinsic-value method to determine compensation expense for stock options granted prior to the adoption of SFAS 123(R).
Determining the appropriate fair value model and calculating the fair value of share-based payment awards requiresrequired the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. We useused the Black-Scholes-Merton model to value our stock option awards. The assumptions used in calculating the fair value of share-based payment awards representrepresented management’s best estimates, but these estimates involveinvolved inherent uncertainties and the application of management judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future. Because our shares are not traded on a public market, we useused comparable companies as a basis for our expected volatility. This may materially impact the fair value of stock option grants. In addition, we arewere required to estimate the expected term and forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be significantly different from what has been recorded in the current period.
The foregoing list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result.
Recent Accounting Pronouncements
Fair Value MeasurementsOn July 1, 2009, Holdings adopted SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” which was incorporated into Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles.” This new accounting standard identifies the ASC as the authoritative source of GAAP in the United States. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The adoption of this new accounting standard did not have an impact on the financial position, results of operations, or cash flows; however Holdings has included references to the ASC within the financial statements.
On January 1, 2008, the Company adopted certain provisions ofIn May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 165, “Subsequent Events” (“SFAS 165”), which was incorporated into ASC 855, “Subsequent Events.” The provisions of SFAS 165 set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may have occurred for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The provisions of SFAS 165 became effective on April 1, 2009 and are being applied prospectively be ginning in the second quarter of 2009.
In April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 107-1 and Accounting Principles Board 28-1 “Interim Disclosures about Fair Value of Financial Accounting Standards (“SFAS”)Instruments,” which was incorporated into FASB ASC 825, “Financial Instruments.” The FSP amends SFAS No. 157, 107 “Disclosures about Fair Value Measurements (“SFAS 157”), which establishes the authoritative definition of fair value, sets out a framework for measuring fair value and expands the requiredFinancial Instruments” to require an entity to provide disclosures about fair value measurement. The provisions of SFAS 157 adopted on January 1, 2008 relate to financial assets and liabilities, as well as other assets and liabilities carried at fair value on a recurring basis and did not have a material impact on the Company’s consolidatedinstruments in interim financial statements. The provisions of FAS 157 related to other nonfinancial assets and liabilities will be effective for the Company on January 1, 2009, and will be applied prospectively. These provisions are not expected to have any impact on the Company’s historical consolidated financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS 141(R) also includes a substantial number of new disclosure requirements. SFAS 141(R)information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The provisions of FSP No. 107-1 was adopted in the second quarter of 2009.
In November 2008, the FASB issued guidance under EITF 08-6, “Equity Method Investment Accounting Considerations,” which was incorporated into FASB ASC 323-10, “Investments – Equity Method and Joint Ventures.” This guidance clarifies how to business combinationsaccount for whichcertain transactions and impairment considerations involving equity method investments. Specifically, this guidance notes: 1) an entity shall measure its equity method investment initially at cost; 2) an equity method investor is required to recognize other-than-temporary impairments of an equity method investment in accordance with paragraph 35-32A and an equity method investor shall not separately test an investee’s underlying indefinite-lived intangible asset(s) for impairment; and 3) an equity method investor shall account for a sh are issuance by an investee as if the acquisition dateinvestor had sold a proportionate share of its investment and any gain or loss to the investor resulting from an investee’s share issuance shall be recognized in earnings. This guidance is effective on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This guidance was adopted prospectively beginning January 1, 2009. We expect SFAS 141(R) will have anOn the date of adoption, there was no impact on our accounting for future business combinations once adopted but the effect is dependent upon the acquisitions that are made in the future.to Holdings’ financial position or results of operations.
| ITEM 7A. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk relates primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed income securities. We invest only with high credit quality issuers and we do not use derivative financial instruments in our investment portfolio. We do not believe that a significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.None
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Item 8 is incorporated by reference to pages F-1 through F-27F-28 herein.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Termination of Prior Independent Accountants 55
By resolution adopted on March 6, 2010, our board of directors elected to change independent accountants. No report on the consolidated financial statements of Holdings prepared by Ernst & Young LLP contained any adverse opinion, disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During the time Ernst & Young LLP served as Holdings’ independent registered public accounting firm, there were no disagreements between Ernst & Young LLP and Holdings on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Effective March 6, 2010, PricewaterhouseCoopers LLP was appointed as Holdings’ independent registered public accounting firm to audit the financial statements. PricewaterhouseCoopers LLP was not consulted on any matter described in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K prior to March 6, 2010.
| CONTROLS AND PROCEDURESPROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who is our principal executive officer and our Chief Financial Officer, who is our principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e), as applicable, under the Exchange Act) as of December 31, 2008.2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2008,2009, our disclosure controls and procedures arewere not effective. The conclusion that our disclosure controls and procedures were not effective was due to the presence of inadequate segregation of duties which represents a material weaknesses in internal control over financial reporting. Management anticipates that such disclosure controls and procedures will no t be effective until the material weakness is remediated.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports that are filed under the Exchange Act, is accumulated and communicated to management, including our chief Executive Officer and our Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no evaluation of internal control over financial reporting can provide absolute assurance that all control issues, if any, within our company have been detected and may not prevent or detect misstatements. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Notwithstanding the existence of the material weakness described below, management has concluded that the consolidated financial statements in this Form 10-K fairly present, in all material respects, Holdings’ financial position, results of operations and cash flows for the periods and dates presented.
Changes in Internal Control over Financial Reporting
DuringAs a result of the three months ended December 31, 2008, thererecapitalization transactions, which closed on September 14, 2009, Holdings does not have any operations or material assets other than the ownership of its partner interest in Ultimate Parent. In conjunction with the recapitalization transactions, all of our employees were either terminated or transferred with Grande Operating which was no change in ourcontributed by Holdings to Ultimate Parent. Substantial changes have been made to Holdings’ internal controls over financial reporting that has materially affected, or is likely to materially affect, our internal controls over financial reporting.as a result of the lack of employees and operations.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20082009 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2008.2009 as a result of the material weakness described below.
A “material weakness” is a significant deficiency, or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements presented will not be prevented or detected. A “significant deficiency” is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements presented that is more than inconsequential will not be prevented or detected.
As a result of the recapitalization transactions, which closed on September 14, 2009, Holdings does not have any operations or material assets other than the ownership of its partner interest in Ultimate Parent. In conjunction with the recapitalization transactions, all of our employees were either terminated or transferred with Grande Operating, which was contributed by Holdings to Ultimate Parent, resulting in a lack of segregation of duties at Holdings as of December 31, 2009. This impacts all of our accounts due to the pervasive nature of the deficiency.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report on Form 10-K.
NoneIn January 2010, Holdings filed a Form 15 with the SEC to suspend its reporting obligations under the Exchange Act. As a result of filing the Form 15, Holdings’ obligation to file certain reports and forms including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K has been suspended. We expect that this Annual Report on Form 10-K for the year ended December 31, 2009 will be the last filing made by Holdings under the Exchange Act.
The election of certain director nominees to serve on Holdings’ board of directors until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier death, resignation or removal was submitted to a vote of and approved by the stockholders at the 2009 annual meeting of stockholders held on January 19, 2010. There were no other matters voted upon at the 2009 annual stockholders meeting. As of December 17, 2009, the record date for holders of Holdings’ capital stock entitled to vote at the 2009 annual meeting, there were 451,631,583 shares of capital stock issued and outstanding. A total of 231,619,558 shares of our capital stock were present or represented by proxy at the 2009 annual meeting, representing more than 51% of our shares of capi tal stock issued and outstanding as of the record date. The following votes were cast at the 2009 annual meeting regarding the election of nominated directors:
| Nominee name | | Votes for | | | Votes withheld | |
| Duncan T. Butler, Jr. | | | 221,651,892 | | | | 178,522 | |
| John C. Hockin | | | 221,651,892 | | | | 178,522 | |
| David C. Hull, Jr. | | | 221,651,892 | | | | 178,522 | |
| William Laverack, Jr. | | | 221,651,892 | | | | 178,522 | |
| Richard W. Orchard | | | 221,651,892 | | | | 10,146,188 | |
| Paul V. Walsh, Jr. | | | 221,651,892 | | | | 10,146,188 | |
| Michael L. Wilfley | | | 221,651,892 | | | | 178,522 | |
PART III
| DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE DirectorsGOVERNANCE |
Our board of directors is divided into three classes, being divided as equally as possible with each class having a term of three years. Each year the term of office of one class expires at Grande’s annual meeting of stockholders. At Grande’s next annual meeting of stockholders, which is expected to occur in December 2009 or January 2010, the term of class II directors, currently consisting of two directors, will expire. Directors
The following table sets forth the name and age of each director, indicating the year the director joined the CompanyHoldings and all positions and offices with our Company currently held by the director as well asdirector. At Holdings’ next annual meeting of stockholders, which is expected to occur in December 2010 or January 2011, the class and term of office for each director: director will expire.
| Name | | Age | | Year Joined Board | | Position |
| Duncan T. Butler, Jr. | | 47 | | 2000 | | Chairman of the board of directors and Chairman of the compensation and finance committees |
| | | | | | | |
| David C. Hull, Jr. | | 65 | | 2000 | | Member, board of directors, audit, compensation and nominating committees |
| | | | | | | |
| William Laverack, Jr. | | 54 | | 2001 | | Member, board of directors, compensation, finance committees and Chairman of the nominating committee |
| | | | | | | |
| John C. Hockin | | 39 | | 2002 | | Member, board of directors |
| | | | | | | |
| Richard W. Orchard | | 56 | | 2006 | | Member, board of directors, audit and nominating committees |
| | | | | | | |
| Paul V. Walsh, Jr. (1) | | 45 | | 2009 | | Member, board of directors, finance committee and Chairman of the audit committee |
| | | | | | | |
| Michael L. Wilfley | | 54 | | 2009 | | Member, board of directors, President, Chief Executive Officer, Chief Financial Officer and Treasurer |
| Name | | Age | | Year Joined Board | | Class/Term Expiration | | Position |
| | | | | | | | | |
| Roy H. Chestnutt | | 49 | | 2006 | | I / 2011 | | President, Chief Executive Officer and Chairman of the board of directors |
| | | | | | | | | |
| Richard W. Orchard | | 55 | | 2006 | | I / 2011 | | Member, board of directors, audit and nominating committees |
| | | | | | | | | |
| Paul V. Walsh, Jr. (1) | | 44 | | 2009 | | I / 2011 | | Member, board of directors, finance committee and Chairman of the audit committee |
| | | | | | | | | |
| John C. Hockin | | 38 | | 2002 | | II / 2009 | | Member, board of directors |
| | | | | | | | | |
| David C. Hull, Jr. | | 64 | | 2000 | | II / 2009 | | Member, board of directors, audit, compensation and nominating committees |
| | | | | | | | | |
| Duncan T. Butler, Jr. | | 46 | | 2000 | | III / 2010 | | Member, board of directors, compensation and finance committees |
| | | | | | | | | |
| William Laverack, Jr. | | 51 | | 2001 | | III / 2010 | | Member, board of directors, compensation, finance and nominating committees |
_______________
(1) Audit committee financial expert.
James M. Mansour served as Chairman of the board of directors from January 2005 until his resignation in January 2008. | (1) | Audit committee financial expert. |
Lawrence M. Schmeltekopf served as Chairman of the audit committee from June 2006 until the end of his term in January 2009. Roy H. Chestnutt served as a member of the board of directors from February 2006 and Chairman of the board of directors from January 2008 until his resignation in September 2009.
Set forth below are descriptions of the backgrounds of each of our directors.
Roy H. Chestnutt Duncan T. Butler, Jr.joined Grande as our Chief Executive Officer became a member of Holdings’ board of directors in February 20062000 and Chairman in September 2009. Since April 2000, Mr. Butler has served as a membermanaging director of our boardCentennial Ventures and he has served as a managing director of directorsPrime New Ventures since February 2006. In June 2006,October 1994. Mr. Chestnutt was appointedButler is currently a managing director and on the investment committee of Centennial Holdings VI, LLC and Mr. Butler is a Senior Vice President of the Company in addition to his role as Chief Executive Officer. In January 2008,Centennial Holdings I, LLC. Mr. Chestnutt was appointed Chairman ofButler currently also serves on the board of directors upon James Mansour’s resignation.of Grande Manager, Grande Parent LLC, Grande Operating, Masergy Communications, Inc., a global network service provider and Hoak Media, a television and radio broadcasting company. Mr. Butler received his BBA and hi s MBA from The University of Texas at Austin and his JD from The University of Texas School of Law.
David C. Hull, Jr. became a member of Holdings’ board of directors in February 2000. Since 1993, Mr. Hull has been a managing director of Centennial Ventures. From 1986 to 1993, Mr. Hull served as general partner, during which time he was promoted to managing general partner, of Criterion Venture Partners, the venture arm of TransAmerica. Prior to joining Grande,Criterion, from 1976 to 1985 he was senior vice president of finance, treasurer and director of General Leisure Corporation, a restaurant and hotel operating company. From 1969 to 1976, Mr. ChestnuttHull was an analyst for Telecom Corporation and was subsequently promoted to vice president of Texas Capital Corporation, a wholly-owned subsidiary of Telecom Corporation. Mr. Hull cu rrently serves on the Senior Vice Presidentboard of National Field Salesdirectors of Centennial Holdings I, LLC and General Business for Sprint-Nextel. He was responsible for the General Business segment, which focuses on nationwide wirelineExteNet Systems, Inc. Mr. Hull received his BS in Chemical Engineering and wireless operations of direct sales channels, value-added resellers, business solutions partners, sales operations and pre-sale support. Before Nextel merged with Sprint, Mr. Chestnutt held positions at Nextel Communications as Regional Vice President of the Southwest in Austin and of the West in the San Francisco Bay Area from 2000 to 2006. He also served as President of the Texas/Oklahoma area from its Austin offices from September 1998. Mr. Chestnutt also has general management experience with PrimeCo Personal Communications and AirTouch Cellular. Mr. Chestnutt earned anhis MBA from theThe University of San Francisco with an emphasis in General Management and International Business and a BS in Business Administration from San Jose State University with a concentration in marketing.Texas at Austin.
William Laverack, Jr. became a member of Holdings’ board of directors in May 2001. Mr. Laverack is a managing director of J. H. Whitney & Co., which he joined in 1993, and managing partner of Laverack Capital Partners, LLC, which he founded in 2005. Mr. Laverack received his BA and MBA from Harvard University.
John C. Hockin became a member of Holdings’ board of directors in November 2002. Mr. Hockin has been a Portfolio Manager (and co-founder) of Whitney Green River Fund, L.P. since November 2004. Prior to that, he was an investment professional at J.H. Whitney & Co. since 1999. Mr. Hockin received his BA from Yale and his MBA from the Stanford Business School.
Richard W. Orchard was appointed as a member of ourHoldings’ board of directors in October 2006. From November 2004 to September 2006, Mr. Orchard served as Chief Transition Officer for Sprint-Nextel where he managed all aspects of the $36 billion dollar merger between Sprint and Nextel. Prior to the Sprint-Nextel merger, he was with Nextel for over ten years, serving as Eastern Regional President and during his last four years as a Senior Vice President and Chief Service Officer. Prior to joining Nextel in 1994, Mr. Orchard spent over ten years with PacTel/Airtouch and five years with Motorola Communications. Mr. Orchard also currently serves on the board of directors of Peco II, a telecom power equipment manufacturer and National Safeplace, a nationwide outreach for at-risk kids.ki ds. Mr. Orchard received a BA in Political Science from the University of California, Santa Barbara.
Paul V. Walsh, Jr. was elected as a member of ourHoldings’ board of directors in January 2009 and serves as Chairman of the audit committee and as a member of the finance committee.2009. Mr. Walsh currently serves as the Vice President and Chief Accounting Officer for Silicon Laboratories, a publicly traded technology company based in Austin, Texas. Mr. Walsh joined Silicon Laboratories in January 2004 as Director of Finance, Worldwide Operations, and was appointed as the Corporate Controller in May 2005. In November 2006, Mr. Walsh was promoted to Vice President and Chief Accounting Officer. Prior to joining Silicon Laboratories, Mr. Walsh was Site Controller from February 2003 to January 2004 with PerkinElmer, a supplier to the health sciences and photonics markets. From 1992 to 2003, Mr. Walsh held various operational, finance and management roles at TeradyneTera dyne and Analog Devices. Mr. Walsh is certifiable as a CPA and received his BS in Mechanical Engineering from the University of Maine, and an MBA from Boston University.
John C. HockinMichael L. Wilfley has servedis the Chief Executive Officer, Chief Financial Officer, President and Treasurer of Holdings. He was appointed as Chief Executive Officer and President of Holdings on September 14, 2009 and as Treasurer and a member of ourHoldings’ board of directors since November 2002.(filling the seat vacated by Roy H. Chestnutt) on September 17, 2009. Mr. HockinWilfley was previously appointed Chief Financial Officer of Holdings in July 2000 and continues in that capacity with Holdings. Mr. Wilfley has beenover 20 years experience as a Portfolio Manager (and co-founder)chief financial officer, including ten years as a chief financial officer in the telecommunications industry. Previously, from 1998 to 2000, Mr. Wilfley was the chief financial officer of Whitney Green River Fund, L.P. since November 2004.Thrifty Call, Inc., a telecommunication s company, where he was responsible for the capital markets and mergers and acquisitions efforts that led to Holdings’ eventual acquisition of Thrifty Call. Prior to that, he was an investment professional at J.H. Whitney & Co. since 1999.working for Thrifty Call, from 1993 to 1997, Mr. Hockin received his BA from Yale and his MBA from the Stanford Business School.
David C. Hull, Jr. hasWilfley served as the chief financial officer for Littlefield Real Estate Co., a member of our board of directors since February 2000. Since 1993,private investment company. Mr. Hull has been a managing director of Centennial Ventures. From 1986 to 1993, Mr. Hull served as general partner, during which time he was promoted to managing general partner, of Criterion Venture Partners, the venture arm of TransAmerica. Prior to joining Criterion, from 1976 to 1985 he was senior vice president of finance, treasurer and director of General Leisure Corporation, a restaurant and hotel operating company. From 1969 to 1976, Mr. Hull was an analyst for Telecom Corporation and was subsequently promoted to vice president of Texas Capital Corporation, a wholly-owned subsidiary of Telecom Corporation. Mr. Hull currentlyWilfley serves on the board of directors of Centennial Holdings I, LLC, and ExteNet Systems, Inc. Mr. Hull received his BS in Chemical Engineering and his MBA from The University of Texas at Austin.
Duncan T. Butler, Jr. has served asLittlefield Corporation, a member of our board of directors since February 2000. Since April 2000, Mr. Butler has served as a managing director of Centennial Ventures and he has served as a managing director of Prime New Ventures since October 1994. Mr. Butler is currently a managing director andpublic company listed on the investment committee of Centennial Holdings VI, LLC andover-the-counter bulletin board. Mr. ButlerWilfley is a Senior Vice Presidentcertified public accountant and a graduate of Centennial Holdings I, LLC. Mr. Butler currently also serves on the board of directors of Masergy Communications, Inc., a global network service provider and Hoak Media, a television and radio broadcasting company. Mr. Butler received his BBA and his MBA from The University of Texas at Austin, andwhere he earned his JD from The University of Texas School of Law.BBA degree in Accounting.
William Laverack, Jr. has served as a member of our board of directors since May 2001. Mr. Laverack is a managing director of J. H. Whitney & Co., which he joined in 1993, and managing partner of Laverack Capital Partners, LLC, which he founded in 2005. Mr. Laverack received his BA and MBA from Harvard University.
Executive Officers
The following table sets forth the name and age of each namedour executive officer, indicating all positions and offices with our CompanyHoldings currently held by the named executive officer (1):
| Name | | Age | | Position |
Roy H. ChestnuttMichael L. Wilfley | | 49 | 54 | President, Chief Executive Officer, Chief Financial Officer, Treasurer and Chairmanmember of the board of directors |
Michael L. Wilfley(1) | | 53 | | Roy H. Chestnutt served as President and Chief Financial Officer |
| Executive until September 2009, Walter K.L. “Scott” Ferguson, Jr. | | 50 | | served as Chief Operating Officer |
| until September 2009, Kay Stroman | | 42 | | served as Vice President, Human Resources |
| until September 2009 and Jared P. Benson | | 39 | | served as Vice President, Enterprise and Wholesale Services |
_______________
(1) | William C. “Chad” Jones, Jr. served as Chief Service Officer until January 2008 and Jeffrey A. Brennan served as Senior Vice President of Business Services until August 2008.September 2009. |
Set forth below are descriptionsSee above for the description of the backgrounds of each of our executive officers, other thanbackground for Mr. Chestnutt, whose position and background is described above.Wilfley.
Michael L. Wilfley has served as our Chief Financial Officer since July 2000. Mr. Wilfley has over 20 years experience as a chief financial officer, including eight years as a chief financial officer in the telecommunications industry. Previously, from 1998 to 2000, Mr. Wilfley was the chief financial officer of Thrifty Call, Inc., a telecommunications company, where he was responsible for the capital markets and mergers and acquisitions efforts that led to our eventual acquisition of Thrifty Call. Prior to working for Thrifty Call, from 1993 to 1997, Mr. Wilfley served as the chief financial officer for Littlefield Real Estate Co., a private investment company. Mr. Wilfley serves on the board of directors of Littlefield Corporation, a public company listed on the over-the-counter bulletin board. Mr. Wilfley is a certified public accountant and a graduate of The University of Texas at Austin, where he earned his BBA degree in Accounting.
Walter K.L. “Scott” Ferguson, Jr. has served as our Chief Operating Officer since February 2006. Prior to that, from July 2005 to February 2006, he served as Interim Chief Executive Officer and President, and from June 2002 to January 2005, Executive Vice President, Retail Services and from February 2000 to June 2002 as Chief Operating Officer. Previously, from 1997 to 1999, Mr. Ferguson was a founding partner and senior vice president of PrimeOne, L.P., a broadband video services company. At PrimeOne, Mr. Ferguson was involved with operating, sales and customer service strategies for BellSouth, SBC Communications, Inc. and Southern New England Telephone Corporation broadband trials and businesses. Prior to working at PrimeOne, Mr. Ferguson served in various capacities at Prime Cable, a cable multiple systems operator based in Austin, Texas, including vice president of administrative services and vice president of operations. Prior to Prime Cable, Mr. Ferguson worked for Tenneco, Inc. in the corporate finance and investor relations groups as well as Arthur Young & Co. where he focused in tax practice. He is a certified public accountant and a graduate of The University of Texas at Austin, where he earned his BBA degree in Finance and an MBA in Accounting and Finance.
Kay Stroman has served as our Vice President of Human Resources since September 2001. Prior to that, Ms. Stroman served as both Senior Manager and Director of Human Resources since joining Grande in July 2000. Prior to joining Grande, Ms. Stroman worked with Hexcel Corporation, an international manufacturer of advanced structural materials. As a member of Hexcel's management team, she interacted with all levels of plant and corporate management in the creation and use of strategic employee relations programs. Ms. Stroman earned her Bachelor of Arts in Political Science and Speech Communications from Texas State University.
Jared P. Benson has served as Vice President of Enterprise and Wholesale Services since August 2008. Prior to that, from January 2001 to August 2008, he served as Vice President of Network Services. Mr. Benson is responsible for Grande’s Enterprise and Wholesale divisions. Prior to joining Grande in April 2000, he served as Senior Carrier Account Manager for C3 Communications Network Division. Mr. Benson also provided voice, data and Internet service consulting to a variety of businesses while President of Intellicom Consulting Corporation. Before his consulting work, he served Westel Long Distance Communications, Inc. managing regional sales, where he directed multiple branch sales offices across the South. Additionally, Mr. Benson serves on the Board of Texaltel as its Vice President, a trade association with the purpose of promoting the business interests of competitive telecommunications and data service providers. He also served as the Marketing Chair on the board of the Young Men's Business League of Austin. Mr. Benson received his Bachelor of Science in Marketing from the University of Tulsa.
Contractual Provisions Relating to Grande’sHoldings’ Board of Directors
In November 2005,Holdings is party to the Sixth Amended and Restated Investor Rights Agreement (the “Rights Agreement”) with holders of its Preferred Stock and certain stockholders and Grande entered into an investor rightsholders of its Common Stock. Under the Rights Agreement, each stockholder who is a party to such agreement under which those stockholders agreedagrees to vote all securities of their Grande capital stockHoldings over which such stockholder has voting control and to take all other necessary or desirable actions within its control so that the directors are selected in favor of certain designees tocompliance with the board of directors. The board of directors currently consists of seven members and, under the investor rights agreement, may consist of no more than ten directors. Under the terms of the investor rights agreement,following requirements. Robert Hughes, representing the Robert W. Hughes Charitable Remainder Trust No. 1, has the right to designate one member of the boardBoard of Directors as designated by the common stockholders. TheUp to five directors (the “Series A Directors”) are to be designated by the holders of ourthe outstanding Series A preferred stock have the right to designate five representatives to Grande’s board of directors, withP referred Stock, two of the five towhom may be designated by Centennial Fund VI, L.P., on behalf of itself and the other Centennial entitiesany of its affiliates or related funds that are GrandeHoldings’ stockholders and(“Centennial”), two of the five towhom may be designated by J. H. Whitney IV, L.P. and any of its affiliates that are Grande stockholders. TheHoldings’ stockholders (“Whitney”), and one of whom may be designated by the holders of oura majority of the outstanding shares of Series A Preferred Stock. One director is to be designated by the holders of a majority vote of the outstanding Series D preferred stockPreferred Stock and Series E preferred stock togetherPreferred Stock, voting as a single class haveclass. One director is to be the rightperson serving as president or chief executive officer of Holdings. One independent director is to designate one representative to Grande’s board of directors. The nominating committee hasbe selected by the right to select a representative to Grande’s board of directors, who must beNominating Committee and approved by the boardBoard of directorsDirectors and the holders of a majority of Grande’s capital stock, otherHoldings’ Equity Securities (as defined in the Rights Agreement) who are parties to and identified as “Inve stors” in the Rights Agreement (the “Outside Director”).
The rights of Centennial and Whitney each to designate two Series A Directors are subject to each such entity continuing to maintain certain minimum percentages of ownership of Holdings stock. If the requisite percentage fails to be maintained by either Centennial or Whitney, then such entity shall relinquish the right to designate one of its two Series A Directors and the holders of a majority of the shares of Series A Preferred Stock then outstanding shall have the right to designate such Series A Director. Currently, Centennial and Whitney each maintain more than the stock held byrequisite percentage and therefore continue to have the founders of Grande identified in an exhibitright to the investor rights agreement. The person serving as Grande’s president or chief executive officer will also serve on Grande’s board of directors.designate two Series A Directors.
Currently, all seven directorsThe right of our board of directors were elected in accordance with designations or selections made under the terms of the investor rights agreement. Centennial has designated one of our current directors, Mr. Hull, and Whitney has designated two of our current directors, Messrs. Laverack and Hockin. Mr. Walsh is the director designated by the holderseach to designate one of the Series A preferred stock;Directors will terminate on the effective date of the registration statement pertaining to Holdings’ first firm commitment underwritten public offering with an offering price of at least $1.30 per share and gross proceeds to Holdings of at least $150,000,000. However, if either of Centennial or Whitney has already relinquished the right to designate one director due to its failure to maintain the requisite percentage of ownership, then the right of the holders of Series A Preferred Stock to designate such Series A Director in place of Centennial or Whitney, as applicable, shall terminate upon such date.
The Board of Directors currently consists of seven members. Messrs. Laverack and Hockin currently serve as the Series A Directors designated by Whitney. Mr. Hull currently serves as one of the Series A Directors designated by Centennial. Centennial has chosen to leave one of its designee Series A Director positions vacant, but has reserved its right to designate such Series A Director in the future. Mr. Walsh currently holds a seat on the Board of Directors that is not required to be designated in accordance with the Rights Agreement. Mr. Butler is the director designated by the holders of the outstanding Series D preferred stockPreferred Stock and the Series E preferred stock;Preferred Stock. Mr. ChestnuttWilfley is our president and chief executive officer; andthe Chief Executive Officer of Holdings. Mr. Orchard currently serves as the director selected by the nominating committeeOutside Dire ctor.
Pursuant to the investor rights agreement,Rights Agreement, to the extent that a holder of at least 15 million15,000,000 shares of preferred stockPreferred Stock of Holdings does not have a representative on our boardthe Board of directors,Directors, such holder has the right to designate a non-voting observer to attend meetings of the boardBoard of directors.Directors. The right of observers to attend meetings of the boardBoard of directorsDirectors is subject to exclusionthe right of the Board of Directors to exclude any observer from all or any portion of a meeting to the extent required to protect confidential information of Holdings or to preserve and protect the attorney-client privilege. We require all board observers to execute a confidentiality agreement on customary terms with respect to all non-public information that they receive or are given access to as a result of their attendance at board meetings.
Under the investor rights agreement, our board of directors must meet at least six times a year and must maintain nominating, audit and compensation committees. The audit committee may not include any representatives of our management. The nominating and compensation committees must include at least one of Centennial’s directors and at least one of Whitney’s directors, and the directors designated by the holders of Series A preferred stock must comprise a majority of the members of such committees.
Director Independence
Our securities are not listed on any national securities exchange, and therefore, we are not required by any such exchange to have a majority of, or any, independent directors. Although we have no formal written director independence standards, in February 2008, our board of directors analyzed the independence of all members of the board at that time and determined that all six members who are not officers of the CompanyHoldings would be considered to be independent as that term is defined under the listing standards of the NASDAQ Global Select Market. We have also determined that all members of the audit committee met the additional independence requirements of the applicable SEC rules regarding audit committee membership, all members of the compensation committee and the nominating committee met the independence requirements of the NASDAQNAS DAQ Global Select Market and all members of the compensation committee are “outside directors” as defined in Section 162(m) of the Internal Revenue Code. The relationships of (i) John C. Hockin and William Laverack, Jr. to the Whitney Funds, (ii) Duncan T. Butler, Jr. and David C. Hull, Jr. to the Centennial funds and (iii) Duncan T. Butler, Jr. to the Prime fund were considered in connection with these determinations. Our nominating committee, in accordance with its charter, and our board of directors will continue to periodically evaluate the independence of members of the board of directors and each committee and expects to complete its annual evaluation during 2009.
Board Committees
Grande’sHoldings’ board of directors has established and maintains an audit, compensation, nominating and finance committee.
Audit Committee. The audit committee, currently consisting of Messrs. Walsh, Hull and Orchard, all of whom are independent directors, is responsible for appointing the firm to serve as independent accountants to audit Grande’sHoldings’ financial statements. The audit committee then discusses the scope and results of the audit with the independent accountants and reviews with the independent accountants and management Grande’sHoldings’ interim and year-end operating results. In addition to these activities, the audit committee considers the adequacy of internal controls over financial reporting and disclosure controls and procedures. The audit committee also oversees audit procedures and approves all audit and non-audit services to be performed by the independent accountants. Mr. Walsh serves as the Chairman of the audit committee and is the “audit committee financial expert” as defined by SEC rules. Prior to the end of his term in January 2009, Mr. Schmeltekopf served as the Chairman of the audit committee and was the “audit committee financial expert” as defined by SEC rules. The committee charter is available on our website at the investor relations portion of www.grandecom.com.included as exhibit 99.1 in this annual report.
Compensation Committee. The compensation committee oversees the establishment of the compensation policies applicable to managementHoldings and administers Grande’sadministered Holdings’ stock option plan.plan prior to its termination in February 2010. The compensation committee currently consists of Messrs. Butler, Hull and Laverack and Mr. Butler serves as Chairman of the compensation committee. The committee charter is available on our website at the investor relations portion of www.grandecom.com.included as exhibit 99.2 in this annual report.
Although no formal written policies and procedures are in place other than the compensation committee charter, the compensation committee is responsible, among other things, for:
establishing the salary scale of officers and employeesemployees;
examining periodically the compensation structure of the Company;
structure;
monitoring the health and welfare benefit and compensation plans of the Company;
plans;
determining the Annual Cash Incentive Plan; and
approval of equity incentive awards.
The compensation committee has the sole authority to discharge its responsibilities, including, requesting appropriate funding from the CompanyHoldings to compensate any advisor retained by the compensation committee. The compensation committee may delegate all or a portion of its duties and responsibilities to a board of director subcommittee. Additionally, the compensation committee may direct management to assist the committee in any of its duties. The compensation committee has not engaged any compensation consultants in setting executive compensation.
Nominating Committee. The nominating committee recommends individuals to serve on the board of directors and is responsible for, among other things, reviewing at least annually that the Board and each of its committees meet the requirements for independence, expertise or otherwise imposed by the SEC. The nominating committee currently consists of Messrs. Hull, Laverack and Orchard.Orchard and Mr. Laverack serves as chairman of the nominating committee. The nominating committee does not have a policy with regard to the consideration of any director candidates recommended by security holders because that process is governed by the terms of the investor rights agreement described above under “Contractual Provisions Relating to Grande’sHoldings’ Board of Directors.”
Finance Committee. The finance committee makes recommendations to the board of directors regarding plans for expenditures by the Company.Holdings. The finance committee also recommends an annual budget to the board of directors, advises the board of directors regarding the need for financing and makes recommendations regarding the terms of such financing and asset management in connection with the raising of funds. The finance committee currently consists of Messrs. Butler, Laverack and Walsh.Walsh and Mr. Butler serves as chairman of the finance committee. Mr. Schmeltekopf served as a member of the finance committee until the end of his term in January 2009.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee was at any time during 20082009 an officer or employee of GrandeHoldings and no member had any relationship with GrandeHoldings requiring disclosure as a related-party transaction in the section entitled “Certain Relationships and Related Transactions, and Director Independence.” No executive officer of GrandeHoldings has served on the board of directors or compensation committee of any other entity that has or has had one or more executive officers who served as a member of our board of directors or the compensation committee of our board of directors during 2008.2009.
Code of Ethics
We have adopted a code of ethics that applies to all of our employees including our executives, chief executive officer and chief financial officer. For a copy of our code of ethics containedRefer to exhibit 99.3 in our corporate compliance policy, please visit our website at the investor relations portion of www.grandecom.com. We will disclose changes to or waivers of the code of ethics on this website.annual report.
| ITEM 11. | ITEM EXECUTIVE COMPENSAT11.ION | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
As a result of the recapitalization transactions, the only officers of Holdings are Michael L. Wilfley and W.K.L. “Scott” Ferguson and Holdings has no employees. Therefore, subsequent to the transactions contemplated by the Recapitalization Agreement, Holdings no longer has any compensatory requirements.
Additionally, in connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, after October 9, 2009, we had no outstanding options to purchase any equity of Holdings.
Prior to the transactions contemplated by the Recapitalization Agreement:
We provideprovided a total compensation program that we believe willbelieved would be perceived by both our employees and our stockholders as fair and equitable. In addition to conducting analyses of market pay levels and considering individual circumstances related to each executive officer, we also considerconsidered the pay of each executive officer relative to our other executive officers and with respect to the role and responsibilities of the position held. We have designed the total compensation program to be consistent for our executive management team and, primarily, without regard to level of employment.
The purpose of our compensation program iswas to reward and sustain desired individual performance that translatestranslated into desired organizational performance and to attract, retain, and motivate executive officers and other senior management with the quality and profile required to successfully lead the Company in our highly competitiveHoldings and evolving industries.Grande Operating. This Compensation Discussion and Analysis explains our compensation philosophy and objectives, compensation policies and practices, and elements of our compensation program with respect to our chief executive officer, chief financial officer, and the other three most highly compensated executive officers, collectively referred to as the named executive officers (“NEOs”). The group of employees considered executive officers for purposes of determining the NEOs for Holdings and Grande isOperating i s defined as our president and chief executive officer, our chief financial officer, our chief operating officer and any vice president of Grande Communications Holding, Inc. in charge of a principal business unit, division or function (such as sales, administration or finance), and any other officer who performsperformed a policy making function for Holdings and Grande Communications Holdings, Inc.
Compensation Philosophy and Objectives
Grande’sHoldings’ and Grande Operating’s compensation philosophy iswas to provide an attractive, flexible, and market competitive total compensation program tied to performance and aligned with stockholder interests. We believebelieved that total compensation includesincluded everything the employee perceivesperceived to be of value resulting from the employment relationship and that willwould motivate the employee to perform.
We considerconsidered the following objectives in setting the compensation components for our executive officers:
design competitive total compensation and rewards programs to enhance our ability to attract and retain experienced executives, whose knowledge, skills and performance arewere critical to our success;
set compensation and incentive levels that arewere competitive with our peer group, as described below;
drive and reward performance that supports the Company’ssupported financial and strategic goals;
provide a significant percentage of total compensation that iswas “at-risk”, or variable, based on predetermined performance criteria;
alignaligned the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value through equity or equity based incentives;
ensureensured fairness among the executive management team; and
fosterfostered a shared commitment among executives by coordinating the Company,Holdings and Grande Operating, their team and individual goals.
In establishing compensation within the framework of the above objectives, the Compensation Committee considers:considered:
whether the performance targets underlying cash incentive awards have beenwere achieved and the difficulty in achieving such targets given current and expected economic conditions;
whether benefits willwould be realized under stock options or other equity awards given current and expected economic conditions; and
the projections for distributions that may occurcould have occurred in the next several years under our compensation plans.
In addition, we reviewreviewed the compensation practices and market data of companies with revenue and company size similar to ours both within our industry and as applicable to general industry groups, which we refer to as our “peer group”. We have chosenchose to benchmark our compensation against our peer group to ensure internal equity and consistency with external market practices. To identify our peer group, we participateparticipated in salary surveys from time to time to gain access to various survey data. We utilizeutilized two different compensation analysis tools to assist us in this process for our executive positions: The Thobe Group survey and Salary.com’s Executive Compensation Database.
The Thobe Group survey is a national telecom industry specific survey tool. Companies who participateparticipated in this survey include:included:
| Broadwing Communications | | Citizens Communications | | Integra Telecom CLEC |
| Cablevision | | HickoryTech | | Mpower Communications |
| Charter Communications | | Integra Telecom ILEC | | Pac-West Telecomm, Inc. |
| Covad | | QWEST | | RCN Corporation |
| Cox Communications, Inc. | | AT&T Inc. | | TDS Metrocom |
| Global Crossing, Inc. | | TDS Telecommunications, Inc. | | TelCove |
| ALLTEL Corporate | | Verizon Communications | | Time Warner Telecom |
| ALLTEL Wireline | | Birch Telecom | | PAETEC |
| CenturyTel, Inc. | | Enventis Telecom | | XO Communications |
| Cincinnati Bell | | IBasis | | Williams Communications Group |
Salary.com is a national compensation benchmark subscription service with over 3,500 enterprise subscribers offering real time survey information on general industry positions that can be searched by revenue and company size. The data sets contain base, bonus and incentive pay data for positions held by more than 80% of U.S. employees and similar data for the top executives in more than 12,000 U.S. public companies. Salary.com combines one of the largest databases of U.S. public company executives with on-demand software to create a leading source of executive and director compensation information. Because survey participation is confidential, specific companies in our peer group are not identifiable.
The comparative peer group data iswas used to help establish and determine fair and equitable base salary adjustments each year when budgeting for merit increases and other salary adjustments, as necessary. The peer group comparison iswas taken into consideration along with individual and company performance to determine the final merit and/or other salary adjustment, if any. Although the peer group data iswas used to determine base pay and other changes as defined above, ultimately discretion iswas used by the compensation committee and Grande’sthe Company’s then chief executive officer for the final determination of a salary change, based on the benchmark data, company and individual performance. The peer group benchmarks chosen for consideration arewere those relative to our industry and size, and are primarilywere primar ily used for base pay considerations, but also serveserved to assess the continued competitiveness of the NEOs’ total cash compensation package.
Executive Compensation Policies and Practices
Our compensation committee, which is composed of three non-management independent directors, overseesoversaw the establishment and the administration of the compensation policies applicable to our NEOs and administersadministered our stock incentive plan. Annually,Prior to the transactions contemplated by the Recapitalization Agreement, annually, the compensation committee reviewsreviewed recommendations and approvesapproved base pay changes and bonus distributions for Grande’sHoldings’ and Grande Operating’s then chief executive officer. Benchmark data, as well as individual and company performance iswas taken into consideration at thisthat time. Additionally, the compensation committee reviewsreviewed base pay changes and bonus distribution recommendations made by Grande’sHoldings’ and Grande Operating’s then chief executive officer for the other NEO’s, whenw hen it iswas outside the scope of the NEO’s employment agreement, where applicable (not all NEO’s havehad an employment agreement). For NEO’s who havehad written contracts, any changes or amendments to the agreement willwould be ratified by the compensation committee. For more information on our compensation committee, including information on the scope of its authority, please see Item 10. “Directors, Executive Officers and Corporate Governance—Board Committees” above. The compensation committee hashad adopted the material policies described below related to executive compensation, as was documented in the Company’s total compensation program for all employees, to providethat provided consistency in the application of compensation across all grades levels and to helphelped maintain internal and external equity. These policies and practices arewere periodically evaluated for effectiveness by management through benchmark survey participation and data analysis, employee retention results and internalinterna l survey findings and such policies and practices arewere reviewed by the compensation committee on an annual basis.
Allocation between cash and non-cash compensation. Historically, it hashad been our policy to allocate all short-term NEO compensation in the form of cash and all long-term compensation in the form of option awards to purchase our common stock and Series H preferred stock to provide a long-term retention incentive. However, during 2008 and 2009, no stock options were granted to any NEO and since 2008, we ceased issuing common stock option grants to all employees until management and the compensation committee cancould perform further analysis on the ability of the equity based incentive program to meet our compensation program objectives. During 2008,2009, the potential compensation that could have been paid consisted of base pay and annual cash incentive compensation pursuant to our 2008 Cash Incentive Plan.o ur cash incentive plan. However, no discretionary bonus or award under the 2008 Cash Incentive Plancash incentive plan was paid during 2008.2009. As noted below under the “Summary Compensation Table,” Mr. Chestnutt wasbonuses were paid a bonus in January 20082009 that related to the fiscal year ending December 31, 2007.transactions contemplated by the Recapitalization Agreement.
Health and Welfare Programs. It iswas our policy that there willwould be no material difference in the health and welfare benefit offerings made to our executive officers and those that arewere offered to all employees of the Company.employees.
Elements of Executive Compensation
Historically, we have provided what we believe isbelieved was a competitive total compensation package to our NEOs through a combination of base salary, an annual cash incentive plan, an equity incentive plan and broad-based benefits programs. During the third quarter of 2008, we ceased issuing common stock option grants to all employees until management and the compensation committee cancould perform further analysis on the ability of the equity based incentive program to meet our compensation program objectives. Additionally, effective in 2009, and until otherwise determined, we have suspended certain elements of compensation applicable to all employees of Grande as part of a company wide cost reduction initiative.
Overall, our compensation programs arewere designed to be consistent with the philosophy and objectives set forth above. The basic elements of our compensation programs are summarized in the table below, followed by a more detailed discussion of each component of total compensation.
| | | | |
| Base salary | | Fixed annual cash compensation; all members of management arewere eligible for periodic increases in base salary based on performance; targeted at or around the median market base salary level. | | KeepKept our base compensation competitive with our peer group for skills and experience necessary to meet the requirements of the employee’s role with the Company and enhanceenhanced our ability to attract and retain executive talent critical to the success of the business. |
| | | | |
| Annual cash incentive plan | | Performance-based annual cash incentive earned based on the CompanyGrande Operating’s and individual’s performance against target performance level; incentive pay out percent iswas targeted at the median market incentive level for our peer group. | | MotivateMotivated and rewardrewarded for the achievement and over-performance of our critical financial and strategic goals. Amounts earned for achievement of target performance levels arewere based on our annual budget and arewere designed to provide a market-competitive pay package at median performance; potential for lesser or greater amounts iswas intended to motivate participants to exceed our financial performance goals and to not reward if performance goals arewere not met. |
| | | | | |
| Equity incentive plans (stock options) | | Long-term equity incentive awards, which havehad value only to the extent the Company’sGrande Operating’s value increasesincreased over time with consideration given to competitive practices with our peer group. | | AlignAligned interest of management with stockholders; motivatemotivated and rewardrewarded management to increase the stockholder value of the Company over the long term. Vesting was based on continued employment willwould facilitate retention; amount realized from exercise of stock options rewards increased stockholder value of the Company; providesvalue; and provided change in control protection for executive options. |
Element | | Characteristics | | Objectives |
| Health & welfare benefits | | Fixed component. The same health & welfare benefits (medical, dental, vision, disability insurance and life insurance) arewere available for all full-time employees. | | ProvidesProvided benefits to meet the health and welfare needs of employees and their families. |
| | | | | |
| Retirement savings opportunity (401(k) Plan) | | Tax-deferred plan in which all employees cancould choose to defer up to 100% of compensation for retirement, subject to annual statutory limitations. We provideprovided matching contributions comparable to peer companies. | | ProvideProvided employees the opportunity to save for their retirement. Account balances arewere affected by continued contributions, the Company’sGrande Operating’s matching contributions and investment choices made by the employee. |
All pay elements arewere cash-based except for the equity incentive program, which iswas an equity-based (stock options) award. In addition to the objectives and other matters discussed above, we considerconsidered market pay practices and practices of our peer group in determining the amounts to be paid, what components should be paid in cash versus equity, and how much of a NEO’s compensation should be short-term versus long-term. Our goal iswas to be at or around the 50th percentile of our peer group for cash compensation. All benchmark goals arewere discretionary.
Our executive officers, including the NEOs, arewere assigned to pay grades, determined by comparing position-specific roles and responsibilities with the market pay data and our internal structure. Each pay grade hashad a base salary range with corresponding cash and equity incentive award opportunities. We believebelieved this iswas the most transparent and flexible approach to achieve the objectives of our executive compensation program.
With respect to new executive officers, we taketook into account their prior base salary and annual cash incentive, as well as the contribution expected to be made by the new executive officer, our business needs and the role of the executive officer with the Company.officer. As with all of our employees, we believebelieved that our executive officers should be fairly compensated, which we believe includesbelieved included the 50th percentile of our peer group.
There arewere no differences in how targets arewere set or the compensation philosophy and objectives among the NEOs. The elements of the compensation package arewere only different among the NEOs, including Grande’sthe then chief executive officer, based on the existence of an individual employment agreement for certain NEOs. The primary difference between NEOs with an employment agreement and those without an employment agreement iswas the severance benefit guarantee and the level of benefit within the specific compensation element (i.e. cash incentive percentage). Additionally, the level of approval required for compensation changes iswas different for Grande’sthe then chief executive officer, which requiresrequired approval by the board of directors for salary increases, and other NEOs, which salary increases arewere determined by Grande’sthe then chief executive officer.
The decision to award changes in one element, for instance, base salary, did not affect any changes that may have been made in another, for instance stock option incentives. Awarding a base salary increase and equity incentives arewere the most likely scenario where one decision maywould impact the other, however, that haswas not yet been the case at Grande.case. Health and welfare plans and 401(k) matching arewere administered evenly to all employees, without regard to level, across the Company.level.
Base Salary
We reviewreviewed salary ranges and individual salaries for all employees, including our NEOs, on an annual basis. We reviewreviewed the base salary for each executive officer based on consideration of median pay levels of our peer group and internal factors such as the individual’s performance and experience, the position’s scope and responsibilities, the pay of other officers and retention needs.
We considerconsidered market median pay levels (the 50th percentile) among individuals in comparable positions with transferable skills within our peer group as described above.
We also considerconsidered the following when establishing or adjusting the base salary of any executive officer:
our business need for the executive officer’s skills;
the contributions that the executive officer hashad made or we believe willbelieved would make to our success;
the transferability of the executive officer’s managerial skills to other potential employers;
the relevance of the executive officer’s experience to other potential employers, particularly in the telecommunications industry; and
the readiness of the executive officer to assume a more significant role with another potential employer.
We believebelieved a competitive base salary iswas necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us. Specifically, we targettargeted the market median (50th percentile) of our peer group base salary for base and total compensation as well as consideringconsidered individual performance and experience, in order to ensure that each executive iswas appropriately compensated. The 50th percentile iswas determined by assessing market competitive compensation data as described above.
The base salaries earned by our NEOs are set forth below in the Summary Compensation Table. During the year ended December 31,In 2008 total compensation earned by our current NEOs was approximately $1.6 million, with our chief executive officer earning approximately $0.6 million of that amount. In 2008,and 2009, there were no adjustments made to our NEOs’ compensation based only on company performance and budgetary constraints. Review of current market pay levels benchmarked in the published surveys described above, individual performance of the NEO, the role and responsibilities of the NEO and the relationship of the NEO’s base salary to the base salary of our other executives werewas not considered in 2008 or 2009 when making the decision to not make any base pay adjustments.
Annual Cash Incentive Plan
During 2008, we established a 2008 Cash Incentive Plan pursuant to which our executive officers, including our NEOs, were eligible to receive an annual cash incentive payment based upon our performance against pre-established annual performance targets, including financial measures and other factors such as individual performance. We believe that the Annual Cash Incentive Plan helps focus our executive officers’ efforts and rewards NEOs for annual operating results that help create value for our stockholders. The 2008 Cash Incentive Plan was presented to the compensation committee for review, and ultimately to the board of directors for their approval with such modifications deemed appropriate by the board of directors. For 2008, the Cash Incentive Plan was based on a percentage of base salary subject to the Company’s performance exceeding the Adjusted EBITDA goal. We chose Adjusted EBITDA as the goal because we believe that achieving our Adjusted EBITDA goal requires the concerted effort and teamwork of many different functions within Grande under the oversight of the NEOs. It is also heavily impacted by the dynamic, highly competitive and regulated nature of our industry and the markets within which we operate. To achieve our annual company goal is, therefore, a stretch goal for our executive team. See “Selected Financial Data – Non-GAAP Financial Measures” for a discussion of this non-GAAP financial measure of our operating performance as well as our use of Adjusted EBITDA. When our performance exceeds the Adjusted EBITDA threshold, funds are set-aside into a bonus pool for distribution to our NEOs and other eligible employees. Funds continue to accumulate in the bonus pool until the maximum potential performance payout for all NEOs and other eligible employees is met. The compensation committee may exercise discretion by adjusting awards based on its consideration of each NEO’s individual performance, and for each NEO other than the chief executive officer, based on a review of such NEO’s performance as communicated to the compensation committee by the chief executive officer. Executive performance is reviewed against the budgeted financial goals as well as internal goals set in support of the financial goals such as operational efficiency goals or employee retention goals. The goals are mutually agreed upon by and between the chief executive officer, the individual executive and the executive team. The chief executive officer’s performance is evaluated by the compensation committee based on overall company performance against the budgeted financial goals as approved by the board of directors. The Annual Cash Incentive Plan awards for all executive officers, including the NEOs, must be reviewed and recommended by the compensation committee for approval and ultimately must be approved by the board of directors before being paid. The compensation committee and the board of directors may modify the Annual Cash Incentive Plan awards prior to their payment.
Generally, incentive award opportunities are targeted to result in Annual Cash Incentive Plan payments comparable to the market median (50th percentile) of the external peer group assuming our target business objectives are achieved. If the target level for the performance goals is exceeded, executives and other eligible employees have an opportunity to earn cash incentive awards above the median of the market of our peer group. We chose the 50th percentile because we believe that it allows us to attract and retain executives. If the target level for the performance goal is not achieved, executives and other eligible employees earn
During 2009, no cash incentive plan payments. In 2008, there were no cash incentive payment under the 2008 Cash Incentive Plan was established based only on company performance and there were no discretionary cash incentive payments, outside the Cash Incentive Plan, that were awarded by the board of directors to any employee, including the NEOs.budgetary constraints. As noted below under the “Summary Compensation Table,” Mr. Chestnutt wasbonuses were paid a bonus in January 20082009 that related to the fiscal year ending December 31, 2007. Currently, no Annual Cash Incentive Plan has been established for 2009 until further considerationtransactions contemplated by the compensation committee.Recapitalization Agreement.
Equity Incentive Plans (Stock Options)
In connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, after October 9, 2009, we had no outstanding options to purchase any equity of Holdings.
Historically, we have offered equity incentive awards to create a long-term incentive and to reward the performance of our employees, including our NEOs, which improves the Company’sHoldings’ and Grande Operating’s performance and increases stockholder value, thereby strengthening the mutual interests between NEOs and stockholders. By providing equity awards to our NEOs, they are not only rewarded for past performance but also have a long-term incentive to continue to promote the Company’sHoldings’ and Grande Operating’s success. During the third quarter of 2008, we ceased issuing common stock option grants to all employees until management and the compensation committee cancould perform further analysis on the ability of the equity based incentive program to meet our compensation program objectives, which can then be considered by the compensation committee.objectives.
In the past, we have utilized stock options as the form of our equity incentives. We believebelieved that stock options alignaligned employee incentives with the interests of our stockholders because options havehad value only if the value of our stock increasesincreased over time. The compensation committee hashad made discretionary stock option grants to NEOs of the Company, as recommended by the chief executive officer, based on a number of factors including each NEO’s individual performance; the importance of the individual’s talent and knowledge to the future success of the Company;Holdings and Grande Operating; and overall contribution to the Company’sHoldings and Grande Operating’s success. The compensation committee also hashad granted equity awards to newly hired executive officers as a way of promoting long-term investment in the CompanyHoldings as the stock awards arewere earned over a period of time.ti me. Typically, the size of grants arewere set at a level that iswas deemed appropriate to create a meaningful opportunity for stock ownership based upon the NEO’s performance, position, potential for future responsibility and promotion, and overall expected contribution to the Company’sHoldings’ and Grande Operating’s success. The compensation committee also considersconsidered other factors in determining the size of the grant such as the amount of unvested options held by the individual from prior grants, the length of time that the employee hashad been with the Company,employed, the amount of other compensation earned by the NEO and the size of option grants held by other executive officers in comparable roles. The relative weight given to each of these factors variesvaried from individual to individual. Peer group practices playplayed a minimal role in the determination of individual awards. We believebelieved that equity awards arewere one component of an overall compensation package that iswas competitive with our peer group. However, the amountsam ounts of the awards arewere determined by internal factors only, such as performance and equity as compared to other executives.
Historically, stock option grants were triggered by new hire and at the time of internal promotion to a higher grade level associated with an increased grant award or at the discretion of the compensation committee for reward or retention purposes. All new hires were assigned a stock option grant amount based on their grade level at the time of hire. New hire stock option awards as well as stock option awards associated with an internal promotion arewere subject to board approval. The grant dates associated with all option grants iswas the date the option awards arewere approved by the board.
2000 Stock Incentive Plan Summary
On October 25, 2006, the board of directors of the CompanyHoldings approved and adopted the Grande Communications Holdings, Inc. Second Amended and Restated 2000 Stock Incentive Plan (the “2000 Stock Incentive Plan” or the “Plan”). The stockholders approved the 2000 Stock Incentive Plan at the annual stockholders meeting on December 6, 2006.
Administration. Our board of directors or a committee designated by the board of directors, such as the compensation committee (in either case, we refer to such body as the board of directors) administers the 2000 Stock Incentive Plan.
Stock Subject to the Plan. The number of shares of common stock available for issuance under the Plan is the lesser of (i) 10% of all of the shares of capital stock on a fully diluted basis, as if all such shares of capital stock were converted to common stock or (ii) 82,000,000 shares of common stock. Of the shares available for issuance under the Plan, 30,000,000 shares of Series H preferred stock and 12,000,000 shares of common stock are designated as “Executive Compensation Shares”. The maximum number of shares that may be reserved for issue pursuant to incentive stock options under the 2000 Stock Incentive Plan may not exceed 82,000,000 shares of stock.
As of December 31, 2008, the number of shares that are reserved for issuance upon exercise of outstanding option agreements were 33.9 million shares of common stock that are not Executive Compensation Shares, 7.5 million shares of common stock that are Executive Compensation Shares and 23.2 million shares of Series H preferred stock (all shares of Series H preferred stock are Executive Compensation Shares). The weighted average exercise price of common stock options and Series H preferred stock options outstanding as of December 31, 2008 was $0.06 and $0.10, respectively, and all option exercise prices currently exceed the fair value of the underlying stock. As of December 31, 2008, the number of shares that remain available for future issuance under the 2000 Incentive Stock Plan were 34.2 million shares of common stock that are not Executive Compensation Shares, 4.5 million shares of common stock that are Executive Compensation Shares, and 6.8 million shares of Series H preferred stock.
Eligibility. Officers, employees, directors, consultants or advisers to the Company are eligible to participate in the Plan. The 2000 Stock Incentive Plan provides that the Executive Compensation Shares may only be issued to directors, officers or key employees, as approved by the board of directors from time to time.
Awards Under the 2000 Stock Incentive Plan. We may award “incentive stock options” and “non-statutory stock options” under the 2000 Stock Incentive Plan (in either case we refer to such awards as the options(s)).
Incentive Stock Options. Incentive stock options awarded under the 2000 Stock Incentive Plan must have an exercise price of at least 100% of the fair market of our stock on the date of grant. In the case of an employee who owns more than 10% of our voting power, the exercise price will be the greater of the aggregate par value of the stock and at least 110% of the fair market value of the stock on the date of grant.
Non-Statutory Stock Options. We can award non-statutory stock options to any person eligible under the 2000 Stock Incentive Plan. The minimum exercise price for non-statutory stock options under the 2000 Stock Incentive Plan is 85% of the fair market value of our stock on the date of grant, provided, however, that (i) if the grantee owns more than 10% of our voting power, the exercise price will be the greater of the aggregate par value of the stock and at least 110% of the fair market value of the stock on the date of grant, (ii) to the extent that the option is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended, the exercise price will be the greater of the aggregate par value of the stock and at least 100% of the fair market value of the stock on the date of grant.
Restricted Stock. Restricted stock may be granted under the 2000 Stock Incentive Plan and may be subject to vesting conditions that may be prescribed by the board of directors, including the satisfaction of corporate or individual performance objectives or continued service to the Company. In making an award of restricted stock, the board of directors will determine the restrictions that will apply, the period during which the award will be subject to such restrictions, and the price, if any, payable by a recipient. The restricted stock may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restriction period or prior to the satisfaction of any other conditions prescribed by the board of directors. A recipient of a restricted stock award must purchase the restricted stock from the Company at a purchase price equal to the greater of the aggregate par value of the stock and at least 85% of the fair market value of the stock on the date of grant, or if the recipient owns more than 10% of our voting power, then the purchase price will be the greater of the aggregate par value of the stock and at least 100% of the fair market of the stock on the date of grant. The purchase price for the restricted stock shall be payable in cash or cash equivalents or, if the board of directors determines, payable in consideration for past services rendered to the Company. Unless the board of directors otherwise provides in an award agreement, holders of restricted stock shall have the right to vote such stock and to receive any dividends and distributions declared or paid with respect to such stock. Restricted stock is also subject to a right of first refusal of the Company that the Company may assign to any of its stockholders or affiliates. The right of first refusal will not apply to transfers of restricted stock that occurs as a result of the death of the participant, but will apply to the executor, administrator, personal representative, estate and legatees, beneficiaries and assigns. To date, we have not made any restricted stock grants under the Plan.
Vesting. Options and restricted stock awards vest as determinedIn connection with the closing of the transactions contemplated by the board of directors and as stated in the individual’s award agreement. Vesting is subject to a participant’s continued employment or service with the Company. Vesting of suchRecapitalization Agreement, Holdings cancelled all outstanding options and restricted stock awards are subject to acceleration upon a Change of Control unless the board of directors exercises the right to cancel vested options or the award agreement provides otherwise. Generally, unless a specific award agreement provides otherwise, the options with respect to shares of stock that are not Executive Compensation Shares provide for a vesting of the total number of option shares over a four year period, commencing with vesting of 25% of the option shares on the first anniversary of the vesting start date, and an additional 25% for each of the three following anniversaries of that date. Generally, unless a specific award agreement provides otherwise, the options for Executive Compensation Shares and Series H preferred stock vest as follows: (i) 25% of the total option shares on the first anniversary of the vesting start date, (ii) 2.1% of the option shares on the last day of each of the first 35 months after such first anniversary, and (iii) 1.5% of the option shares on the last day of the 36th month after such first anniversary.
For newly hired employees, including NEOs, and newly elected directors, the vesting start date is based on the first day of employment or of service. In no case is the option grant date or exercise price backdated.
Other Terms Applicable to Options. Option agreements may contain other provisions that the board of directors determines are appropriate relating to when the options will become exercisable, the times at which and circumstances under which the options may be exercised and the methods by which the exercise price may be paid. Options that become exercisable will expire no later than ten years from the date the options were granted; however, in certain cases the Options will expire five years from the date they were granted (i.e., in the case of options granted to an employee who owns stock representing more than 10% of our voting power). Also, non-qualified options granted with respect to the right to purchase shares of Series H preferred stock include certain restrictions on the timing of when the options may be exercised. The exercise price is payable in cash or in cash equivalents and, for so long as the Company’s stock is not publicly traded, through a cashless exercise paid in Company stock held by the participant, provided that the option agreement does not prohibit cashless exercises. If the Company’s stock becomes publicly traded, then, to the extent permitted by the Company or as provided in an option agreement, a participant may pay the exercise price of an option as a cashless exercise in Company stock.
Adjustments Upon Changes in Capitalization, Recapitalization or Reorganization
The number of shares of stock subject to the 2000 Stock Incentive Plan (whether awarded or reserved but not awarded) as well as the price per share of stock subject to the 2000 Stock Incentive Plan (whether awarded or reserved but not awarded) is subject to adjustment in certain circumstances.
Reorganization in which the Company is the Surviving Entity and in which No change of Control Occurs. If the Company is the surviving entity in any reorganization, merger or consolidation of the Company with one or more other entities and in which no change of control occurs, any option granted under the 2000 Incentive Stock Option Plan, the number of shares of stock subject to an option granted prior to such reorganization, merger or consolidation will be adjusted to the number of shares that a holder of the number of shares of stock subject to the option would have been entitled immediately following such reorganization, merger or consolidation. The exercise price subject to an option granted prior to such reorganization, merger or consolidation would be proportionately adjusted so that the aggregate exercise price after such reorganization, merger or consolidation will be the same as the aggregate exercise price was prior to such reorganization, merger or consolidation.
Acceleration of Vesting. In the event of a change of control, vesting will be accelerated under the restricted stock award agreements awarded under the 2000 Stock Incentive Plan unless a particular award agreement provides otherwise. No restricted stock is outstanding as of December 31, 2008. Inand the event of a change of control, vesting will be accelerated under the option agreements awarded under the 2000 Stock Incentive Plan unless (i) a particular option agreement provides otherwise or (ii) an express provision is made in writing in connection with the change of control that vesting will not be accelerated.terminated on February 24, 2010.
Cancellation of Vested Options. In the event of a change of control, the board of directors may elect to cancel the vested options (including the options which become vested by reason of acceleration), if the cancellation date is no earlier than the last to occur of (a) the 15th day following delivery of the cancellation notice and (b) the 60th day prior to the proposed date for the consummation of the change of control. Unless the participant elects in writing to waive the right to a conditional exercise, any option exercise due to a cancellation related to a change of control will be conditional, meaning that if the transaction does not occur within 180 days of the proposed date for the consummation of the change of control, the exercising participant will be refunded all amounts paid to exercise his option, the exercise of the option will be void, and the option will be reissued.
Change of Control under the Option Agreements for the Purchase of Shares that are Not Executive Compensation Shares. Generally, under the option agreements regarding rights to purchase Company shares that are not Executive Compensation Shares, a change of control means:
(i) a change in ownership of the Company such that an individual or corporation or a group of persons acting in concert, excluding stockholders or affiliates of the Company (we refer to such a person, corporation or group as a Person) acquires more than 50% of the combined voting power of our stock, but it will not be a change of control if the Person already owns more than 50% of the total fair market value or combined voting power of our stock; or
(ii) a change in the effective control of the Company such that a Person acquires or has within the preceding 12 month period acquired, directly or indirectly, ownership of a number of shares of our stock which constitutes 50% of the combined voting power of our stock, provided, however, that if a Person already owns 50% or more of the combined voting power of our stock, the acquisition of additional shares of our stock by such Person is not a change of control; or
(iii) a change in the ownership of the assets of the Company such that a Person acquires or has within the preceding 12 month period acquired assets of the Company that has a total gross fair market value of all of the assets of the Company as determined by the board of directors (which will not be less than a minimum percentage required to comply with Section 409A of the Internal Revenue Code of 1986, as amended); provided that it will not be a change of control if (a) assets are transferred to an entity that is controlled by the stockholders of the Company immediately after the transfer, (b) the Company transfers assets to a Person that is a stockholder of the Company immediately before the asset transfer in exchange for the stockholder’s stock in the Company, (c) the Company transfers assets to an entity of which 50% or more of the total value or voting control is owned, directly, or indirectly, by the Company, (d) the Company transfers assets to a Person that owns, directly or indirectly, 50% or more of the total value or voting power of all of our stock, or (e) the Company transfers assets to an entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a Person that owns, directly or indirectly, 50% or more of the total value or voting power of all of our stock.
Some of the NEOs have option agreements for the purchase of shares of common stock that are not Executive Compensation Shares. For more information, see the tables of Outstanding Equity Awards at Fiscal Year End and Directors Outstanding Equity Awards at Year End.
Change of Control under the Option Agreements for the Purchase of Executive Compensation Shares. Under the existing option agreements regarding rights to purchase Company shares that are Executive Compensation Shares, the definition of a change of control includes all of the events described in the immediately preceding subparagraphs (i) – (iii) and also includes:
(A) a change in the ownership of the assets of the Company such that a Person acquires or has within the preceding 12 month period acquired assets of the Company that has a total gross fair market value of 50% or more of the assets of the Company as determined by the board of directors, rather than of all of the assets of the Company (as required in the immediately preceding subparagraph (iii) with respect to options to acquire shares that are not Executive Compensation Shares), subject to the same exceptions to a change of control outlined in (a)-(e) of such subparagraph (iii); or
(B) a change in the effective control of the Company such that as a result of any tender offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, a majority of the persons who were members of the board of directors is, within a 12 month period, replaced by individuals whose appointment or election to the board of directors is not endorsed by a majority of the board of directors prior to such appointment or election.
All of the NEOs and some of the directors have option agreements for the purchase of Series H preferred stock (all shares of Series H preferred stock available for issuance under the 2000 Stock Incentive Plan are Executive Compensation Shares) and some of the NEOs and directors have options for the purchase of shares of common stock that are Executive Compensation Shares. For more information on the option agreements to acquire shares of Executive Compensation Shares for the NEOs and directors, see the tables of Outstanding Equity Awards at Fiscal Year End and Directors Outstanding Equity Awards at Year End.
Rights of First Refusal of the Company and Repurchase Rights. Under the terms of the 2000 Stock Incentive Plan, Company stock acquired through the exercise of an option agreement is subject to transfer restrictions and to a right of first refusal of the Company. The right of first refusal will not apply to transfers of restricted stock that occurs as a result of the death of the participant, but will apply to the executor, administrator, personal representative, estate and legatees, beneficiaries and assigns. The Company may assign any of its rights of first refusal to any of its stockholders or affiliates. Unless otherwise provided in an option agreement, upon termination of a participant’s service or employment with the Company, the Company will have the right to purchase all of the stock acquired under or that will be acquired under the option agreement at the fair market value of the stock.
Termination, Amendment or Suspension. The board of directors may terminate, amend or suspend the 2000 Stock Incentive Plan as to any shares of stock as to which grants have not been made at any time, subject to the stockholder approval required under applicable law. No termination, amendment or suspension of the 2000 Stock Incentive Plan may, without the consent of the participant, alter or impair the rights or obligations under any grant awarded prior to such termination, amendment or suspension. However, the plan and each restricted stock award and option granted under the 2000 Stock Incentive Plan may be amended, modified or supplemented either with the participant’s consent for any reason or without the participant’s consent, as necessary or desirable, by the board of directors to cause the 2000 Stock Incentive Plan and all grants to satisfy Section 409A of the Internal Revenue Code of 1986, as amended, or other applicable law.
Regulatory Considerations:
Section 162(m). The 2000 Stock Incentive Plan is designed to meet the requirements of Section 162(m) of the Internal Revenue Code. Our intention is to structure compensation arrangements to maximize the Company’s available deductions consistent with Section 162(m) unless the compensation committee reasonably believes that the best interests of the Company and its stockholders will be served by structuring compensation for a given executive officer, or executive officers, differently. The maximum number of shares of capital stock that may be granted under an option under the 2000 Stock Incentive Plan in any fiscal year to an employee cannot exceed 82,000,000 shares of Common Stock and 30,000,000 shares of Series H preferred stock.
Nonqualified Deferred Compensation. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law and established Internal Revenue Code Section 409A ("Section 409A"), which changed the tax rules applicable to nonqualified deferred compensation, effective January 1, 2005. Any amendments or modifications to plans and agreements that were necessary for compliance with Section 409A or the final Treasury regulations issued thereunder were required to be performed by December 31, 2008. We performed a review of all potentially affected plans and agreements for Section 409A compliance, and all amendments or modifications to these plans and agreements that we believed were necessary to ensure compliance were performed in a timely manner. In addition, we believe that we operated in good faith compliance with the statutory provisions of Section 409A and the relevant regulations and other guidance relating to Section 409A that has been issued by the Department of Treasury and the Internal Revenue Service under the affected plans and agreements prior to the above-referenced amendments and modifications.
Accounting for Stock-Based Compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R).
Health and Welfare Benefits Plan
We provideprovided a competitive benefits package to all full-time employees, which includesincluded health and welfare benefits, such as medical, dental, vision care, disability insurance, life insurance benefits, and a 401(k) savings plan (see below). We havehad no structured executive perquisite benefits (e.g., club memberships or company vehicles) for any executive officer, including the NEOs, and we currently dodid not provide any deferred compensation programs or supplemental pensions to any executive officer, including the NEOs.
Retirement Savings Opportunity (401(k) Plan )
We maintainmaintained a 401(k) retirement and savings plan for all of our employees. The 401(k) plan iswas intended to qualify under section 401(k) of the Internal Revenue Code, so that contributions and the income earned on those contributions arewere not taxable to our employees until they make withdrawals from the plan. Subject to statutory limits, participants in the 401(k) plan maycould elect to contribute up to 100% of their current compensation. All of the contributions to the 401(k) plan made by our employees arewere fully vested at all times. Additionally during 2008, we offered a matching contribution of $0.50 per dollar contributed by the employee, up to a maximum of 6% of the employee’s salary. Employees earnearned vesting credits for these matching contribution based upon years of service at a rate of 33% per year, for the first three years of service. Benefits under the 401(k) plan arewere paid upon a participant’s retirement, death, disability or termination of employment, and arewere based on the amountam ount of a participant’s contributions plus vested employer contributions, as adjusted for gains, losses and earnings. The 401(k) plan iswas comparable in all area of plan design to companies within our peer group.
Effective January 2009, until otherwise determined, we suspended matching employees’ contributions to the 401(k) plan, applicable to all employees, as part of a company wide cost reduction initiative.
Pension Benefits
We dodid not have any plan that providesprovided for payments or other benefits at, following, or in connection with, retirement.
Non-Qualified Deferred Compensation
We dodid not have any plan that providesprovided for the deferral of compensation on a basis that is not tax-qualified.
Policy on Recovery of Compensation
Our chief executive officer and chief financial officer arewere required to repay certain bonuses and equity-based compensation they receivereceived if we arewere required to restate our financial statements as a result of misconduct, as required by Section 304 of the Sarbanes-Oxley Act of 2002.
Compensation Committee Report
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review, the related discussions and such other matters deemed relevant and appropriate by the compensation committee, the compensation committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in the Company’sHoldings’ Annual Report on Form 10-K. Duncan T. Butler, Jr. (Chairman) David C. Hull, Jr. William Laverack, Jr.
| Duncan T. Butler, Jr. (Chairman) |
| David C. Hull, Jr. |
| William Laverack, Jr. |
Summary Compensation Table
The following table summarizes the compensation earned by our Chief Executive Officer, our Chief Financial Officer and by each of our three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial Officer who were serving as executive officers at the end of our last fiscal year.
Name and Principal Position | | | | | | | | | | | | | All Other Compensation (3) | | | | |
| Michael Wilfley | | 2009 | | $ | 168,269 | | | $ | 112,500 | | | $ | — | | | $ | 268,022 | | | $ | 548,791 | |
| President, Chief Executive Officer, Chief Financial Officer and Treasurer | | 2008 | | | 250,000 | | | | — | | | | — | | | | 7,961 | | | | 257,961 | |
| | 2007 | | | 243,302 | | | | 26,763 | | | | 16,000 | | | | 7,651 | | | | 293,716 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Roy H. Chestnutt (4) | | 2009 | | | 270,769 | | | | 112,500 | | | | — | | | | 419,653 | | | | 802,922 | |
| Formerly: President and Chief Executive Officer | | 2008 | | | 400,000 | | | | 88,000 | | | | — | | | | 12,111 | | | | 500,111 | |
| | 2007 | | | 391,346 | | | | 88,000 | | | | — | | | | 11,859 | | | | 491,205 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Walter K.L. “Scott” Ferguson, Jr. (4) | | 2009 | | | 141,238 | | | | 225,000 | | | | — | | | | — | | | | 366,238 | |
| Formerly: Chief Operating Officer | | 2008 | | | 209,840 | | | | — | | | | — | | | | 11,239 | | | | 221,079 | |
| | 2007 | | | 208,195 | | | | 22,901 | | | | 16,000 | | | | 10,367 | | | | 257,463 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Jared P. Benson (4) | | 2009 | | | 156,574 | | | | 62,500 | | | | — | | | | — | | | | 219,074 | |
| Formerly: Vice President, Enterprise and Wholesale Services | | 2008 | | | 202,682 | | | | — | | | | — | | | | 11,024 | | | | 213,706 | |
| | 2007 | | | 213,000 | | | | — | | | | — | | | | 11,311 | | | | 224,311 | |
| Name and Principal Position | Year | | Salary | | | Bonus (1) | | | Option Awards (2) | | | All Other Compensation (3) | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | |
| Roy H. Chestnutt (4) | 2008 | | $ | 400,000 | | | $ | 88,000 | | | $ | 148,721 | | | $ | 12,111 | | | $ | 648,832 | |
| | 2007 | | | 391,346 | | | | 88,000 | | | | 237,477 | | | | 11,859 | | | | 728,682 | |
| | 2006 | | | 324,519 | | | | 162,260 | | | | 183,687 | | | | 50,856 | | | | 721,322 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Michael Wilfley | 2008 | | | 250,000 | | | | — | | | | 38,924 | | | | 7,961 | | | | 296,885 | |
| | 2007 | | | 243,302 | | | | 26,763 | | | | 40,329 | | | | 7,651 | | | | 318,045 | |
| | 2006 | | | 226,999 | | | | 10,000 | | | | 31,519 | | | | 9,582 | | | | 278,100 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Walter K.L. “Scott” Ferguson, Jr. | 2008 | | | 209,840 | | | | — | | | | 38,924 | | | | 11,239 | | | | 260,003 | |
| | 2007 | | | 208,195 | | | | 22,901 | | | | 40,329 | | | | 10,367 | | | | 281,792 | |
| | 2006 | | | 200,140 | | | | 10,000 | | | | 31,519 | | | | 7,820 | | | | 249,479 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Kay Stroman | 2008 | | | 169,770 | | | | — | | | | 18,883 | | | | 10,037 | | | | 198,690 | |
| | 2007 | | | 165,614 | | | | 12,752 | | | | 18,804 | | | | 10,271 | | | | 207,441 | |
| | 2006 | | | 151,984 | | | | 10,000 | | | | 12,180 | | | | 9,804 | | | | 183,968 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Jared P. Benson | 2008 | | | 202,682 | | | | — | | | | 8,230 | | | | 11,024 | | | | 221,936 | |
| | 2007 | | | 213,000 | | | | — | | | | 8,142 | | | | 11,311 | | | | 232,453 | |
| | 2006 | | | 198,000 | | | | — | | | | 1,628 | | | | 10,887 | | | | 210,515 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Jeffrey A. Brennan (4)(5) | 2008 | | | 130,145 | | | | — | | | | 17,102 | | | | 89,181 | | | | 236,428 | |
| | 2007 | | | 199,017 | | | | 15,324 | | | | 27,951 | | | | 9,493 | | | | 251,785 | |
| | 2006 | | | 131,250 | | | | 8,033 | | | | 16,124 | | | | 39,747 | | | | 195,154 | |
_______________
| (1) | Bonus columnBonuses awarded during 2009 relate to the transactions contemplated by the Recapitalization Agreement. The 2008 bonus includes an accrued discretionary bonus for Mr. Chestnutt, which was paid by the CompanyGrande Operating in January 2008 but was related to the fiscal year 2007. No discretionary bonus was awarded or accrued during fiscal year 2008. Bonuses to all other NEOs during 2006 and 2007 were discretionary bonuses awarded by the board of directors and paid in 2006 and 2007. No discretionary bonus was awarded or accrued during fiscal year 2008 and no bonuses were paid under our Annual Cash Incentive Plan for any year presented. |
| (2) | Compensation cost for all option awards was based on the estimated grant-date fair value estimated in accordance with the provisions of SFAS 123(R).value. Amounts reflected in this column is the total compensation cost calculated under SFAS 123(R),at the grant date, which is amortized to compensation expense on a straight-line basis over the vesting period of the underlying stock option grants. See footnote No. 9, “Stockholder’s Equity” in the Notes to our Consolidated Financial Statements included in this annual report on Form 10-K for the valuation assumptions used in determining the fair value of option grants. |
| (3) | All Other Compensation includes severance, car allowance and 401(k) employer match. Effective in 2009, and until otherwise determined, we have suspended the car allowance for most employees, including the NEOs, as well as the 401(k) match, applicable to all employees of Grande Operating, as part of a company wide cost reduction initiative. The following table presents the incremental cost of the components of All Other Compensation for the NEOs. |
| | Year | | Other Annual Compensation | |
| | | | Roy H. Chestnutt | | | Michael L. Wilfley | | | Walter K.L. “Scott” Ferguson, Jr. | | | Kay Stroman | | | Jared P. Benson | | | Jeffrey A. Brennan | |
| Car Allowance | 2008 | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 3,139 | |
| 401(k) match | 2008 | | | 7,311 | | | | 3,161 | | | | 6,439 | | | | 5,237 | | | | 6,224 | | | | 4,160 | |
| Severance | 2008 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 81,882 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Other Compensation | 2008 | | $ | 12,111 | | | $ | 7,961 | | | $ | 11,239 | | | $ | 10,037 | | | $ | 11,024 | | | $ | 89,181 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Car Allowance | 2007 | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | |
| 401(k) match | 2007 | | | 7,059 | | | | 2,851 | | | | 5,567 | | | | 5,471 | | | | 6,511 | | | | 4,693 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Other Compensation | 2007 | | $ | 11,859 | | | $ | 7,651 | | | $ | 10,367 | | | $ | 10,271 | | | $ | 11,311 | | | $ | 9,493 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Car Allowance | 2006 | | $ | 4,154 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 3,231 | |
| 401(k) match | 2006 | | | — | | | | 4,782 | | | | 3,020 | | | | 5,004 | | | | 6,087 | | | | 4,160 | |
| Relocation | 2006 | | | 22,031 | | | | — | | | | — | | | | — | | | | — | | | | 13,400 | |
| Tax Reimbursements | 2006 | | | 24,671 | | | | — | | | | — | | | | — | | | | — | | | | 18,956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Other Compensation | 2006 | | $ | 50,856 | | | $ | 9,582 | | | $ | 7,820 | | | $ | 9,804 | | | $ | 10,887 | | | $ | 39,747 | |
(4) | Mr. Chestnutt and Mr. Brennan joined Grande in February 2006 and April 2006, respectively; therefore, 2006 compensation included in this table represents a partial year. |
| | | Year | | Other Annual Compensation | |
| | | | | | | | | | | Walter K.L. “Scott” Ferguson, Jr. | | | | |
| Car Allowance | | 2009 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 401(k) match | | 2009 | | | — | | | | — | | | | — | | | | — | |
| Severance | | 2009 | | | 268,022 | | | | 419,653 | | | | — | | | | — | |
| Total Other Compensation | | 2009 | | $ | 268,022 | | | $ | 419,653 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
| Car Allowance | | 2008 | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | |
| 401(k) match | | 2008 | | | 3,161 | | | | 7,311 | | | | 6,439 | | | | 6,224 | |
| Total Other Compensation | | 2008 | | $ | 7,961 | | | $ | 12,111 | | | $ | 11,239 | | | $ | 11,024 | |
| | | | | | | | | | | | | | | | | | | |
| Car Allowance | | 2007 | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | | | $ | 4,800 | |
| 401(k) match | | 2007 | | | 2,851 | | | | 7,059 | | | | 5,567 | | | | 4,693 | |
| Total Other Compensation | | 2007 | | $ | 7,651 | | | $ | 11,859 | | | $ | 10,367 | | | $ | 9,493 | |
(5)(4) | Mr. Brennan’s position wasAs a result of the transactions contemplated by the Recapitalization Agreement, Messrs. Wilfley, and Chestnutt’s positions were eliminated and histheir separation from the CompanyGrande Operating occurred in August 2008. PursuantSeptember and November 2009, respectively. Messrs. Ferguson and Benson both resigned as officers of Holdings and Grande Operating but have continued their employment with Grande Operating through a transition period. The liability for payment of severance pursuant to the Separation Agreement, Mr. Brennanindividual separation agreements was assumed by Grande Operating. Messrs. Wilfley, Chestnutt and Ferguson will receive severance in the form of the continuation of histheir current base salary (i.e., $200,497)$250,000, $400,000 and $209,840, respectively) payable over the approximately 12-month period following the Separation Date,separation date, in 26 equal semi-monthly installments, less withholdings. The Separation Agreementindividual separation agreements further provides forprovide f or a lump sum payment to Mr. BrennanMessrs. Wilfley, Chestnutt and Ferguson in an amount equal to histheir cost of continuing the medical insurance coverage for himthem and histheir eligible dependents under COBRA for the 12-month period following the Separation Dateseparation date (i.e. $11,529)approximately $18,000, $20,000, and 16,000,respectively), less withholdings. Mr. Benson did not have an employment agreement with Grande Operating; therefore, his severance will be the responsibility of Grande Operating and will be determined by them upon his separation from Grande Operating. |
Grants of Plan-Based Awards
There were no grants of plan-based awards during the year ended December 31, 2008.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth certain information relating to outstanding equity awards to the NEOs as of December 31, 2008.
| Named Executive Officer | | | Number of Securities Underlying Unexercised Options (#) Exercisable (1) | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Option Exercise Price (2) | | |
| Roy H. Chestnutt (3) | 06/28/06 | | | 3,000,000 | | | | 1,000,000 | | | $ | 0.10 | | 06/28/16 |
| Roy H. Chestnutt (4) | 06/28/06 | | | — | | | | 1,750,000 | | | | 0.10 | | 06/28/16 |
| Roy H. Chestnutt (5) | 06/28/06 | | | — | | | | 1,750,000 | | | | 0.10 | | 06/28/16 |
| Roy H. Chestnutt (6) | 06/28/06 | | | — | | | | 1,750,000 | | | | 0.10 | | 06/28/16 |
| Roy H. Chestnutt (7) | 06/28/06 | | | — | | | | 1,750,000 | | | | 0.10 | | 06/28/16 |
| Roy H. Chestnutt (8) | 06/28/06 | | | 4,958,333 | | | | 2,041,667 | | | | 0.05 | | 06/28/16 |
| | | | | | | | | | | | | | | |
| Michael L. Wilfley | 06/13/00 | | | 1,000,000 | | | | — | | | | 0.05 | | 06/13/10 |
| Michael L. Wilfley | 04/05/02 | | | 64,386 | | | | — | | | | 0.05 | | 04/05/12 |
| Michael L. Wilfley | 05/07/02 | | | 200,000 | | | | — | | | | 0.05 | | 05/07/12 |
| Michael L. Wilfley | 02/25/03 | | | 55,287 | | | | — | | | | 0.05 | | 02/25/13 |
| Michael L. Wilfley | 05/20/03 | | | 250,000 | | | | — | | | | 0.05 | | 05/20/13 |
| Michael L. Wilfley | 12/09/03 | | | 1,600,000 | | | | — | | | | 0.05 | | 12/09/13 |
| Michael L. Wilfley | 02/09/04 | | | 104,925 | | | | — | | | | 0.05 | | 02/09/14 |
| Michael L. Wilfley | 02/15/05 | | | 158,265 | | | | 52,756 | | | | 0.05 | | 02/15/15 |
| Michael L. Wilfley (9) | 06/28/06 | | | 1,593,750 | | | | 656,250 | | | | 0.10 | | 06/28/16 |
| Michael L. Wilfley (10) | 05/02/07 | | | 79,166 | | | | 120,834 | | | | 0.10 | | 05/02/17 |
| | | | | | | | | | | | | | | |
| Walter K.L. “Scott” Ferguson, Jr. | 04/04/00 | | | 500,000 | | | | — | | | | 0.05 | | 04/04/10 |
| Walter K.L. “Scott” Ferguson, Jr. | 12/05/00 | | | 100,000 | | | | — | | | | 0.05 | | 12/05/10 |
| Walter K.L. “Scott” Ferguson, Jr. | 04/05/02 | | | 52,582 | | | | — | | | | 0.05 | | 04/05/12 |
| Walter K.L. “Scott” Ferguson, Jr. | 05/07/02 | | | 250,000 | | | | — | | | | 0.05 | | 05/07/12 |
| Walter K.L. “Scott” Ferguson, Jr. | 02/25/03 | | | 52,531 | | | | — | | | | 0.05 | | 02/25/13 |
| Walter K.L. “Scott” Ferguson, Jr. | 05/20/03 | | | 250,000 | | | | — | | | | 0.05 | | 05/20/13 |
| Walter K.L. “Scott” Ferguson, Jr. | 12/09/03 | | | 1,200,000 | | | | — | | | | 0.05 | | 12/09/13 |
| Walter K.L. “Scott” Ferguson, Jr. (9) | 06/28/06 | | | 1,593,750 | | | | 656,250 | | | | 0.10 | | 06/28/16 |
| Walter K.L. “Scott” Ferguson, Jr. (10) | 05/02/07 | | | 79,166 | | | | 120,834 | | | | 0.10 | | 05/02/17 |
| | | | | | | | | | | | | | | |
| Kay Stroman | 08/30/00 | | | 50,000 | | | | — | | | | 0.05 | | 08/30/10 |
| Kay Stroman | 04/17/01 | | | 50,000 | | | | — | | | | 0.05 | | 04/17/11 |
| Kay Stroman | 10/30/01 | | | 100,000 | | | | — | | | | 0.05 | | 10/30/11 |
| Kay Stroman | 04/05/02 | | | 28,845 | | | | — | | | | 0.05 | | 04/05/12 |
| Kay Stroman | 05/07/02 | | | 75,000 | | | | — | | | | 0.05 | | 05/07/12 |
| Kay Stroman | 02/25/03 | | | 15,760 | | | | — | | | | 0.05 | | 02/25/13 |
| Kay Stroman | 05/20/03 | | | 15,000 | | | | — | | | | 0.05 | | 05/20/13 |
| Kay Stroman | 12/09/03 | | | 235,000 | | | | — | | | | 0.05 | | 12/09/13 |
| Kay Stroman | 02/09/04 | | | 44,557 | | | | — | | | | 0.05 | | 02/09/14 |
| Kay Stroman | 02/15/05 | | | 52,132 | | | | 17,378 | | | | 0.05 | | 02/15/15 |
| Kay Stroman (9) | 06/28/06 | | | 708,333 | | | | 291,667 | | | | 0.10 | | 06/28/16 |
| Kay Stroman (10) | 05/02/07 | | | 79,166 | | | | 120,834 | | | | 0.10 | | 05/02/17 |
| | | | | | | | | | | | | | | |
| Jared Benson | 06/13/00 | | | 100,000 | | | | — | | | | 0.05 | | 06/13/10 |
| Jared Benson | 04/17/01 | | | 400,000 | | | | — | | | | 0.05 | | 04/17/11 |
| Jared Benson | 04/05/02 | | | 38,925 | | | | — | | | | 0.05 | | 04/05/12 |
| Jared Benson | 05/07/02 | | | 30,000 | | | | — | | | | 0.05 | | 05/07/12 |
| Jared Benson | 02/25/03 | | | 19,768 | | | | — | | | | 0.05 | | 02/25/13 |
| Jared Benson | 05/20/03 | | | 15,000 | | | | — | | | | 0.05 | | 05/20/13 |
| Jared Benson | 12/09/03 | | | 100,000 | | | | — | | | | 0.05 | | 12/09/13 |
| Jared Benson | 02/15/05 | | | 36,750 | | | | 12,250 | | | | 0.05 | | 02/15/15 |
| Jared Benson (11) | 10/25/06 | | | 270,833 | | | | 229,167 | | | | 0.10 | | 10/25/16 |
_______________
(1) | Unless otherwise noted, all stock option grants vest ratably over a four-year term from the Option Grant Date. |
(2) | All options shown in the above table granted before May 3, 2006 were repriced to $0.05 per share on May 3, 2006. |
(3) | Series H Preferred Stock Options (Executive Compensation Shares) vest 25% on December 31, 2006, 2.083% on the last day of each of the first 36 months after December 31, 2006, and the remainder on January 1, 2010. |
(4) | Series H Preferred Stock Options (Executive Compensation Shares) vest 100% on February 13, 2007. Vested Series H Preferred Stock Options are only exercisable within the applicable exercise period, which shall commence on the first to occur of (i) March 16, 2009, (ii) the date of a Change of Control, and (iii) the date of termination of Mr. Chestnutt’s service with the Company or any of its affiliates. If March 16, 2009 occurs first, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning on March 16, 2009 and ending on March 15, 2010. If a Change of Control is the first to occur, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning 90 days prior to the Change of Control and ending on the 75th day after the Change of Control. If Mr. Chestnutt’s service is terminated first (for any reason other than for Cause), then the vested Series H Preferred Stock Options are only exercisable: (i) within the period commencing on the date of the termination of service and ending on the later of (x) December 31 of the calendar year in which the service termination occurred and (y) March 15 following the service termination date, if such termination of service is other than by reason of Voluntary Termination or for Cause, or (ii) within the period beginning on the service termination date and ending on the 90th day after the service termination date, if such termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s service is terminated first and such termination is for Cause, then there will not be any applicable exercise period and the Series H Preferred Stock Options will terminate and become null and void on the service termination date. |
(5) | Series H Preferred Stock Options (Executive Compensation Shares) vest 100% on February 13, 2008. Vested Series H Preferred Stock Options are only exercisable within the applicable exercise period, which shall commence on the first to occur of (i) March 16, 2010, (ii) the date of a Change of Control, and (iii) the date of termination of Mr. Chestnutt’s service with the Company or any of its affiliates. If March 16, 2010 occurs first, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning on March 16, 2010 and ending on March 15, 2011. If a Change of Control is the first to occur, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning 90 days prior to the Change of Control and ending on the 75th day after the Change of Control. If Mr. Chestnutt’s service is terminated first (for any reason other than for Cause), then the vested Series H Preferred Stock Options are only exercisable: (i) within the period commencing on the date of the termination of service and ending on the later of (x) December 31 of the calendar year in which the service termination occurred and (y) March 15 following the service termination date, if such termination of service is other than by reason of Voluntary Termination or for Cause, or (ii) within the period beginning on the service termination date and ending on the 90th day after the service termination date, if such termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s service is terminated first and such termination is for Cause, then there will not be any applicable exercise period and the Series H Preferred Stock Options will terminate and become null and void on the service termination date. |
2009.(6) | Series H Preferred Stock Options (Executive Compensation Shares) vest 100% on February 13, 2009. Vested Series H Preferred Stock Options are only exercisable within the applicable exercise period, which shall commence on the first to occur of (i) March 16, 2011, (ii) the date of a Change of Control, and (iii) the date of termination of Mr. Chestnutt’s service with the Company or any of its affiliates. If March 16, 2011 occurs first, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning on March 16, 2011 and ending on March 15, 2012. If a Change of Control is the first to occur, then the vested Series H Preferred Stock Options (Executive Compensation Shares) will only be exercisable in the period beginning 90 days prior to the Change of Control and ending on the 75th day after the Change of Control. If Mr. Chestnutt’s service is terminated first (for any reason other than for Cause), then the vested Series H Preferred Stock Options (Executive Compensation Shares) are only exercisable: (i) within the period commencing on the date of the termination of service and ending on the later of (x) December 31 of the calendar year in which the service termination occurred and (y) March 15 following the service termination date, if such termination of service is other than by reason of Voluntary Termination or for Cause, or (ii) within the period beginning on the service termination date and ending on the 90th day after the service termination date, if such termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s service is terminated first and such termination is for Cause, then there will not be any applicable exercise period and the Series H Preferred Stock Options (Executive Compensation Shares) will terminate and become null and void on the service termination date. |
Outstanding Equity Awards at Fiscal Year End
(7) | Series H Preferred Stock Options (Executive Compensation Shares) vest 100% on February 13, 2010. Vested Series H Preferred Stock Options are only exercisable within the applicable exercise period, which shall commence on the first to occur of (i) March 16, 2012, (ii) the date of a Change of Control, and (iii) the date of termination of Mr. Chestnutt’s service with the Company or any of its affiliates. If March 16, 2009 occurs first, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning on March 16, 2012 and ending on March 15, 2013. If a Change of Control is the first to occur, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning 90 days prior to the Change of Control and ending on the 75th day after the Change of Control. If Mr. Chestnutt’s service is terminated first (for any reason other than for Cause), then the vested Series H Preferred Stock Options are only exercisable: (i) within the period commencing on the date of the termination of service and ending on the later of (x) December 31 of the calendar year in which the service termination occurred and (y) March 15 following the service termination date, if such termination of service is other than by reason of Voluntary Termination or for Cause, or (ii) within the period beginning on the service termination date and ending on the 90th day after the service termination date, if such termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s service is terminated first and such termination is for Cause, then there will not be any applicable exercise period and the Series H Preferred Stock Options will terminate and become null and void on the service termination date. |
In connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, as of December 31, 2009, we had no outstanding options to purchase any equity of Holdings.
(8) | Common Stock Options (Executive Compensation Shares) vest 25% on February 13, 2007, 2.1% on the last day of each of the first 35 months after February 13, 2007, and 1.5% on the last day of the 36th month after February 13, 2007. |
(9) | Series H Preferred Stock Options (Executive Compensation Shares) vest 25% on February 13, 2007, 2.1% on the last day of each of the first 35 months after February 13, 2007, and 1.5% on the last day of the 36th month after February 13, 2007. |
(10) | Series H Preferred Stock Options (Executive Compensation Shares) vest 25% on February 2, 2008, 2.1% on the last day of each of the first 35 months after February 2, 2008, and 1.5% on the last day of the 36th month after February 2, 2008. |
(11) | Series H Preferred Stock Options (Executive Compensation Shares) vest 25% on October 25, 2007, 2.1% on the last day of each of the first 35 months after October 25, 2007, and 1.5% on the last day of the 36th month after October 25, 2007. |
Option Exercises
There were no options exercised by any of the NEOs or directors during the year ended December 31, 2008. 2009.
Compensation of Directors
Compensation of directors is the responsibility of the compensation committee of the board of directors. There are no formal standard compensation arrangements for directors that have been adopted by the CompanyHoldings or the board of directors. Certain directors are compensated with a combination of cash and stock options to compensate for their contributions to the oversight of the Company. Stock option pricing and practices are governed by the terms and conditions of the 2000 Stock Incentive Plan and the option agreements.Holdings.
The following table sets forth the compensation paid to our directors in 2008.2009. The directors named are the only directors who received compensation during 2008. 2009.
| Name | | Year | | Fees Earned or Paid in Cash (1) | |
| Richard W. Orchard | | 2009 | | $ | 35,000 | |
| Paul V. Walsh, Jr. | | 2009 | | | 33,965 | |
| | | Fees Earned or Paid in Cash (1) | | | | | | | |
| Richard W. Orchard | 2008 | | | 20,000 | | | | 3,505 | | | | 23,505 | |
| Lawrence M. Schmeltekopf | 2008 | | | 18,333 | | | | 3,505 | | | | 21,838 | |
| (1) | Mr.Messrs. Orchard receivedand Walsh receive monthly compensation of $1,666$2,917 for his servicetheir services as a director. Mr. Schmeltekopf received monthly compensation of $1,666 for his service as Chairman of the audit committee until the end of his term in January 2009.directors. Directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings. Other directors do not receive cash compensation for serving on the board of directors or any of its committees. |
(2) | Compensation cost for all option awards was based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Amounts reflected in this column is the compensation cost calculated under SFAS 123(R), which is amortized to compensation expense on a straight-line basis over the vesting period of the underlying stock option grants. See footnote No. 9, “Stockholder’s Equity” in the Notes to our Consolidated Financial Statements included in this annual report on Form 10-K for the valuation assumptions used in determining the fair value of option grants. |
Grant of Plan Based Awards to Directors
No options were granted to board members during the year ended December 31, 2008.2009.
Directors Outstanding Equity Awards at Year End
The following table sets forth certain information relating to outstanding equity awards to directors asAs of December 31, 2008.
| Name and Principal Position | | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | | | |
| Richard W. Orchard (1) | 10/25/06 | | | 108,333 | | | | 91,667 | | | | 0.10 | | 10/25/16 |
| Richard W. Orchard (2) | 10/25/06 | | | 150,000 | | | | 150,000 | | | | 0.05 | | 10/25/16 |
| | | | | | | | | | | | | | | |
| Lawrence M. Schmeltekopf (3) | 10/25/06 | | | 141,666 | | | | 58,334 | | | | 0.10 | | 06/28/16 |
| Lawrence M. Schmeltekopf (3) | 06/28/06 | | | 150,000 | | | | 150,000 | | | | 0.05 | | 06/28/16 |
(1) | Series H Preferred Stock Options (Executive Compensation Shares) vest 25% on October 25, 2007, 2.1% on the last day of each of the first 35 months after October 25, 2007, and 1.5% on the last day of the 36th month after October 25, 2007. Vested Series H Preferred Stock Options are only exercisable within the applicable exercise period, which shall commence on the first to occur of (i) October 24, 2016, (ii) the date of a Change of Control, and (iii) the date of termination of Mr. Orchard’s service with the Company or any of its affiliates. If October 24, 2016 occurs first, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning on October 24, 2016 and ending on October 25, 2016. If a Change of Control is the first to occur, then the vested Series H Preferred Stock Options will only be exercisable in the period beginning 90 days prior to the Change of Control and ending on the 75th day after the Change of Control. If Mr. Orchard’s service is terminated first (for any reason other than for Cause), then the vested Series H Preferred Stock Options are only exercisable: (i) within the period commencing on the date of the termination of service and ending on the later of (x) December 31 of the calendar year in which the service termination occurred and (y) March 15 following the service termination date, if such termination of service is other than by reason of Voluntary Termination or for Cause, or (ii) within the period beginning on the service termination date and ending on the 90th day after the service termination date, if such termination is by reason of a Voluntary Termination. If Mr. Orchard’s service is terminated first and such termination is for Cause, then there will not be any applicable exercise period and the Series H Preferred Stock Options will terminate and become null and void on the service termination date.
|
(2) | Common stock options (not Executive Compensation Shares) vest 25% on October 25, 2007, 25% on October 25, 2008, 25% on October 25, 2009 and 25% on October 25, 2010. |
(3) | Subsequent to the end of his term in January 2009, Mr. Schmeltekopf’s vested common stock options and Series H Preferred Stock Options are only exercisable within the period beginning on the service termination date and ending on the 90th day after the service termination date. |
Holdings.
Employment Agreements, Severance Benefits and Change in Control Provisions
As of December 31, 2009, Holdings had no employment agreements, severance benefits or change in control provisions.
Severance Benefits, Change in Control Provisions and Employment Agreements
Roy H. Chestnutt entered an employment agreement (the “Chestnutt Agreement”) with Grande Communications Networks, Inc. (“Networks”) on December 31, 2005 with an effective date of January 26, 2006. Under the terms of the Employment Agreement, Mr. Chestnutt’s employment with Networks is at will. Mr. Chestnutt will be paid his current base salary of $400,000 per annum with such increases as may be determined by the board of directors, and Mr. Chestnutt is eligible to earn an annual bonus during each fiscal year during which he remains an executive employee of Networks of 100% of his then current base salary if the written annual performance goals adopted by both the board of directors and Mr. Chestnutt are achieved for that fiscal year. If only certain of the annual goals are achieved or if the annual goals are achieved only in part, then any bonus will be at the sole discretion of the board of directors. The Chestnutt Agreement provided that Mr. Chestnutt would receive an annual bonus for 2006 of at least 50% of the salary he earned in 2006, regardless of whether the annual goals were achieved for that year. The Chestnutt Agreement also provided for the reimbursement of relocation expenses incurred by Mr. Chestnutt. On June 28, 2006, Mr. Chestnutt and Networks entered into an Amendment (the “Amendment”) to the Chestnutt Agreement, whereby, among other things, Networks agreed to grant new stock options to Mr. Chestnutt that were in lieu of the stock options that Networks previously agreed to grant to Mr. Chestnutt under the Chestnutt Agreement. The options that were described in the Chestnutt Agreement could not be granted to Mr. Chestnutt under the 2000 Stock Incentive Plan because at that time, shares of common stock designated as Executive Compensation Shares and shares of Series H preferred stock could not be granted under such Plan. The board of directors amended the 2000 Stock Incentive Plan to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and to add the Series H preferred stock and Executive Compensation Shares to the shares available for issuance under such Plan. The options that were granted to Mr. Chestnutt pursuant to the Amendment were issued at the same exercise price and were with regard to the right to purchase the same number and class of shares as had been described in the Chestnutt Agreement.
The Chestnutt Agreement, as amended to date, also provides certain benefits payable upon the occurrence of the following triggering events:
If Networks terminates the Chestnutt Agreement without cause or Mr. Chestnutt terminates the Chestnutt Agreement for good reason upon 60 days prior written notice, then Networks must pay Mr. Chestnutt severance in the amount of twelve months salary at his then current base salary and Networks will continue Mr. Chestnutt’s then current insurance and health care coverage until the first anniversary of the date of such termination, provided that Networks may cease providing such insurance and health care coverage at an earlier date if Mr. Chestnutt receives equivalent benefits from his next full time employer. Payment of the severance amount will be made by Networks in equal monthly installments over 12 months. To the extent this severance pay exceeds certain amounts, as set forth in applicable Treasury Regulations, the excess amount of severance pay will not begin sooner than 6 months following the employment termination date. The payment of the severance is conditioned upon Mr. Chestnutt’s delivery to Networks of a release of claims in a form satisfactory to the board of directors. The Chestnutt Agreement defines “cause” as (i) the commission by Mr. Chestnutt of a felony or a crime involving moral turpitude or the commission of any other act involving dishonesty, disloyalty or fraud, (ii) conduct by Mr. Chestnutt tending to bring Networks into substantial public disgrace or disrepute, (iii) the failure by Mr. Chestnutt to cure within 30 days of notice of his failure to perform in any material respect his obligations under the Chestnutt Agreement or the reasonable directives of the board of directors, (iv) gross negligence or willful misconduct of Mr. Chestnutt in providing the services required by the Chestnutt Agreement or (v) the habitual use of alcohol or drugs. The Chestnutt Agreement defines “good reason termination” as any of the following actions by the board of directors: (i) material diminishment of Mr. Chestnutt’s duties and responsibilities; (ii) material relocation of the office where Mr. Chestnutt is to work to an area outside of the Austin/San Antonio corridor, Texas; (iii) removal of Mr. Chestnutt from the board of directors without cause; (iv) stripping Mr. Chestnutt of the title of Chief Executive Officer without cause, provided such action either causes Mr. Chestnutt to report to someone other than the board or directors or materially reduces the budget over which he has control; or (v) material reduction of Mr. Chestnutt’s base salary without cause. A termination will only be considered a “good reason termination” if Mr. Chestnutt provides the board of directors with written notice of an event giving rise to such termination within 90 days of its occurrence, the board of directors fails to remedy the event within 30 days of such notice, and Mr. Chestnutt provides 60 days notice of his intent to terminate the contract (such notice provided no later than 1 year following the occurrence of the event).
In the event of a voluntary termination by Mr. Chestnutt upon 60 days written notice, Mr. Chestnutt will be entitled to the amount of base pay accrued and unpaid through the effective date of termination.
Walter K.L. “Scott” Ferguson, Jr. entered into an Employment Agreement (the “Ferguson Agreement”) with Networks on June 28, 2006. Under the terms of the Ferguson Agreement, as amended to date, Mr. Ferguson’s employment is at will. Networks will pay Mr. Ferguson his current bi-weekly salary of $8,070.77 (annualized equates to $209,840) with such increases from time to time as may be determined by the Chief Executive Officer and an annual incentive bonus each fiscal year equal to 50% of his annual salary if annual performance goals adopted by both Mr. Ferguson and the Chief Executive Officer are met for that fiscal year. If only certain or a portion of the annual goals are met during a fiscal year, Mr. Ferguson may earn a bonus in an amount determined by and at the discretion of the Chief Executive Officer and approved by the board of directors. Additional bonuses may be awarded to Mr. Ferguson based on achievement of the Company’s objectives with such bonuses being at the sole discretion of the board of directors. In addition, the Ferguson Agreement also provided for the grant of options to acquire shares of Series H preferred stock. The Ferguson Agreement also provides certain benefits payable upon the occurrence of the following triggering events:
If Networks terminates the Ferguson Agreement without cause or Mr. Ferguson terminates the Ferguson Agreement for good reason upon 60 days prior written notice, Networks must (i) pay Mr. Ferguson severance in the amount equal to his then current bi-weekly base salary multiplied by 26, provided that if Mr. Ferguson receives any W-2 wages (during the severance period of 52 weeks) as an employee of an employer other than Networks, then the amount of any severance pay payable to Mr. Ferguson by Networks shall be reduced by an amount equal to such wages, and (ii) continue Mr. Ferguson’s then current insurance and health care coverage until the first anniversary of the date of such termination, provided that Networks may cease providing such insurance and health care coverage at an earlier date if Mr. Ferguson receives equivalent benefits from his next full time employer. Payment of the severance amount will be made by Networks in equal bi-weekly installments over 52 weeks. To the extent this severance pay exceeds certain amounts, as set forth in applicable Treasury Regulations, the excess amount of severance pay will not begin sooner than 6 months following the employment termination date. The payment of the severance is conditioned upon Mr. Ferguson’s delivery to Networks of a release of claims in a form satisfactory to the board of directors. The Ferguson Agreement defines “cause” as (i) the commission by Mr. Ferguson of a felony or a crime involving moral turpitude or the commission of any other act involving dishonesty, disloyalty or fraud, (ii) conduct by Mr. Ferguson tending to bring Networks into substantial public disgrace or disrepute, (iii) the failure by Mr. Ferguson to cure within 30 days of notice of his failure to perform in any material respect his obligations under the Ferguson Agreement, his obligations under the Employee Confidentiality Information and Invention Assignment Agreement between Mr. Ferguson and Networks dated as of May 23, 2000, or the reasonable directives of the Chief Executive Officer or the board of directors, (iv) gross negligence or willful misconduct of Mr. Ferguson in providing the services required by the Ferguson Agreement or (v) any substance abuse of Mr. Ferguson in any manner interferes with the performance of his duties under the Ferguson Agreement. The Ferguson Agreement defines “good reason termination” as any of the following actions by Networks: (i) material diminishment of Mr. Ferguson’s duties and responsibilities; (ii) material relocation of the office where Mr. Ferguson is to work to an area outside of the Austin/San Antonio corridor, Texas; (iii) stripping Mr. Ferguson of the title of Chief Operating Officer without cause, provided such action either materially changes the authority, duties and responsibilities of the supervisor to which he reports or materially decreases the budget over which he has control; or (v) material reduction of Mr. Ferguson’s base salary without cause. A termination will only be considered a “good reason termination” if Mr. Ferguson provides Networks with written notice of an event giving rise to such termination within 90 days of its occurrence, Networks fails to remedy the event within 30 days of such notice, and Mr. Ferguson provides 60 days notice of his intent to terminate the contract (such notice provided no later than 1 year following the occurrence of the event).
In the event of a “voluntary termination” by Mr. Ferguson upon 60 days written notice, Mr. Ferguson will be entitled to the amount of base pay accrued and unpaid through the effective date of termination.
Michael Wilfley entered into an Employment Agreement (the “Wilfley Agreement”) with Networks on June 28, 2006. Under the terms of the Wilfley Agreement, as amended to date, Mr. Wilfley’s employment is at will. Networks will pay Mr. Wilfley his current bi-weekly salary of $9,615.38 (annualized equates to $250,000) and an annual bonus each fiscal year equal to 50% of his annual salary if annual performance goals adopted by both Mr. Wilfley and the Chief Executive Officer are met for that fiscal year. If only certain or a portion of the annual goals are met during a fiscal year, Mr. Wilfley may earn a bonus in an amount determined by and at the discretion of the Chief Executive Officer and approved by the board of directors. Additional bonuses may be awarded to Mr. Wilfley based on achievement of Networks’ objectives with such bonuses being at the sole discretion of the board of directors. In addition, the Wilfley Agreement provided for the grant of options to acquire shares of Series H preferred stock. The Wilfley Agreement also provides certain benefits payable upon the occurrence of the following triggering events:
If Networks terminates the Wilfley Agreement without cause or Mr. Wilfley terminates the Wilfley Agreement for good reason upon 60 days prior written notice, then Networks must (i) pay Mr. Wilfley severance in the amount equal to his then current bi-weekly base salary multiplied by 26, provided that if Mr. Wilfley receives any W-2 wages (during the severance period of 52 weeks) as an employee of an employer other than Networks, then the amount of any severance pay payable to Mr. Wilfley by Networks shall be reduced by an amount equal to such wages, and (ii) continue Mr. Wilfley’s then current insurance and health care coverage until the first anniversary of the date of such termination, provided that Networks may cease providing such insurance and health care coverage at an earlier date if Mr. Wilfley receives equivalent benefits from his next full time employer. Payment of the severance amount will be made by Networks in equal bi-weekly installments over 52 weeks. To the extent this severance pay exceeds certain amounts, as set forth in applicable Treasury Regulations, the excess amount of severance pay will not begin sooner than 6 months following the employment termination date. The payment of the severance is conditioned upon Mr. Wilfley’s delivery to Networks of a release of claims in a form satisfactory to the board of directors. The Wilfley Agreement defines “cause” as (i) the commission by Mr. Wilfley of a felony or a crime involving moral turpitude or the commission of any other act involving dishonesty, disloyalty or fraud, (ii) conduct by Mr. Wilfley tending to bring Networks into substantial public disgrace or disrepute, (iii) the failure by Mr. Wilfley to cure within 30 days of notice of his failure to perform in any material respect his obligations under the Wilfley Agreement, his obligations under the Employee Confidentiality Information and Invention Assignment Agreement between Mr. Wilfley and Networks dated as of July 12, 2000, or the reasonable directives of the Chief Executive Officer or the board of directors, (iv) gross negligence or willful misconduct of Mr. Wilfley in providing the services required by the Wilfley Agreement or (v) any substance abuse of Mr. Wilfley in any manner interferes with the performance of his duties under the Wilfley Agreement. The Wilfley Agreement defines “good reason termination” as any of the following actions by Networks: (i) material diminishment of Mr. Wilfley’s duties and responsibilities; (ii) material relocation of the office where Mr. Wilfley is to work to an area outside of the Austin/San Antonio corridor, Texas; (iii) stripping Mr. Wilfley of the title of Chief Financial Officer without cause, provided such action either materially changes the authority, duties and responsibilities of the supervisor to which he reports or materially decreases the budget over which he has control; or (v) material reduction of Mr. Wilfley’s base salary without cause. A termination will only be considered a “good reason termination” if Mr. Wilfley provides Networks with written notice of an event giving rise to such termination within 90 days of its occurrence, Networks fails to remedy the event within 30 days of such notice, and Mr. Wilfley provides 60 days notice of his intent to terminate the contract (such notice provided no later than 1 year following the occurrence of the event).
In the event of a “voluntary termination” by Mr. Wilfley upon 60 days written notice, Mr. Wilfley will be entitled to the amount of base pay accrued and unpaid through the effective date of termination.
Severance Benefits
Severance Practices: Our severance policy for reductions in force or job elimination relating to our employees at a job grade defined as vice president and above, statesstated that when determining the number of weeks that will be paid severance, subject to certain restrictive covenants described below, past precedent shall apply where service to the CompanyGrande Operating is greater than 1 year, not to exceed twelve months, except for severance contemplated in the employment agreements described above. This is the Company’s current policy and is subject to change. If our severance policy changes, we would have no further obligation to pay severance to our employees at a job grade defined as vice president and above, unless it is covered in a written agreement.below. Severance payments arewere generally payable on a bi-weekly basis in equal installments over the severance period.
Restrictive Covenants: In order to be eligible for severance benefits, all executives (including the NEOs) arewere required to enter into a Separation Agreement and Full and Final Release of Claims in a form satisfactory to the CompanyGrande Operating that includesincluded certain restrictive covenants regarding, among other things, the following:
Confidentiality of information;
Continued adherence to company policies;
Nonsolicitation of customers; and
Other reasonable restrictions.
Death or Total Disability: Employment with the Company shall terminateGrande Operating terminated upon death or total disability of the NEO. After such termination, the Company shall haveGrande Operating had no obligation or liability other than payment of earned compensation to the NEO, or the NEO’s estate, the amount of base salary accrued but unpaid at the date of death or total disability, as the case may be.have been.
Change in Control Provisions
Reorganization, Sale of Assets or Sale of Stock which Involves a Change of Control. Except as provided by the board of directors pursuant to the authority described below or expressly provided in the stock option agreement, upon the occurrence of a change of control, as described below, all common and Series H Preferred stock options outstanding shall becomebecame immediately vested. For additional information regarding the definitions of change of control that apply to option agreements awarded to the NEOs, see “2000 Stock Incentive Plan Summary – Change of Control.”
Unless otherwise expressly provided in the individual’s stock option agreement, the board of directors maycould, in its sole discretion, deliver a written notice canceling the unexercised vested portion (including the portion which becomes vested by reason of acceleration). If the common and Series H Preferred stock options outstanding arewere not canceled, express provision may becould have been made in writing in connection with such change of control for the assumption or continuation of the common and Series H Preferred stock options outstanding, or for the substitution for such options of new options covering the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, in which event the 2000 Stock Incentive Plan and options theretofore granted shalls hall continue in the manner and under the terms so provided and no acceleration shall occur.
PotentialIn connection with the closing of the transactions contemplated by the Recapitalization Agreement and in accordance with these change in control provisions, Holdings cancelled all outstanding options under the 2000 Stock Incentive Plan and the Plan terminated on February 24, 2010.
Employment Agreements and Payments upon Termination or Change in Control
The following table sets forth the estimated benefits that would have been payable to our NEOs as of December 31, 2008 if an event triggering a termination without cause by the Company or for good reason by the NEO or a change in control had occurred on that date. For the NEOs that do not haveRoy H. Chestnutt entered an employment agreement (the “Chestnutt Agreement”) with Grande Communications Networks, Inc. (“Networks”) on December 31, 2005 with an effective date of January 26, 2006. Pursuant to the estimatedterms of the Chestnutt Agreement, in connection with the closing of the recapitalization transactions and Mr. Chestnutt’s resignation, Mr. Chestnutt is entitled to $400,000, less withholding and other required adjustments, which represents twelve months of Mr. Chestnutt’s base salary, to be paid in twelve equal installments, which liability was assumed by Grande Operating on September 14, 2009 upon the closing of the recapitalization transactions. In addition, Grande Operating will continue Mr. Chestnutt’s current insura nce and health care coverage until the first anniversary of the date of his termination, provided that Grande Operating may cease providing such insurance and health care coverage at an earlier date if Mr. Chestnutt receives equivalent benefits shown below arefrom his next full time employer. To the extent this severance pay exceeds certain amounts, as set forth in applicable Treasury Regulations, the caseexcess amount of a reduction in force or job elimination, see further discussion under “Severance Practices” above for our severance policy. In determiningpay will not begin sooner than six months following the benefits payable upon certain terminations of employment we have assumed in all cases that the NEO does not become employed by a new employer or return to work for us.
| | | | | Continued Medical Benefits (3) | | | | |
| Roy H. Chestnutt (4) | | $ | 400,000 | | | $ | 16,720 | | | $ | 416,720 | |
| Michael L. Wilfley (4) | | | 250,000 | | | | 16,720 | | | | 266,720 | |
| Walter K.L. “Scott” Ferguson, Jr. (4) | | | 209,840 | | | | 16,720 | | | | 226,560 | |
| Kay Stroman (5) | | | 169,770 | | | | 9,801 | | | | 179,571 | |
| Jared P. Benson (5). | | | 174,000 | | | | 5,765 | | | | 179,765 | |
(1) | In general, in the event of (i) death or total disability, (ii) a voluntary termination of employment without good reason and (iii) termination with cause by the Company, the NEOs would receive compensation and benefits accrued but unpaid. This would include accrued but unpaid salary and any balance under the 401(k) plan as well as any amounts due under any insurance plan in the case of death or total disability. |
(2) | As of December 31, 2008, the exercise price for all stock options held by the NEOs exceeded the estimated fair market value attributed to the common and Series H preferred stock options at such date; therefore, no value has been placed on the options in the table above. Vesting of stock options upon a change of control (as defined in the option agreements) would be governed under the terms of the 2000 Stock Incentive Plan. Under the terms of the 2000 Stock Incentive Plan, the Company may repurchase any shares acquired by exercise of such stock options if the NEO’s employment is terminated, at a purchase price equal to the fair market value for such shares, as determined by the board of directors of the Company. See “Change in Control Provisions” above. |
termination date.Michael Wilfley entered into an Employment Agreement (the “Wilfley Agreement”) with Networks on June 28, 2006. Pursuant to the terms of the Wilfley Agreement, in connection with the termination of his employment by Grande Operating on November 6, 2009, Mr. Wilfley is entitled to $250,000, less withholding and other required adjustments, which represents his current bi-weekly base salary multiplied by 26, to be paid in equal bi-weekly installments over 52 weeks, which liability was assumed by Grande Operating on September 14, 2009 upon the closing of the recapitalization transactions. In addition, Grande Operating will continue Mr. Wilfley’s current insurance and health care coverage until the first anniversary of the date of his termination. To the extent this severance pay exceeds certain amounts, as set forth in applicable Treasury Regulations, the excess amount of severance pay will not begin sooner than six months following the employment termination date.
(3) | Continued medical benefits represent Cobra payments for medical and dental coverage that would be paid by the Company during the severance period for each NEO. |
Walter K.L. “Scott” Ferguson, Jr. entered into an Employment Agreement (the “Ferguson Agreement”) with Networks on June 28, 2006. Pursuant to the terms of the Ferguson Agreement, in connection with the termination of his employment by Grande Operating, Mr. Ferguson is entitled to $209,840, less withholding and other required adjustments, which represents his current bi-weekly base salary multiplied by 26, to be paid in equal bi-weekly installments over 52 weeks, which liability was assumed by Grande Operating on September 14, 2009 upon the closing of the recapitalization transactions. In addition, Grande Operating will continue Mr. Ferguson’s current insurance and health care coverage until the first anniversary of the date of his termination. To the extent this severance pay exceeds certain amounts, as set forth in applicable Treasury Regulations, the excess amount of severance pay will not begin sooner than six months following the employment termination date.
(4)ITEM 12. | Represents payments to which the NEO would be entitled pursuant to his employment agreement with the Company. Actual amounts that would be paid out and the assumptions used in arriving at such amounts can only be determined at the time of such NEO’s termination and may differ materially from the amounts set forth in the table. Upon a change in control, other than accelerated vesting of stock options, the NEO is not entitled to any other benefits unless termination without cause by the Company or for good reason by the NEO also occurs at the time of the change in control. |
(5) | Ms. Stroman and Mr. Benson do not have an employment agreement with the Company, therefore, severance and continued medical benefits is estimated based upon the Company’s historical practices for NEO severance. See “Severance Practices” above. Upon a change in control, other than accelerated vesting of stock options, and a voluntary termination or a termination by the Company for cause, Ms. Stroman and Mr. Benson are not entitled to any other benefits, other than benefits accrued but unpaid. |
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Our outstanding voting securities consist of our common stock and seven series of preferred stock, Series A through Series G. Stockholders are entitled to one vote for each share of common stock held or issuable upon conversion of preferred stock. Except as otherwise provided in Grande CommunicationsRio Holdings, Inc.’s restated certificatearticles of incorporation or as required under DelawareNevada law, the holders of the preferred stock are entitled to vote on an as-converted basis with the holders of our common stock as a single class on all matters presented for a vote to the holders of our common stock.
As of February 28, 2009,March 31, 2010, our outstanding capital stock consisted of 12,784,07212,104,072 shares of common stock, 232,617,838227,617,838 shares of Series A preferred stock, 20,833,333 shares of Series B preferred stock, 17,005,19116,799,694 shares of Series C preferred stock, 114,698,442109,401,335 shares of Series D preferred stock, 7,999,0997,797,329 shares of Series E preferred stock, 11,758,27811,423,177 shares of Series F preferred stock and 34,615,330 shares of Series G preferred stock. The total number of votes that could have been cast as of such date equaled 452,311,583. The Company440,592,108. Holdings has authorized 30,000,000 shares of Series H Preferred Stock, of which no shares are issued or outstanding. As of February 28, 2009,March 31, 2010, there were 152,107,016 outstanding warrants to purchase common stock, all exerciseableexercisable as of such date at a weighted average exercise price of $0.01, 33,414,853 outstanding options to purchase common stock, exercisable within 60 days at a weighted average exercise price of $0.07 and 13,362,494 outstanding options to purchase shares of Series H Preferred Stock, exercisable within 60 days at a weighted average exercise price of $0.10.$0.01.
Principal Stockholders
The following table presents, as of February 28, 2009,March 31, 2010, information based upon our records and, to the extent described in the footnotes following the table, disclosures provided by representatives of the applicable holders, regarding each person known to us to be the beneficial owner of more than 5% of any class of our voting stock:
| | | Common Stock | | | Preferred Stock | | | | |
| Name (1) | | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | | |
| Whitney & Co. affiliated funds (the “Whitney Funds”)(4) | | | 105,660,232 | | | | 89.72 | % | | | 72,178,132 | | | | 16.84 | % | | | 22.29 | % |
| Centennial Holdings VI, LLC (5) | | | 79,920,563 | | | | 86.85 | % | | | 53,564,579 | | | | 12.50 | % | | | 17.12 | % |
| Centennial Holdings V, L.P. (5) | | | 20,101,025 | | | | 62.42 | % | | | 13,472,165 | | | | 3.14 | % | | | 4.48 | % |
| Centennial Holdings I, LLC (5) | | | 1,507,853 | | | | 11.08 | % | | | 1,010,597 | | | | * | | | | * | |
| Austin Ventures VII, L.P. (6) | | | 30,996,152 | | | | 71.92 | % | | | 23,570,796 | | | | 5.50 | % | | | 6.92 | % |
| HarbourVest Partners VI-Direct Fund, L.P. (7) | | | 30,652,654 | | | | 71.69 | % | | | 23,309,586 | | | | 5.44 | % | | | 6.84 | % |
| Alta Communications (8) | | | 30,650,514 | | | | 71.69 | % | | | 23,309,158 | | | | 5.44 | % | | | 6.84 | % |
| CIBC (9) | | | 28,244,166 | | | | 70.00 | % | | | 21,478,074 | | | | 5.01 | % | | | 6.31 | % |
| Trinity Ventures (10) | | | 22,989,490 | | | | 65.51 | % | | | 17,482,190 | | | | 4.08 | % | | | 5.15 | % |
| Reliant Energy Broadband, Inc. (11) | | | 22,368,560 | | | | 64.89 | % | | | 22,368,560 | | | | 5.22 | % | | | 5.08 | % |
| Nautic Funds (12) | | | 22,087,122 | | | | 64.60 | % | | | 22,087,122 | | | | 5.15 | % | | | 5.01 | % |
| BancBoston Ventures, Inc. (13) | | | 20,581,010 | | | | 62.97 | % | | | 15,650,678 | | | | 3.65 | % | | | 4.62 | % |
| Prime VIII, L.P. (14) | | | 17,891,342 | | | | 59.65 | % | | | 12,740,246 | | | | 2.97 | % | | | 4.01 | % |
| Lightspeed (15) | | | 15,326,320 | | | | 55.87 | % | | | 11,654,792 | | | | 2.72 | % | | | 3.45 | % |
| Opus Capital (16) | | | 15,326,308 | | | | 55.87 | % | | | 11,654,788 | | | | 2.72 | % | | | 3.45 | % |
| Knology (17) | | | 14,237,464 | | | | 55.10 | % | | | 10,446,556 | | | | 2.44 | % | | | 3.21 | % |
| Kinetic Ventures (18) | | | 12,872,952 | | | | 51.54 | % | | | 9,789,144 | | | | 2.28 | % | | | 2.90 | % |
| Toronto Dominion Investments, Inc. (19) | | | 10,736,909 | | | | 47.01 | % | | | 10,736,909 | | | | 2.51 | % | | | 2.44 | % |
| GPSF Securities Inc. (20) | | | 9,200,806 | | | | 43.19 | % | | | 6,996,686 | | | | 1.63 | % | | | 2.08 | % |
| PNC Equity (21) | | | 8,404,687 | | | | 40.98 | % | | | 6,391,287 | | | | 1.49 | % | | | 1.90 | % |
| Private Equity Investment Fund IV, L.P. (22) | | | 8,084,586 | | | | 40.05 | % | | | 6,147,866 | | | | 1.43 | % | | | 1.83 | % |
| Norwest Equity Partners VII, L.P. (23) | | | 5,254,681 | | | | 30.27 | % | | | 3,995,885 | | | | * | | | | 1.19 | % |
| Morgan Stanley Dean Witter (24) | | | 5,000,000 | | | | 29.23 | % | | | 5,000,000 | | | | 1.17 | % | | | 1.13 | % |
| South Atlantic Private Equity Funds (25) | | | 4,718,745 | | | | 28.05 | % | | | 943,749 | | | | * | | | | 1.06 | % |
| Dupont/Conoco Private Market Group Trust (26) | | | 4,463,039 | | | | 26.94 | % | | | 4,463,039 | | | | 1.04 | % | | | 1.01 | % |
| William E. Morrow (27) | | | 2,909,431 | | | | 23.92 | % | | | 45,119 | | | | * | | | | * | |
| Boeing Co. Employee Retirement Plans Master Trust (28) | | | 2,231,519 | | | | 15.57 | % | | | 2,231,519 | | | | * | | | | * | |
| Jerry L. James (29) | | | 1,844,250 | | | | 15.18 | % | | | 33,650 | | | | * | | | | * | |
| Tipton Ross (30) | | | 1,682,002 | | | | 13.16 | % | | | 514,822 | | | | * | | | | * | |
| James M. Hoak, Jr. (31) | | | 1,730,551 | | | | 12.51 | % | | | 1,358,751 | | | | * | | | | * | |
| HC Crown Corporation (32) | | | 1,338,911 | | | | 9.96 | % | | | 1,338,911 | | | | * | | | | * | |
| Martha E. Smiley (33) | | | 1,201,575 | | | | 9.77 | % | | | 145,683 | | | | * | | | | * | |
| Robert W. Hughes (34) | | | 1,120,059 | | | | 8.53 | % | | | 775,699 | | | | * | | | | * | |
| John M. Saenz (35) | | | 1,100,000 | | | | 8.87 | % | | | 300,000 | | | | * | | | | * | |
| Citicorp North America, Inc. (36) | | | 892,608 | | | | 6.87 | % | | | 892,608 | | | | * | | | | * | |
| SKA Management, Inc. (37) | | | 750,000 | | | | 6.20 | % | | | — | | | | — | | | | * | |
| Joe C. Ross (38) | | | 735,685 | | | | 6.06 | % | | | 27,137 | | | | * | | | | * | |
______________
| | | | | | | | | | |
| | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | | |
| Whitney & Co. affiliated funds (the “Whitney Funds”)(4) | | | 105,660,232 | | | | 89.21 | % | | | 72,178,132 | | | | 16.42 | % | | | 21.75 | % |
| Centennial Holdings VI, LLC (5) | | | 79,920,563 | | | | 86.21 | % | | | 53,564,579 | | | | 12.19 | % | | | 16.70 | % |
| Centennial Holdings V, L.P. (5) | | | 20,101,025 | | | | 61.13 | % | | | 13,472,165 | | | | 3.07 | % | | | 4.38 | % |
| Centennial Holdings I, LLC (5) | | | 1,507,853 | | | | 10.55 | % | | | 1,010,597 | | | | * | | | | * | |
| Austin Ventures VII, L.P. (6) | | | 30,996,152 | | | | 70.80 | % | | | 23,570,796 | | | | 5.36 | % | | | 6.74 | % |
| HarbourVest Partners VI-Direct Fund, L.P. (7) | | | 30,652,654 | | | | 70.57 | % | | | 23,309,586 | | | | 5.30 | % | | | 6.67 | % |
| Alta Communications (8) | | | 30,650,514 | | | | 70.57 | % | | | 23,309,158 | | | | 5.30 | % | | | 6.67 | % |
| CIBC (9) | | | 28,244,166 | | | | 68.84 | % | | | 21,478,074 | | | | 4.89 | % | | | 6.15 | % |
| Trinity Ventures (10) | | | 22,989,490 | | | | 64.26 | % | | | 17,482,190 | | | | 3.98 | % | | | 5.02 | % |
| Reliant Energy Broadband, Inc. (11) | | | 22,368,560 | | | | 63.63 | % | | | 22,368,560 | | | | 5.09 | % | | | 4.95 | % |
| Nautic Funds (12) | | | 22,087,122 | | | | 63.34 | % | | | 22,087,122 | | | | 5.03 | % | | | 4.88 | % |
| BancBoston Ventures, Inc. (13) | | | 20,581,010 | | | | 61.68 | % | | | 15,650,678 | | | | 3.56 | % | | | 4.50 | % |
| Prime VIII, L.P. (14) | | | 17,891,342 | | | | 58.32 | % | | | 12,740,246 | | | | 2.90 | % | | | 3.91 | % |
| South Atlantic Private Equity Funds (15) | | | 15,758,220 | | | | 55.21 | % | | | 11,983,224 | | | | 2.73 | % | | | 3.46 | % |
| Lightspeed (16) | | | 15,326,320 | | | | 54.52 | % | | | 11,654,792 | | | | 2.65 | % | | | 3.36 | % |
| Opus Capital (17) | | | 15,326,308 | | | | 54.52 | % | | | 11,654,788 | | | | 2.65 | % | | | 3.36 | % |
| Knology (18) | | | 14,237,464 | | | | 53.68 | % | | | 10,446,556 | | | | 2.38 | % | | | 3.12 | % |
| Kinetic Ventures (19) | | | 12,872,952 | | | | 50.17 | % | | | 9,789,144 | | | | 2.23 | % | | | 2.83 | % |
| Toronto Dominion Investments, Inc. (20) | | | 10,736,909 | | | | 45.65 | % | | | 10,736,909 | | | | 2.44 | % | | | 2.37 | % |
| GPSF Securities Inc. (21) | | | 9,200,806 | | | | 41.85 | % | | | 6,996,686 | | | | 1.59 | % | | | 2.02 | % |
| PNC Equity (22) | | | 8,404,687 | | | | 39.67 | % | | | 6,391,287 | | | | 1.45 | % | | | 1.85 | % |
| Private Equity Investment Fund IV, L.P. (23) | | | 8,084,586 | | | | 38.74 | % | | | 6,147,866 | | | | 1.40 | % | | | 1.78 | % |
| William E. Morrow (24) | | | 5,715,402 | | | | 36.52 | % | | | 45,119 | | | | * | | | | 1.26 | % |
| Norwest Equity Partners VII, L.P. (25) | | | 5,254,681 | | | | 29.13 | % | | | 3,995,885 | | | | * | | | | 1.16 | % |
| Morgan Stanley Dean Witter (26) | | | 5,000,000 | | | | 28.12 | % | | | 5,000,000 | | | | 1.14 | % | | | 1.11 | % |
| Dupont/Conoco Private Market Group Trust (27) | | | 4,463,039 | | | | 25.88 | % | | | 4,463,039 | | | | 1.02 | % | | | * | |
| Martha E. Smiley (28) | | | 3,856,756 | | | | 24.67 | % | | | 145,683 | | | | * | | | | * | |
| Tipton Ross (29) | | | 2,362,002 | | | | 17.55 | % | | | 514,822 | | | | * | | | | * | |
| Boeing Co. Employee Retirement Plans Master Trust (30) | | | 2,231,519 | | | | 14.86 | % | | | 2,231,519 | | | | * | | | | * | |
| Jerry L. James (31) | | | 1,844,250 | | | | 14.38 | % | | | 33,650 | | | | * | | | | * | |
| James M. Hoak, Jr. (32) | | | 1,730,551 | | | | 11.92 | % | | | 1,358,751 | | | | * | | | | * | |
| J Lyn Findley (33) | | | 1,727,298 | | | | 11.90 | % | | | 770,833 | | | | * | | | | * | |
| Convergent Investors V, L.L.C. (34) | | | 1,532,630 | | | | 10.71 | % | | | 1,165,478 | | | | * | | | | * | |
| Mark Machen (35) | | | 1,511,401 | | | | 10.57 | % | | | 770,833 | | | | * | | | | * | |
| HC Crown Corporation (36) | | | 1,338,911 | | | | 9.48 | % | | | 1,338,911 | | | | * | | | | * | |
| Brady Adams (37) | | | 1,202,254 | | | | 8.61 | % | | | 770,833 | | | | * | | | | * | |
| Robert W. Hughes (38) | | | 1,120,059 | | | | 8.11 | % | | | 775,699 | | | | * | | | | * | |
| John M. Saenz (39) | | | 1,100,000 | | | | 8.41 | % | | | 300,000 | | | | * | | | | * | |
| Douglas T. Brannagan (40) | | | 924,684 | | | | 6.75 | % | | | 385,416 | | | | * | | | | * | |
| Citicorp North America, Inc. (41) | | | 892,608 | | | | 6.53 | % | | | 892,608 | | | | * | | | | * | |
| SKA Management, Inc. (42) | | | 750,000 | | | | 5.87 | % | | | — | | | | — | | | | * | |
| Joe C. Ross (43) | | | 735,685 | | | | 5.74 | % | | | 27,137 | | | | * | | | | * | |
| (1) | The address of all principal stockholders is c/o Grande CommunicationsRio Holdings, Inc., 401 Carlson Circle, San Marcos,600 Congress Ave., Ste. 200, Austin, Texas 78666.78701. |
| (2) | Beneficial ownership is calculated in accordance with SEC rules and regulations. For the purpose of computing the percentage ownership of each beneficial owner, any securities which were not outstanding but which were subject to options, warrants, rights or conversion privileges held by such beneficial owner exercisable within 60 days were deemed to be outstanding in determining the percentage owned by such person, but were not deemed outstanding in determining the percentage owned by any other person. |
| (3) | Reflects the beneficial ownership percentage of such person or entity when both common stock and preferred stock vote together as a single class. Total voting power as of a particular date is calculated by dividing the number of common shares beneficially owned by such person by the sum of (i) the total number of shares of common stock outstanding, (ii) the total number of shares of preferred stock outstanding, and (iii) the number of securities which were not outstanding but which were subject to options, warrants, rights or conversion privileges held by such beneficial owner exercisable within 60 days of such date. |
| (4) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | |
| J.H. Whitney IV, L.P. | | | 32,000,000 | | | | 1,315,178 | | | | 13,078,716 | | | | 1,199,067 | | | | 1,489,837 | | | | 6,438,869 | | | | 25,755,476 | |
| J.H. Whitney III, L.P. | | | — | | | | — | | | | 12,775,028 | | | | 1,171,224 | | | | 436,569 | | | | 1,886,793 | | | | 7,547,172 | |
| Whitney Strategic Partners III, L.P. | | | — | | | | — | | | | 303,687 | | | | 27,842 | | | | 10,459 | | | | 44,863 | | | | 179,452 | |
| (5) | Based upon our records and information provided by representatives of the various Centennial Ventures funds: The following shares are beneficially owned by Centennial Holdings VI, LLC: |
The following shares are beneficially owned by Centennial Holdings VI, LLC:
| | | | | | | | | | | | | | | | | | | | | | |
| Centennial Fund VI, L.P. | | | 26,391,856 | | | | 1,426,107 | | | | 12,163,206 | | | | 1,115,132 | | | | 1,213,042 | | | | 5,934,491 | | | | 23,737,964 | |
| Centennial Strategic Partners VI, L.P. | | | 2,375,267 | | | | 85,567 | | | | 915,510 | | | | 83,934 | | | | 84,913 | | | | 497,263 | | | | 1,989,052 | |
| Centennial Entrepreneurs Fund VI, L.P. | | | 684,932 | | | | 42,783 | | | | 326,967 | | | | 29,976 | | | | 36,391 | | | | 157,242 | | | | 628,968 | |
The following shares are beneficially owned by Centennial Holdings V, L.P.:
| | | | | | | | | | | | | | | | | | | | | | |
| CV Liquidating Trust | | | — | | | | — | | | | 10,620,713 | | | | 400,431 | | | | 439,283 | | | | 1,607,489 | | | | 6,429,956 | |
| CEF - V Liquidating Trust | | | — | | | | — | | | | 328,547 | | | | 12,390 | | | | 13,586 | | | | 49,726 | | | | 198,904 | |
| | | | | | | | | | | | | | | | | | | | | | |
| CEF-V Liquidating Trust | | | — | | | | — | | | | 328,547 | | | | 12,390 | | | | 13,586 | | | | 49,726 | | | | 198,904 | |
| CV Liquidating Trust | | | — | | | | — | | | | 10,620,713 | | | | 400,431 | | | | 439,283 | | | | 1,607,489 | | | | 6,429,956 | |
The following shares are beneficially owned by Centennial Holdings I, LLC:
| | | | | | | | | | | | | | | | | | | | | | |
| Centennial Holdings I, LLC | | | 547,945 | | | | 28,522 | | | | 261,574 | | | | 23,981 | | | | 24,261 | | | | 124,314 | | | | 497,256 | |
Centennial Holdings VI, LLC (“Holdings VI”) is the general partner of each of Centennial Fund VI, L.P. and Centennial Entrepreneurs Fund VI, L.P., and is the managing member of CSP VI Management, LLC (“Strategic Management”), which is the general partner of Centennial Strategic Partners VI, L.P. (“Strategic Partners”). Accordingly, Holdings VI may be deemed to share beneficial ownership of all of the shares and warrants to purchase shares of capital stock of the issuer beneficially owned directly by them, and Strategic Management may be deemed to share beneficial ownership of the shares and warrants to purchase shares of capital stock of the issuer beneficially owned directly by Strategic Partners. Centennial Holdings V, L.P. (“Holdings V”) is the sole trustee of each of CEF-V Liquidating Trust and CV Liquidating Trust. Accordingly, Holdings V may be deemed to share beneficial ownership of such shares and warrants to purchase shares of capital stock of the issuer. See footnote (10)(5) to the Directors and Executive Officers beneficial ownership table below for a discussion of the relationships of Messrs. Butler and Hull to the Centennial Venture funds.
| (6) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Austin Ventures VII, L.P. | | | 20,000,000 | | | | 1,055,320 | | | | 659,137 | | | | 1,856,339 | | | | 7,425,356 | |
| (7) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| HarbourVest Partners VI-Direct Fund, L.P. | | | 20,000,000 | | | | 821,986 | | | | 651,833 | | | | 1,835,767 | | | | 7,343,068 | |
| (8) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Alta Communications VIII, L.P. | | | 18,648,405 | | | | 766,628 | | | | 607,934 | | | | 1,711,735 | | | | 6,846,940 | |
| Alta Communications VIII-B, L.P. | | | 1,038,238 | | | | 42,682 | | | | 33,847 | | | | 95,300 | | | | 381,200 | |
| Alta VIII Associates, LLC | | | 5,000 | | | | — | | | | — | | | | — | | | | — | |
| Alta Comm VIII S by S, LLC | | | 308,357 | | | | 12,676 | | | | 10,052 | | | | 28,304 | | | | 113,216 | |
| (9) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | |
| CIBC WMV, Inc. | | | 11,250,000 | | | | 616,490 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| CIBC WMC, Inc. | | | — | | | | — | | | | 3,269,679 | | | | 299,766 | | | | 600,616 | | | | 1,370,941 | | | | 5,483,764 | |
| CIBC Employee Private Equity Fund Partners | | | 3,750,000 | | | | — | | | | — | | | | — | | | | — | | | | 320,582 | | | | 1,282,328 | |
| | | | | | | | | | | | | | | | | | | | | | |
| CIBC WMV, Inc. | | | 11,250,000 | | | | 616,490 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| CIBC WMC, Inc. | | | — | | | | — | | | | 3,269,679 | | | | 299,766 | | | | 600,616 | | | | 1,370,941 | | | | 5,483,764 | |
| CIBC Employee Private Equity Fund Partners | | | 3,750,000 | | | | — | | | | — | | | | — | | | | — | | | | 320,582 | | | | 1,282,328 | |
| (10) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Trinity Ventures VII, L.P. | | | 14,260,593 | | | | 586,101 | | | | 466,876 | | | | 1,314,868 | | | | 5,259,472 | |
| Trinity VII Side-By-Side Fund, L.P. | | | 739,407 | | | | 30,389 | | | | 21,999 | | | | 61,957 | | | | 247,828 | |
| (11) | Includes the following shares: |
| | | | | | | | | | |
| Reliant Energy Broadband, Inc. | | | 20,833,333 | | | | 856,235 | | | | 678,992 | |
| | | | | | | | | | |
| Reliant Energy Broadband, Inc. | | | 20,833,333 | | | | 856,235 | | | | 678,992 | |
67
| (12) | Includes the following shares: |
| | | | | | | | | | |
| Chisholm Partners IV, L.P. | | | 10,466,243 | | | | 959,553 | | | | 357,685 | |
| Fleet Venture Resources, Inc. | | | 6,179,693 | | | | 566,559 | | | | 211,191 | |
| Fleet Equity Partners VI, L.P. | | | 2,648,440 | | | | 242,811 | | | | 90,511 | |
| Kennedy Plaza Partners II, LLC | | | 323,698 | | | | 29,676 | | | | 11,062 | |
| (13) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | |
| BancBoston Ventures, Inc. | | | 10,000,000 | | | | 410,993 | | | | 3,269,679 | | | | 299,766 | | | | 437,657 | | | | 1,232,583 | | | | 4,930,332 | |
| (14) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | |
| Prime VIII, L.P. | | | 5,000,000 | | | | 205,497 | | | | 5,697,566 | | | | 201,772 | | | | 347,637 | | | | 1,287,774 | | | | 5,151,096 | |
See footnote (13)(8) to the Directors and Executive Officers beneficial ownership table below for a discussion of the relationship of Mr. Butler to Prime VIII, L.P.
| (15) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | |
| South Atlantic Private Equity Fund IV (QP), LP | | | 2,715,000 | | | | 119,188 | | | | 3,033,530 | | | | 88,300 | | | | 194,359 | | | | 547,374 | | | | 2,189,496 | |
| South Atlantic Private Equity Fund IV, LP | | | 2,285,000 | | | | 86,309 | | | | 2,263,577 | | | | 113,470 | | | | 140,742 | | | | 396,375 | | | | 1,585,500 | |
| | | | | | | | | | | | | | | | |
| Lightspeed Venture Partners VI-A, L.P. | | | 65,900 | | | | 2,708 | | | | 2,148 | | | | 6,049 | | | | 24,196 | |
| Lightspeed Venture Partners VI, L.P. | | | 8,797,500 | | | | 361,572 | | | | 286,726 | | | | 807,507 | | | | 3,230,028 | |
| Lightspeed Venture Partners VI Cayman, L.P. | | | 788,000 | | | | 32,386 | | | | 25,682 | | | | 72,329 | | | | 289,316 | |
| Lightspeed Venture Partners Entrepreneur VI-A, L.P. | | | 40,900 | | | | 1,681 | | | | 1,333 | | | | 3,754 | | | | 15,016 | |
| Lightspeed Venture Partners Entrepreneur VI, L.P. | | | 307,700 | | | | 12,646 | | | | 10,028 | | | | 28,243 | | | | 112,972 | |
| (16) | Includes the following shares: |
| | | | | | | | �� | | | | | | | | |
| Lightspeed Venture Partners VI-A, L.P. | | | 65,900 | | | | 2,708 | | | | 2,148 | | | | 6,049 | | | | 24,196 | |
| Lightspeed Venture Partners VI, L.P. | | | 8,797,500 | | | | 361,572 | | | | 286,726 | | | | 807,507 | | | | 3,230,028 | |
| Lightspeed Venture Partners VI Cayman, L.P. | | | 788,000 | | | | 32,386 | | | | 25,682 | | | | 72,329 | | | | 289,316 | |
| Lightspeed Venture Partners Entrepreneur VI-A, L.P. | | | 40,900 | | | | 1,681 | | | | 1,333 | | | | 3,754 | | | | 15,016 | |
| Lightspeed Venture Partners Entrepreneur VI, L.P. | | | 307,700 | | | | 12,646 | | | | 10,028 | | | | 28,243 | | | | 112,972 | |
| | | | | | | | | | | | | | | | |
| WPG Information Sciences Entrepreneur Fund II-A, L.L.C. | | | 111,000 | | | | 4,562 | | | | 3,618 | | | | 10,188 | | | | 40,752 | |
| WPG Information Sciences Entrepreneur Fund II, L.L.C. | | | 180,000 | | | | 7,398 | | | | 5,866 | | | | 16,521 | | | | 66,084 | |
| Weiss, Peck & Greer Venture Associates V-A, L.L.C. | | | 67,000 | | | | 2,754 | | | | 2,184 | | | | 6,149 | | | | 24,596 | |
| Weiss, Peck & Greer Venture Associates V, L.L.C. | | | 8,000,000 | | | | 328,794 | | | | 260,733 | | | | 734,306 | | | | 2,937,224 | |
| Weiss, Peck & Greer Venture Associates V Cayman, L.P. | | | 1,641,999 | | | | 67,485 | | | | 53,515 | | | | 150,716 | | | | 602,864 | |
| (17) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| WPG Information Sciences Entrepreneur Fund II-A, L.L.C. | | | 111,000 | | | | 4,562 | | | | 3,618 | | | | 10,188 | | | | 40,752 | |
| WPG Information Sciences Entrepreneur Fund II, L.L.C. | | | 180,000 | | | | 7,398 | | | | 5,866 | | | | 16,521 | | | | 66,084 | |
| Weiss, Peck & Greer Venture Associates V-A, L.L.C. | | | 67,000 | | | | 2,754 | | | | 2,184 | | | | 6,149 | | | | 24,596 | |
| Weiss, Peck & Greer Venture Associates V, L.L.C. | | | 8,000,000 | | | | 328,794 | | | | 260,733 | | | | 734,306 | | | | 2,937,224 | |
| Weiss, Peck & Greer Venture Associates V Cayman, L.P. | | | 1,641,999 | | | | 67,485 | | | | 53,515 | | | | 150,716 | | | | 602,864 | |
| | | | | | | | | | | | | | | | |
| Knology Holdings, Inc. | | | 500,000 | | | | 4,219,676 | | | | 51,889 | | | | 365,170 | | | | 1,460,680 | |
| Valley Telephone, Inc. | | | — | | | | 5,150,492 | | | | 201,772 | | | | 457,557 | | | | 1,830,228 | |
| (18) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Knology Holdings, Inc. | | | 500,000 | | | | 4,219,676 | | | | 51,889 | | | | 365,170 | | | | 1,460,680 | |
| Valley Telephone, Inc. | | | — | | | | 5,150,492 | | | | 201,772 | | | | 457,557 | | | | 1,830,228 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Kinetic Ventures VI, LLC | | | 3,000,000 | | | | 123,298 | | | | 2,387,167 | | | | 110,685 | | | | 175,970 | | | | 495,587 | | | | 1,982,348 | |
| Kinetic Ventures VII, LLC | | | 3,000,000 | | | | 123,298 | | | | — | | | | — | | | | 97,774 | | | | 275,365 | | | | 1,101,460 | |
| (19) | Includes the following shares: |
| | | | | | | | | | |
| Toronto Dominion Investments, Inc. | | | 10,000,000 | | | | 410,993 | | | | 325,916 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Kinetic Ventures VI, LLC | | | 3,000,000 | | | | 123,298 | | | | 2,387,167 | | | | 110,685 | | | | 175,970 | | | | 495,587 | | | | 1,982,348 | |
| Kinetic Ventures VII, LLC | | | 3,000,000 | | | | 123,298 | | | | — | | | | — | | | | 97,774 | | | | 275,365 | | | | 1,101,460 | |
| (20) | Includes the following shares: |
| | | | | | | | | | | | | |
| GPSF Securities Inc. | | | 6,250,000 | | | | 195,656 | | | | 551,030 | | | | 2,204,120 | |
| | | | | | | | | | |
| Toronto Dominion Investments, Inc. | | | 10,000,000 | | | | 410,993 | | | | 325,916 | |
| (21) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| PAGIC Equity, LLC | | | 2,940,848 | | | | 43,405 | | | | 93,440 | | | | 263,107 | | | | 1,052,428 | |
| PNC Venture Corporation. | | | 2,536,616 | | | | 188,342 | | | | 85,286 | | | | 240,243 | | | | 960,972 | |
(21) | Includes the following shares: |
| | | | | | | | | | | | | |
| GPSF Securities Inc. | | | 6,250,000 | | | | 195,656 | | | | 551,030 | | | | 2,204,120 | |
| (22) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| PAGIC Equity, LLC | | | 2,940,848 | | | | 43,405 | | | | 93,440 | | | | 263,107 | | | | 1,052,428 | |
| PNC Venture Corporation. | | | 2,536,616 | | | | 188,342 | | | | 85,286 | | | | 240,243 | | | | 960,972 | |
| | | | | | | | | | | | | | | | |
| Private Equity Investment Fund IV, L.P. | | | 5,289,774 | | | | 201,770 | | | | 172,142 | | | | 484,180 | | | | 1,936,720 | |
| (23) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Private Equity Investment Fund IV, L.P. | | | 5,289,774 | | | | 201,770 | | | | 172,142 | | | | 484,180 | | | | 1,936,720 | |
| | | | | | | | | | | | | | | | |
| Norwest Equity Partners VII, L.P. | | | 3,269,679 | | | | 299,766 | | | | 111,741 | | | | 314,699 | | | | 1,258,796 | |
| (24) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| William E. Morrow | | | 2,850,100 | | | | 2,805,971 | | | | 25,000 | | | | 1,027 | | | | 13,079 | | | | 1,199 | | | | 1,261 | | | | 3,553 | | | | 14,212 | |
(25) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Norwest Equity Partners VII, L.P. | | | 3,269,679 | | | | 299,766 | | | | 111,741 | | | | 314,699 | | | | 1,258,796 | |
(26) | Includes the following shares: |
| | | | |
| Morgan Stanley Dean Witter Equity Funding, Inc. | | | 4,750,000 | |
| Originators Investment Plan, L.P. | | | 250,000 | |
| (25) | Includes the following shares: |
| | | | | | | |
| South Atlantic Private Equity Fund IV (QP), LP | | | 547,374 | | | | 2,189,496 | |
| South Atlantic Private Equity Fund IV, LP | | | 396,375 | | | | 1,585,500 | |
| (26) | Includes the following shares: |
| | | | | | | | | | |
| State Street Bank and Trust, Trustee of Dupont/Conoco Private Market Group Trust | | | 4,315,577 | | | | 11,987 | | | | 135,475 | |
| (27) | Includes the following shares: |
| | | | | | | | | | |
| State Street Bank and Trust, Trustee of Dupont/Conoco Private Market Group Trust | | | 4,315,577 | | | | 11,987 | | | | 135,475 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| William E. Morrow | | | 2,850,100 | | | | 25,000 | | | | 1,027 | | | | 13,079 | | | | 1,199 | | | | 1,261 | | | | 3,553 | | | | 14,212 | |
| (28) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | | | | |
| Martha E. Smiley | | | 1,010,000 | | | | 2,655,181 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Martha Smiley Ventures, Ltd. | | | — | | | | — | | | | 125,000 | | | | 5,137 | | | | 4,073 | | | | 11,473 | | | | 45,892 | |
| | | | | | | | | | |
| Boeing Co. Employee Retirement Plans Master Trust | | | 2,157,788 | | | | 5,994 | | | | 67,737 | |
| (29) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | |
| Tipton Ross | | | 1,685,000 | | | | 460,000 | | | | 13,078 | | | | 1,199 | | | | 40,545 | | | | 162,180 | |
| | | | | | | | | | | | | |
| Jerry L. James | | | 1,800,000 | | | | 31,000 | | | | 2,650 | | | | 10,600 | |
| (30) | Includes the following shares: |
| | | | | | | | | | |
| Boeing Co. Employee Retirement Plans Master Trust | | | 2,157,788 | | | | 5,994 | | | | 67,737 | |
| | | | | | | | | | | | | | | | | | | |
| Tipton Ross | | | 1,685,000 | | | | 460,000 | | | | 13,078 | | | | 1,199 | | | | 40,545 | | | | 162,180 | |
| (31) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| James M. Hoak, Jr. | | | 1,022,463 | | | | 2,841 | | | | 32,097 | | | | — | | | | — | |
| Hoak Ventures, Ltd. | | | — | | | | — | | | | — | | | | 92,950 | | | | 371,800 | |
| James M. Hoak, Jr. Rollover IRA | | | 172,623 | | | | 480 | | | | 5,419 | | | | — | | | | — | |
| James M. Hoak & Co. | | | 28,892 | | | | 80 | | | | 906 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Jerry L. James | | | 1,800,000 | | | | 31,000 | | | | 2,650 | | | | 10,600 | |
| (32) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| James M. Hoak, Jr. | | | 1,022,463 | | | | 2,841 | | | | 32,097 | | | | — | | | | — | |
| Hoak Ventures, Ltd. | | | — | | | | — | | | | — | | | | 92,950 | | | | 371,800 | |
| James M. Hoak, Jr. Rollover IRA | | | 172,623 | | | | 480 | | | | 5,419 | | | | — | | | | — | |
| James M. Hoak & Co. | | | 28,892 | | | | 80 | | | | 906 | | | | — | | | | — | |
| | | | | | | | | | |
| HC Crown Corp. | | | 1,294,673 | | | | 3,596 | | | | 40,642 | |
| (33) | Includes the following shares: |
| | | | | | Series H Preferred Stock Options | |
| J Lyn Findley. | | | 956,465 | | | | 770,833 | |
(34) | Includes the following shares: |
| | | | | | | | | | | | | | | | |
| Convergent Investors V, L.L.C. | | | 1,000,000 | | | | 41,099 | | | | 32,591 | | | | 91,788 | | | | 367,152 | |
| | | | | | | | | | | | | | | | | | | |
| Martha E. Smiley | | | 1,010,000 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Martha Smiley Ventures, Ltd. | | | — | | | | 125,000 | | | | 5,137 | | | | 4,073 | | | | 11,473 | | | | 45,892 | |
| (34) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | |
| Robert W. Hughes | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Hughes Family Partnership | | | — | | | | 150,000 | | | | 83,333 | | | | — | | | | 19,947 | | | | 79,788 | |
| Robert W. & M. Gail Hughes Living Trust | | | — | | | | 300,000 | | | | 166,667 | | | | 14,609 | | | | 41,143 | | | | 164,572 | |
| (35) | Includes the following shares: |
| | | | | | Series H Preferred Stock Options | |
| Mark Machen. | | | 740,568 | | | | 770,833 | |
| | | | | | | |
| John M. Saenz. | | | 800,000 | | | | 300,000 | |
| (36) | Includes the following shares: |
| | | | | | | | | | |
| HC Crown Corp. | | | 1,294,673 | | | | 3,596 | | | | 40,642 | |
| | | | | | | | | | |
| Citicorp North America, Inc. | | | 863,115 | | | | 2,397 | | | | 27,096 | |
| (37) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | | | | Series H Preferred Stock Options | |
| Brady Adams | | | 20,000 | | | | 411,421 | | | | 770,833 | |
(38) | Includes the following shares: |
| | | | | | | | | | | | | | | | | | | |
| Robert W. Hughes | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Hughes Family Partnership | | | — | | | | 150,000 | | | | 83,333 | | | | — | | | | 19,947 | | | | 79,788 | |
| Robert W. & M. Gail Hughes Living Trust | | | — | | | | 300,000 | | | | 166,667 | | | | 14,609 | | | | 41,143 | | | | 164,572 | |
(39) | Includes the following shares: |
| | | | | | | |
| | | | | | | |
| John M. Saenz. | | | 800,000 | | | | 300,000 | |
(40) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | | | | Series H Preferred Stock Options | |
| Douglas T. Brannagan | | | 5,000 | | | | 534,268 | | | | 385,416 | |
(41) | Includes the following shares: |
| | | | | | | | | | |
| Citicorp North America, Inc. | | | 863,115 | | | | 2,397 | | | | 27,096 | |
(42) | Includes the following shares: |
| | | | |
| SKA Management, Inc. | | | 750,000 | |
(43)(38) | Includes the following shares: |
| | | | | | | | | | | | | |
| Joe C. Ross | | | 700,000 | | | | 25,000 | | | | 2,137 | | | | 8,548 | |
Directors and Executive Officers
The following table presents, as of February 28, 2009,March 31, 2010, information regarding the beneficial ownership of our common stock and preferred stock by each of our directors and NEOs and all of our directors and executive officers as a group:
| | | | | | | | | | |
| | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | | |
| Michael L. Wilfley (4) | | | 146,211 | | | | 1.19 | % | | | 110,947 | | | | * | | | | * | |
| Richard W. Orchard | | | — | | | | — | | | | — | | | | — | | | | — | |
Duncan T. Butler, Jr. (5) (8) | | | — | | | | — | | | | — | | | | — | | | | — | |
David C. Hull, Jr. (5) | | | — | | | | — | | | | — | | | | — | | | | — | |
John C. Hockin (6) | | | — | | | | — | | | | — | | | | — | | | | — | |
William Laverack, Jr. (7) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Paul V. Walsh, Jr. | | | — | | | | — | | | | — | | | | — | | | | — | |
| All directors and executive officers as a group (7 persons) | | | 146,211 | | | | 1.19 | % | | | 110,947 | | | | * | | | | * | |
______________
| | | | | | | | | | |
| | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | Number of Shares Beneficially Owned | | | Beneficial Ownership Percentage (2) | | | | |
| Roy H. Chestnutt (4) | | | 10,395,833 | | | | 44.85 | % | | | 5,000,000 | | | | 1.12 | % | | | 2.25 | % |
| Michael L. Wilfley (5) | | | 5,457,871 | | | | 29.92 | % | | | 1,936,988 | | | | * | | | | 1.19 | % |
Walter K.L. “Scott” Ferguson, Jr. (6) | | | 4,946,476 | | | | 29.04 | % | | | 1,837,695 | | | | * | | | | 1.08 | % |
Kay Stroman (7) | | | 1,546,171 | | | | 10.79 | % | | | 862,499 | | | | * | | | | * | |
Jared P. Benson (8) | | | 1,054,776 | | | | 7.62 | % | | | 302,083 | | | | * | | | | * | |
Richard W. Orchard (9) | | | 270,833 | | | | 2.07 | % | | | 120,833 | | | | * | | | | * | |
Duncan T. Butler, Jr. (10) (13) | | | — | | | | — | | | | — | | | | — | | | | — | |
David C. Hull, Jr. (10) | | | — | | | | — | | | | — | | | | — | | | | — | |
John C. Hockin (11) | | | — | | | | — | | | | — | | | | — | | | | — | |
William Laverack, Jr. (12) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Paul V. Walsh, Jr. | | | — | | | | — | | | | — | | | | — | | | | — | |
| All directors and executive officers as a group (13 persons) | | | 26,194,731 | | | | 68.48 | % | | | 11,487,180 | | | | 2.55 | % | | | 5.48 | % |
| (1) | The address of all directors and executive officers is c/o Grande CommunicationsRio Holdings, Inc., 401 Carlson Circle, San Marcos,600 Congress Ave., Ste. 200, Austin, Texas 78666.78701. |
| (2) | Beneficial ownership is calculated in accordance with SEC rules and regulations. For the purpose of computing the percentage ownership of each beneficial owner, any securities which were not outstanding but which were subject to options, warrants, rights or conversion privileges held by such beneficial owner exercisable within 60 days were deemed to be outstanding in determining the percentage owned by such person, but were not deemed outstanding in determining the percentage owned by any other person. |
| (3) | Reflects the beneficial ownership percentage of such person or group when both common stock and preferred stock vote together as a single class. Total voting power as of a particular date is calculated by dividing the number of common shares beneficially owned by such person by the sum of (i) the total number of shares of common stock outstanding, (ii) the total number of shares of preferred stock outstanding, and (iii) the number of securities which were not outstanding but which were subject to options, warrants, rights or conversion privileges held by such beneficial owner exercisable within 60 days of such date. |
| (4) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | Series H Preferred Stock Options | |
| Roy H. Chestnutt. | | | 5,395,833 | | | | 5,000,000 | |
| | | | | | | | | | | | | |
| Michael L Wilfley | | | 99,000 | | | | 3,131 | | | | 8,816 | | | | 35,264 | |
| (5) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | Series H Preferred Stock Options | | | | | | | | | | | | | |
| Michael L Wilfley | | | 3,485,619 | | | | 1,826,041 | | | | 99,000 | | | | 3,131 | | | | 8,816 | | | | 35,264 | |
(6) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | | | | Series H Preferred Stock Options | | | | | | | | | | | | | | | | |
| Walter K.L. “Scott” Ferguson, Jr. | | | 700,000 | | | | 2,405,113 | | | | 1,826,041 | | | | 10,000 | | | | 411 | | | | 326 | | | | 917 | | | | 3,668 | |
(7) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | Series H Preferred Stock Options | |
| Kay Stroman. | | | 683,672 | | | | 862,499 | |
(8) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | Series H Preferred Stock Options | |
| Jared P. Benson. | | | 752,693 | | | | 302,083 | |
(9) | Includes the following shares. All stock options are exercisable within 60 days of February 28, 2009. |
| | | | | | Series H Preferred Stock Options | |
| Richard W. Orchard. | | | 150,000 | | | | 120,833 | |
(10) | Each of Messrs. Butler and Hull is a managing director and on the investment committee of Holdings VI. Mr. Hull is a managing director and one of three general partners of Holdings V and is the Chief Executive Officer of Centennial Holdings I, L.L.C. (“Holdings I”), and Mr. Butler is a Senior Vice President of Holdings I. Because all decisions of the various Centennial Ventures funds with respect to voting and disposing of the issuer’s shares are made by three or more persons acting by majority vote, Messrs. Butler and Hull do not comprise a majority vote and should not be deemed to have direct or indirect beneficial ownership over any of the shares or warrants to purchase shares of capital stock of the issuer beneficially owned by the various Centennial Ventures funds and each of them expressly disclaims any such beneficial ownership. |
(11)(6) | Shares are owned by the Whitney Funds. Mr. Hockin is a former partner of Whitney & Co., an affiliate of the Whitney Funds. Mr. Hockin disclaims beneficial ownership of shares of our capital stock owned by the Whitney Funds. |
(12)(7) | Shares are owned by the Whitney Funds. Mr. Laverack is a managing member of the general partner of each of the Whitney Funds. Mr. Laverack may be deemed to share voting and dispositive power with respect to such shares. Mr. Laverack disclaims beneficial ownership of such shares except to the extent of his proportionate interest. |
(13)(8) | Prime SKA I, LLC (“PSKAI”) is the general partner of Prime VIII, L.P., which beneficially owns directly the shares and warrants to purchase shares of capital stock of the Company.Holdings. A management committee of PSKAI that is comprised of five natural persons acting by majority vote and without veto rights has the sole power to vote and dispose of all of such shares and warrants to purchase shares of capital stock of the Company.Holdings. Mr. Butler is a member, managing director and management committee member of PSKAI. Because voting and disposition decisions with respect to the Company’s securities beneficially owned by Prime are made in each instance by a majority of the management committee of PSKAI, Mr. Butler should not be deemed to have direct or indirect beneficial ownership over any of the securities of the CompanyHoldings beneficially owned by PSKAI, and Mr. Butler expressly disclaims any such beneficialbe neficial ownership. |
Investor Rights Agreement
We are party to an amended and restated investor rights agreement with our preferred stockholders and certain of our common stockholders. This investor rights agreement sets forth certain board designation rights, preemptive rights, registration rights, transfer restrictions and covenants. See footnote No. 9, “Stockholder’s Equity” in the Notes to our Consolidated Financial Statements included in this annual report on Form 10-K for a description of our investor rights agreement and Item 1010. “Directors, Executive Officers and Corporate Governance—Contractual Provisions Relating to Grande’sHoldings’ Board of Directors” for a description of the board designation rights set forth in the investor rights agreementagreement.
Securities Authorized for Issuance Under Equity Compensation PlanPlans
The Company maintainsHoldings maintained the 2000 Stock Incentive Plan. The table below sets forthIn connection with the following informationclosing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock, options to purchase 21,300,000 shares of Series H preferred stock and the 2000 Stock Incentive Plan automatically terminated in February 2010. As a result, as of December 31, 2008 for (i) all compensation plans previously approved by2009, we had no outstanding options to purchase any equity of Holdings under the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders:2000 Stock Incentive Plan.
| ITEM 13. | (1) | the number of securities to be issued upon the exercise of outstanding options; |
| (2) | the weighted-average exercise price of such outstanding options; and |
| (3) | the number of securities remaining available for future issuance under the plans, other than securities to be issued upon the exercise of such outstanding options. |
| | Number of Securities to be Issued Upon Exercise of Outstanding Options | | | Weighted Average Exercise Price of Outstanding Options | | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excludes Securities Reflected in First Column) | |
| Equity compensation plan approved by stockholders—common stock (1) | | | 41,399,472 | | | $ | 0.06 | | | | 38,726,556 | |
| Equity compensation plan not approved by stockholders—common stock | | | — | | | | — | | | | — | |
| Equity compensation plan approved by stockholders – Series H preferred stock (2) | | | 23,224,999 | | | | 0.10 | | | | 6,775,001 | |
| Equity compensation plan not approved by stockholders – Series H preferred stock | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total | | | 64,624,471 | | | | | | | | 45,501,557 | |
(1) | Outstanding common stock options and common stock options available for future issuance that are designated as Executive Compensation Shares under the 2000 Stock Incentive Plan were 7,500,000 common stock options and 4,500,000 common stock options, respectively. |
(2) | All Series H preferred stock options are designated as Executive Compensation Shares under the 2000 Stock Incentive Plan. |
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Related Person Transaction Approval
Although no formal written policy is in place, our board of directors reviewsreview and approvesapprove all related person transactions where the amount exceeds $120,000. For these purposes, a “related person” is a director, nominee for director, executive officer, or holder of more than 5% of any series of our voting stock, or any immediate family member of any of the foregoing. This policy applies to any financial transaction, arrangement or relationship or any series of similar financial transactions, arrangements or relationships in which the CompanyHoldings or Grande Operating is a participant and in which a related person has a direct or indirect interest.
Our board of directors will analyze the following factors, in addition to any other factors the members of the board deem appropriate, in determining whether to approve a related person transaction:
whether the terms are fair to GrandeHoldings and its unaffiliated stockholders;
whether the transaction is material to Grande;
Holdings;
the role the related person has played in arranging the related person transaction;
the structure of the related person transaction; and
the interests of all related persons in the related person transaction.
Our board of directors may, in its sole discretion, approve or deny any related person transaction. Approval of a related person transaction may be conditioned upon GrandeHoldings and the related person following certain procedures designated by the board of directors.
Transaction with Robert Hughes (Prior to the transactions contemplated by the Recapitalization Agreement)
Hughes Family Partnership, L.P. has invested in a real estate purchase and leaseback transaction between Hill Partners, Inc., general partner of Grand HP, Ltd., and Grande Communications Networks, Inc. pursuant to which Grande Communications Networks, Inc. paid approximately $67,000$68,000 per month for 20082009 to Hill Partners, Inc. for approximately 26,000 square feet of buildings and property located in Austin, Texas. The lease term is 20 years through November 2020 with renewal options for an additional 15 years. Robert Hughes, a stockholder and a former member of our board of directors, is the managing general partner of Hughes Family Partnership, L.P. As a result of the recapitalization transactions, these leases are no longer associated with Holdings.
Director Independence
For information on the independence of our directors, please see Item 10 “Directors, Executive Officers and Corporate Governance-DirectorGovernance—Director Independence.”
| PRINCIPAL ACCOUNTING FEES AND SERVICESSERVICES |
The following table summarizes the fees billed by Ernst & Young LLP for services rendered for the fiscal years ended December 31, 2008 and December 31, 2009. Audit fees include amounts billed for our annual audit, quarterly reviews and consultations related to the audit. Tax fees include amounts billed for services rendered during the year ended December 31, 20072008 and 20082009 for tax consulting and compliance. All other fees include amounts billed for due diligence services rendered in connections with the transactions contemplated by the Recapitalization Agreement during the year ended December 31, 2009.
| | | | | | | | | 2008 | | | 2009 | |
| Audit Fees | | $ | 280,000 | | | $ | 280,000 | | | $ | 280,000 | | | $ | 85,000 | |
| Tax Fees | | | 26,000 | | | | 26,000 | | | | 26,000 | | | | 12,705 | |
| All Other Fees | | | | — | | | | 222,560 | |
| | | | | | | | | | | $ | 306,000 | | | $ | 320,265 | |
| | | $ | 306,000 | | | $ | 306,000 | | |
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Under the terms of our audit committee charter, all audit and permitted non-audit services to be performed by our independent auditors must be pre-approved in advance by our audit committee. Our audit committee approved all of the permitted non-audit services performed by our independent auditors in 20072008 and 2008. For a copy of our audit committee charter, please visit our website at the investor relations portion of www.grandecom.com.2009.
PART IV
| ITEM 15. | | EXHIBITS, FINANCIAL STATEMENT SCHEDULESSCHEDULES |
The following documents are filed as part of this Form 10-K:
| | (2) | Financial Statement Schedule |
Unless designated by an asterisk indicating that such document has been filed herewith, the Exhibits listed below have been heretofore filed by the CompanyHoldings pursuant to Section 13 or 15(d) of the Exchange Act and are hereby incorporated herein by reference to the pertinent prior filing.
Exhibit Exhibit No.
| | |
| | | |
| 2.1 | | | Agreement and Plan of Merger (previously filed as exhibit 2.1 to Form 8-K dated September 18, 2009). |
| | | |
| 3.1 | | Restated Certificate | Articles of Incorporation of Grande CommunicationsRio Holdings, Inc. (previously filed as exhibit 3.1 to Form 10-K8-K dated March 31, 2006)September 18, 2009). |
| | | |
| 3.2 | | | Bylaws of Grande CommunicationsRio Holdings, Inc. (previously filed as exhibit 3.2 to Form S-18-K dated MaySeptember 18, 2004)2009). |
| | | |
3.3 | | Amendment No. 1 to Bylaws of Grande Communications Holdings, Inc. (previously filed as exhibit 3.3 to Form 10-Q dated November 5, 2004). |
| | |
3.4 | | Amendment No. 2 to Bylaws of Grande Communications Holdings, Inc. (previously filed as exhibit 3.4 to Form 10-K dated March 30, 2006). |
| | | |
| 4.1 | | Indenture, dated as of March 23, 2004, by and among Grande Communications Holdings, Inc., the Guarantors named therein and U.S. Bank National Association (previously filed as exhibit 4.1 to Form S-1 dated May 18, 2004). |
| | |
4.2 | | Registration Rights Agreement, dated as of March 23, 2004, by and among Grande Communications Holdings, Inc., the Guarantors named therein, Bear, Stearns & Co. Inc. and Deutsche Bank Securities Inc. (previously filed as exhibit 4.2 to Form S-1 dated May 18, 2004). |
| | |
4.3 | | Form of 14% Senior Secured Note due 2011 issued in connection with March 2004 offering (previously filed as exhibit 4.3 to Form S-1 dated May 18, 2004). |
| | |
4.4 | | Pledge and Security Agreement, dated March 23, 2004, by and among Grande Communications Holdings, Inc., Grande Communications Networks, Inc., Grande Communications ClearSource, Inc., Grande Communications, Inc., Grande Communications Houston, Inc., Denton Telecom Holdings I, L.L.C., Denton Telecom Investors I, L.L.C, Denton Telecom Partners I, L.P., and U.S. Bank National Association (previously filed as exhibit 4.4 to Form S-1 dated May 18, 2004). |
| | |
4.5 | | Form of 14% Senior Secured Notes due 2011 issued in connection with March 2006 private placement (previously filed as exhibit 4.5 to Form 10-K dated March 31, 2006). |
| | |
4.6 | | Supplemental Indenture, dated as of July 18, 2007, by and among Grande Communications Holdings, Inc., the Guarantor named therein and U.S. Bank National Association (previously filed as exhibit 10.1 to Form 8-K dated July 18, 2007). |
| | |
4.7 | | Warrant Agreement, dated as of March 23, 2004, by and between Grande Communications Holdings, Inc. and U.S. Bank National Association as Warrant Agent (previously filed as exhibit 4.7 to Amendment No. 5 to the Registration Statement on Form S-1 dated March 20, 2009). |
| | | | |
10.1+10.1 | | Grande Communications Holdings, Inc. Second Amended and Restated 2000 Stock Incentive Plan (previously filed as exhibit 10.1 to Form 8-K dated October 30, 2006). |
| | | |
10.2+ | | Employment Agreement dated January 26, 2006 by and between Grande Communications Networks, Inc. and Roy H. Chestnutt (previously filed as exhibit 10.3 to Form 10-K dated March 31, 2006). |
| | |
| | |
10.3 | | Fifth Amended and Restated Investor Rights Agreement dated December 12, 2005 by and among Grande Communications Holdings, Inc., Current Investors, Founders and New Investors (previously filed as exhibit 10.4 to Form 10-K dated March 31, 2006). |
| | |
10.4 | | Lease Agreement between Grande Communications Networks, Inc. and GRC (TX) Limited Partnership, dated August 7, 2003 (previously filed as exhibit 10.5 to Form S-1 dated May 18, 2004). |
| | |
10.5+ | | Amendment to Employmentof Indemnification Agreement entered into asby each Member of June 28, 2006, bythe Registrant’s Board of Directors and between Grande Communications Networks, Inc. and Roy H. Chestnutteach of Registrant’s Officers (previously filed as exhibit 10.1 to Form 8-K dated July 3, 2006)22, 2009). |
| | | | |
10.6+10.2 | | Employment | Note Purchase Agreement, entered intodated as of June 28, 2006,August 18, 2009, by and betweenamong Grande Communications Networks,Holdings, Inc., a Delaware corporation, each of the Holders party thereto, and W.K.L. “Scott” Ferguson, Jr.ABRY Partners VI, LP, a Delaware limited partnership (previously filed as exhibit 10.1 to Form 8-K dated July 5, 2006)August 24, 2009). |
| | | | |
10.7+10.3 | | Employment Agreement, entered into as of June 28, 2006, by and between Grande Communications Networks, Inc. and Michael Wilfley (previously filed as exhibit 10.2 to Form 8-K dated July 5, 2006). |
| | | |
10.8+ | | Form of Incentive Stock Option Agreement (Common Stock - Regular) (previously filed as exhibit 10.4 to Form 8-K dated July 5, 2006). |
| | |
10.9+ | | Form of Incentive Stock Option Agreement (Common Stock - Executive Compensation Shares) (previously filed as exhibit 10.5 to Form 8-K dated July 5, 2006). |
| | |
10.10+ | | Form of Incentive Stock Option Agreement (Series H Preferred Stock) (previously filed as exhibit 10.6 to Form 8-K dated July 5, 2006). |
| | |
10.11+ | | Form of Nonqualified Stock Option Agreement (Common Stock - Regular) (previously filed as exhibit 10.7 to Form 8-K dated July 5, 2006). |
| | |
10.12+ | | Form of Nonqualified Stock Option Agreement (Common Stock - Executive Compensation Shares) (previously filed as exhibit 10.8 to Form 8-K dated July 5, 2006). |
| | |
10.13+ | | Form of Nonqualified Stock Option Agreement (Series H Preferred Stock) (previously filed as exhibit 10.9 to Form 8-K dated July 5, 2006). |
| | |
10.14 | | Schedule No. 05, dated May 2, 2007, between Varilease Finance, Inc. as Secured Party, and Grande Communications Holdings, Inc., as Co-Debtor and Grande Communications Networks, Inc. as Co-Debtor to the Master LeaseContribution Agreement, dated as of MarchSeptember 14, 2006 between Varilease Finance, Inc., Grande Communications Holdings, Inc. and Grande Communications Networks, Inc. (previously filed as exhibit 10.17 to Form Post Effective Amendment No. 3 to Form S-1 dated May 23, 2007). |
| | |
10.15 | | Purchase Agreement dated July 6, 20072009, by and among Grande Communications Holdings, Inc., Grande Communications Networks Inc., Goldman, Sachs & Co., Highland Crusader Offshore Partners,LLC, Grande Investment L.P., Communications Media Advisors, and Grande Parent LLC and Highland Capital Management, L.P. (previously filed as exhibit 10.1 to Form 8-K dated July 11, 2007)September 18, 2009). |
| | | | |
10.16+10.4 | | Second Amendment to Employment | Ultimate Parent Limited Partnership Agreement, entered into as of February 5, 2008,dated September 14, 2009, by and betweenamong Grande Communications Networks,Communication Holdings, Inc., Rio GP, LLC, Grande Manager LLC, ABRY Partners VI, L.P. and Roy H. ChestnuttABRY Investment Partnership, L.P. (previously filed as exhibit 10.1610.2 to Form 10-K8-K dated March 31, 2008)September 18, 2009). |
| | | | |
10.17+10.5 | | Amendment to Employment | Ultimate Parent Partners Agreement, entered into as of February 5, 2008,dated September 14, 2009, by and betweenamong Grande Communications Networks, Inc.Investment L.P., Rio GP, LLC, Grande Manager LLC, ABRY Partners VI, L.P. and W.K.L. “Scott” Ferguson, Jr.ABRY Investment Partnership, L.P. (previously filed as exhibit 10.1710.3 to Form 10-K8-K dated March 31, 2008)September 18, 2009). |
| | | | |
10.18+10.6 | | | Ultimate Parent Registration Rights Agreement, dated September 14, 2009, by and among Grande Investment L.P., Rio GP, LLC, ABRY Partners VI, L.P. and ABRY Investment Partnership, L.P. (previously filed as exhibit 10.4 to Form 8-K dated September 18, 2009). |
| | | |
| 10.7 | | | First Amendment to EmploymentGuaranty and Suretyship Agreement, entered into as of February 5, 2008,dated September 14, 2009, by and between Grande Communications Networks,Holdings, Inc., Rio GP, LLC and Michael WilfleyGRC (TX) Limited Partnership (August 2003 Lease) (previously filed as exhibit 10.1810.7 to Form 10-K8-K dated March 31, 2008)September 18, 2009). |
Exhibit Exhibit No.
| | |
10.19 | | Purchase | |
| 10.8 | | | First Amendment to Guaranty and LicenseSuretyship Agreement, dated September 14, 2009, by and between Grande Communications Networks,Holdings, Inc., Rio GP, LLC and GRC-II (TX) Limited Partnership (June 2004 Lease) (previously filed as exhibit 10.8 to Form 8-K dated September 18, 2009). |
| | | |
| 10.9 | | | Sixth Amended and Restated Investor Rights Agreement, dated September 14, 2009, by and among Grande Communications Holdings, Inc. and Nortel Networks, Inc.,the investors named therein (previously filed as exhibit 10.9 to Form 8-K dated September 18, 2009). |
| | | |
| 10.10 | | | Recapitalization Agreement, dated as of January 24, 2005, as amendedAugust 27, 2009, by and among Grande Communications Holdings, Inc., a Delaware corporation, Grande Communications Networks, Inc. a Delaware corporation ABRY Partners VI, L.P., a Delaware limited partnership, Grande Investment L.P., a Delaware limited partnership, Grande Parent LLC, a Delaware limited liability company, and ABRY Partners, LLC, a Delaware limited liability company (previously filed as exhibit 10.1 to Form 10-Q8-K dated May 9, 2008)August 31, 2009). |
| | | |
10.20 | | Amendment to Purchase and License Agreement by and between Grande Communications Networks, Inc. and Nortel Networks, Inc., dated as of January 24, 2008 (previously filed as exhibit 10.2 to Form 10-Q dated May 9, 2008). |
| | |
10.21+ | | Separation Agreement and Full and Final Release of Claims between Grande Communications Networks, Inc. and Jeffrey A. Brennan dated August 15, 2008 (previously filed as exhibit 10.1 to Form 10-Q dated November 10, 2008). |
| | | |
| | Lease Agreement between Grande Communications Networks, Inc. | Code of Ethics and Grand HP, Ltd., dated June 27, 2006, covering 7.942 acres of land.Corporate Compliance policy. |
| | | |
| | Lease Agreement between Grande Communications Networks, Inc. and Grand HP, Ltd., dated June 27, 2006, covering 8.470 acres | Letter of land.Ernst & Young LLP change in certifying accountant. |
| | | |
21 | | Subsidiaries of Registrant (previously filed as exhibit 21 to Form 10-K dated March 31, 2007). |
| | | |
| | Consent | Subsidiaries of Ernst & Young LLP.Registrant. |
| | | |
| 24* | | | Power of Attorney of Grande CommunicationsRio Holdings, Inc. (included on signature page). |
| | | | |
| | Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) promulgated under the Exchange Act. |
| | |
| | Certification of ChiefPrincipal Executive Officer and Principal Financial Officer pursuant to Rule 13a – 14(a) promulgated under the Exchange Act. |
| | | | |
| | | Certification pursuant to Rule 13a – 14(b) promulgated under the Exchange Act and 18 U.S.C. Section 1350. |
| | | |
| | | Audit Committee Charter. |
| | | |
| | | Compensation Committee Charter. |
| | | |
| | | Financial Statements of Grande Investment L.P. |
+ | Management compensatory plan or agreement. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Grande CommunicationsRio Holdings, Inc.
(Registrant) |
| | | |
Date: March 20, 2009April 30, 2010 | By: | /s/ Roy H. Chestnutt |
| | Roy H. Chestnutt |
| | President, Chief Executive Officer, and Chairman of the Board |
| | (Duly Authorized Officer and Principal Executive Officer) |
| | |
Date: March 20, 2009 | By: | /s/ MichaelMICHAEL L. Wilfley
WILFLEY |
| | | Michael L. Wilfley |
| | | President, Chief Executive Officer, Chief Financial Officer and Treasurer |
| | | (Duly Authorized Officer, Principal Executive Officer and Principal Financial Officer) |
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Roy H. Chestnutt and Michael L. Wilfley and each and any of them, our true lawful attorneys-in-fact and agents, to do any and all acts and things in our names and our behalf in our capacities as trustees and officers and to execute any and all instruments for us and in our name in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said Corporation to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.hereo f.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
/s/ RMOYICHAEL H. CL. WHESTNUTTILFLEY | | | | |
Roy H. Chestnutt | | President, Chief Executive Officer (Principal Executive Officer)Officer and Chairman of the Board of DirectorsPrincipal Financial Officer), Treasurer and Director | | March 20, 2009April 30, 2010 |
| Michael L. Wilfley | | | |
| | | | | |
/s/ MDICHAELUNCAN L. WT. BILFLEYUTLER, JR. | | Chairman of the Board of Directors | | April 30, 2010 |
| | | | |
Michael L. Wilfley | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | March 20, 2009 |
| | | | | |
/s/ DJUNCANOHN T. BUTLER, C. HJROCKIN. | | Director | | April 30, 2010 |
| | | | |
Duncan T. Butler, Jr. | | Director | | March 20, 2009 |
| | | | | |
/s/ JDOHNAVID C. HOCKINULL, JR. | | Director | | April 30, 2010 |
| | | | |
John C. Hockin | | Director | | March 20, 2009 |
| | | | | |
/s/ DWAVIDILLIAM C. HULL LAVERACK, JR. | | Director | | April 30, 2010 |
| | | | |
David C. Hull, Jr. | | Director | | March 20, 2009 |
| | | | | |
/s/ WILLIAM LAVERACK, JR.ICHARD W. ORCHARD | | Director | | April 30, 2010 |
| | | | |
William Laverack, Jr. | | Director | | March 20, 2009 |
| | | | | |
/s/ PAUL V. WALSH, JRICHARD W. O.RCHARD | | Director | | April 30, 2010 |
| | | | |
Richard W. Orchard | | Director | | March 20, 2009 |
| | | | |
/s/ PAUL V. WALSH, JR.
| | | | |
Paul V. Walsh, Jr. | | Director | | March 20, 2009 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. AND SUBSIDIARY
AS OF DECEMBER 31, 20072008 AND 20082009 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 20082009
| | Page |
| | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Financial Statements | |
| | |
| Consolidated Balance Sheets | F-3F-4 |
| | |
| Consolidated Statements of Operations | F-4F-5 |
| | |
| Consolidated Statements of Stockholders’ Equity | F-5F-6 |
| | |
| Consolidated Statements of Cash Flows | F-6F-7 |
| | |
| Notes to Consolidated Financial Statements | F-7F-8 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Grande CommunicationsRio Holdings, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheetssheet of Rio Holdings, Inc. and its subsidiary (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rio Holdings, Inc. and its subsidiary at December 31, 2009, and the consolidated results of their operations and their cash flows for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
April 30, 2010
Boston, Massachusetts
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Rio Holdings, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Rio Holdings, Inc. and Subsidiary (formerly Grande Communications Holdings, Inc. and SubsidiarySubsidiary) as of December 31, 2007 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the threetwo years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grande CommunicationsRio Holdings, Inc. and its Subsidiary as of December 31, 2007 and 2008, and the consolidated results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
March 16, 2009
Austin, Texas
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| | | | | | December 31, | |
| | | | | | | | | 2008 | | | 2009 | |
| Assets | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents, net of restricted cash of $3,129 | | $ | 48,138 | | | $ | 26,988 | | |
| Accounts receivable, net of allowance for doubtful accounts of $1,138 and $1,311 | | 17,793 | | | 17,047 | | |
| Cash and cash equivalents, net of restricted cash of $3,129 and $0 | | | $ | 26,988 | | | $ | 916 | |
| Accounts receivable, net of allowance for doubtful accounts of $1,311 and $0 | | | | 17,047 | | | | — | |
| Prepaid expenses and other current assets | | | 1,867 | | | | 2,090 | | | | 2,090 | | | | 72 | |
| | | | | | | | | | |
| Total current assets | | 67,798 | | | 46,125 | | | | 46,125 | | | | 988 | |
| Property, plant and equipment, net of accumulated depreciation of $313,526 and $368,907 | | 249,310 | | | 223,034 | | |
| Intangible assets, net of accumulated amortization of $1,417 and $1,661 | | 1,398 | | | 1,154 | | |
| Property, plant and equipment, net of accumulated depreciation of $368,907and $0 | | | | 223,034 | | | | — | |
| Intangible assets, net of accumulated amortization of $1,661 and $0 | | | | 1,154 | | | | — | |
| Debt issue costs, net | | 4,255 | | | 3,203 | | | | 3,203 | | | | — | |
| Restricted cash | | 3,129 | | | 3,129 | | | | 3,129 | | | | — | |
| Deposit and other long-term assets | | | 353 | | | | 790 | | | | 790 | | | | — | |
| | | | | | | | | | |
| Investment in Grande Investment L.P. | | | | — | | | | 22,807 | |
| Total assets | | $ | 326,243 | | | $ | 277,435 | | | $ | 277,435 | | | $ | 23,795 | |
| | | | | | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 13,809 | | | $ | 13,111 | | | $ | 13,111 | | | $ | — | |
| Accrued liabilities | | 15,328 | | | 15,938 | | | | 15,938 | | | | 15 | |
| Accrued interest payable | | 6,755 | | | 6,755 | | | | 6,755 | | | | — | |
| Deferred revenue and customer deposits | | 6,996 | | | 7,598 | | | | 7,598 | | | | — | |
| Current portion of long-term debt | | 1,612 | | | 1,655 | | | | 1,655 | | | | — | |
| Current portion of capital lease obligations | | | 3,548 | | | | 4,405 | | | | 4,405 | | | | — | |
| | | | | | | | | | |
| Total current liabilities | | 48,048 | | | 49,462 | | | | 49,462 | | | | 15 | |
| Deferred rent | | 1,228 | | | 1,177 | | | | 1,177 | | | | — | |
| Deferred revenue | | 4,377 | | | 4,759 | | | | 4,759 | | | | — | |
| Capital lease obligations, net of current portion | | 13,592 | | | 13,380 | | | | 13,380 | | | | — | |
| Long term debt, net of current portion | | | 189,994 | | | | 189,629 | | | | 189,629 | | | | — | |
| | | | | | | | | | |
| Total liabilities | | | 257,239 | | | | 258,407 | | | | 258,407 | | | | 15 | |
| | | | | | | | | | |
| Stockholders’ equity: | | | | | | | | | | | | | | | | |
| Senior series preferred stock: | | | | | | | | | | | | | | | | |
| Series G preferred stock, $0.001 par value per share; 34,615,384 shares authorized, 34,615,330 shares issued and outstanding; liquidation preference of $134,999,787 | | 35 | | | 35 | | |
| Series G preferred stock, $0.001 par value per share; 34,615,384 shares authorized, 34,615,330 shares issued and outstanding; liquidation preference of $3.90 per share | | | | 35 | | | | 35 | |
| Junior series preferred stock: | | | | | | | | | | | | | | | | |
| Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, 232,617,838 shares issued and outstanding; liquidation preference of $232,617,838 | | 233 | | | 233 | | |
| Series B preferred stock, $0.001 par value per share; 20,833,333 shares authorized, issued and outstanding; liquidation preference of $25,000,000 | | 21 | | | 21 | | |
| Series C preferred stock, $0.001 par value per share; 30,000,000 shares authorized, 17,005,191 shares issued and outstanding; liquidation preference of $20,406,229 | | 17 | | | 17 | | |
| Series D preferred stock, $0.001 par value per share; 115,384,615 shares authorized, 114,698,442 shares issued and outstanding; liquidation preference of $149,107,975 | | 115 | | | 115 | | |
| Series E preferred stock, $0.001 par value per share; 8,000,000 shares authorized, 7,999,099 shares issued and outstanding; liquidation preference of $19,997,748 | | 8 | | | 8 | | |
| Series F preferred stock, $0.001 par value per share; 12,307,792 shares authorized, 11,758,278 shares issued and outstanding; liquidation preference of $15,285,761 | | 12 | | | 12 | | |
| Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, 232,617,838 shares issued, 232,617,838 and 227,617,838 outstanding, respectively; liquidation preference of $1.00 per share | | | | 233 | | | | 233 | |
| Series B preferred stock, $0.001 par value per share; 20,833,333 shares authorized, issued and outstanding; liquidation preference of $1.20 per share | | | | 21 | | | | 21 | |
| Series C preferred stock, $0.001 par value per share; 30,000,000 shares authorized, 17,005,191 shares issued, 17,005,191 and 16,799,694 outstanding, respectively; liquidation preference of $1.20 per share | | | | 17 | | | | 17 | |
| Series D preferred stock, $0.001 par value per share; 115,384,615 shares authorized, 114,698,442 shares issued, 114,698,442 and 109,401,335 outstanding, respectively; liquidation preference of $1.30 per share | | | | 115 | | | | 115 | |
| Series E preferred stock, $0.001 par value per share; 8,000,000 shares authorized, 7,999,099 shares issued, 7,999,099 and 7,797,329 outstanding, respectively; liquidation preference of $2.50 per share | | | | 8 | | | | 8 | |
| Series F preferred stock, $0.001 par value per share; 12,307,792 shares authorized, 11,758,278 shares issued, 11,758,278 and 11,423,177 outstanding, respectively; liquidation preference of $1.30 per share | | | | 12 | | | | 12 | |
| Series H preferred stock, $0.001 par value per share; 30,000,000 shares authorized, no shares issued and outstanding | | | — | | | | — | | | | — | | | | — | |
| Common stock, $0.001 par value per share; 786,835,883 shares authorized, 13,175,940 and 13,284,072 shares issued, 12,675,940 and 12,784,072 shares outstanding, as of December 31, 2007 and 2008, respectively | | 13 | | | 13 | | |
| Common stock, $0.001 par value per share; 786,835,883 shares authorized, 13,284,072 shares issued, 12,784,072 and 12,104,072 shares outstanding, respectively | | | | 13 | | | | 13 | |
| Additional paid-in capital | | 509,312 | | | 509,696 | | | | 509,696 | | | | 510,118 | |
| Treasury stock, at cost | | (5 | ) | | (5 | ) | | | (5 | ) | | | (12 | ) |
| Accumulated deficit | | | (440,757 | ) | | | (491,117 | ) | | | (491,117 | ) | | | (486,780 | ) |
| | | | | | | | | | |
| Total stockholders’ equity | | | 69,004 | | | | 19,028 | | | | 19,028 | | | | 23,780 | |
| | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 326,243 | | | $ | 277,435 | | | $ | 277,435 | | | $ | 23,795 | |
The accompanying notes are an integral part of these consolidated financial statements.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | For the year ended December 31, | | | For the year ended December 31, | |
| | | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 189,867 | | | $ | 197,146 | | | $ | 205,271 | | | $ | 197,146 | | | $ | 205,271 | | | $ | 143,953 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues (excluding depreciation and amortization) | | 63,931 | | | 68,348 | | | 69,798 | | | | 68,348 | | | | 69,798 | | | | 49,394 | |
| Selling, general and administrative | | 94,312 | | | 90,416 | | | 92,486 | | | | 90,416 | | | | 92,486 | | | | 63,282 | |
| Provision for doubtful accounts | | 3,514 | | | 3,301 | | | 3,363 | | | | 3,301 | | | | 3,363 | | | | 2,019 | |
| Depreciation and amortization | | | 56,037 | | | | 56,752 | | | | 59,385 | | | | 56,752 | | | | 59,385 | | | | 43,037 | |
| | | | | | | | | | | | | | |
| Total operating expenses | | | 217,794 | | | | 218,817 | | | | 225,032 | | | | 218,817 | | | | 225,032 | | | | 157,732 | |
| | | | | | | | | | | | | | |
| Operating loss | | (27,927 | ) | | (21,671 | ) | | (19,761 | ) | | | (21,671 | ) | | | (19,761 | ) | | | (13,779 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain on deconsolidation of Grande Communications Networks LLC | | | | — | | | | — | | | | 49,198 | |
| Net gain on sale/disposal of assets | | | | 76 | | | | 764 | | | | 304 | |
| Interest income | | 1,546 | | | 1,670 | | | 728 | | | | 1,670 | | | | 728 | | | | 50 | |
| Interest expense, net of capitalized interest | | (23,970 | ) | | (29,012 | ) | | (31,042 | ) | | | (29,012 | ) | | | (31,042 | ) | | | (22,260 | ) |
| Loss on early extinguishment of 14% senior notes due April 1, 2011 | | | | — | | | | — | | | | (7,139 | ) |
| Equity in loss from investment in Grande Investment L.P. | | | | — | | | | — | | | | (1,414 | ) |
| Other income (expense) | | | — | | | (472 | ) | | 53 | | | | (472 | ) | | | 53 | | | | 242 | |
| Net gain on sale/disposal of assets | | 2,353 | | | 76 | | | 764 | | |
| Goodwill impairment | | | (93,639 | ) | | | — | | | | — | | |
| | | | | | | | | | | | | | |
| Total other income (expense) | | | (113,710 | ) | | | (27,738 | ) | | | (29,497 | ) | | | (27,738 | ) | | | (29,497 | ) | | | 18,981 | |
| | | | | | | | | | | | | | |
| Loss before income tax expense | | (141,637 | ) | | (49,409 | ) | | (49,258 | ) | | | (49,409 | ) | | | (49,258 | ) | | | 5,202 | |
| Income tax expense | | | — | | | | (1,123 | ) | | | (1,102 | ) | | | (1,123 | ) | | | (1,102 | ) | | | (865 | ) |
| Net income (loss) | | | $ | (50,532 | ) | | $ | (50,360 | ) | | $ | 4,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (141,637 | ) | | $ | (50,532 | ) | | $ | (50,360 | ) | |
| | | | | | | | | | | | | | |
| Basic and diluted net loss per share | | $ | (11.30 | ) | | $ | (4.01 | ) | | $ | (3.94 | ) | |
| Basic and diluted weighted average common shares outstanding | | 12,530 | | | 12,610 | | | 12,765 | | |
| Basic and diluted net income (loss) per share | | | $ | (4.01 | ) | | $ | (3.94 | ) | | $ | 0.01 | |
The accompanying notes are an integral part of these consolidated financial statements.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Additional Paid-in Capital | | | | | | | | | Total Stockholders’ Equity | | |
| Balance as of December 31, 2005 | | 439,527 | | | $ | 441 | | | 12,990 | | | $ | 13 | | | $ | 508,346 | | | $ | (5 | ) | | $ | (248,588 | ) | | $ | 260,207 | | |
| Exercise of common stock options | | | — | | | | — | | | 101 | | | | — | | | 13 | | | — | | | | — | | | 13 | | |
| Stock compensation | | | — | | | | — | | | | — | | | | — | | | 377 | | | — | | | | — | | | 377 | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (141,637 | ) | | | (141,637 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additional Paid-in Capital | | | | | | | | | | | | | | | Total Stockholders’ Equity | |
| Balance as of December 31, 2006 | | 439,527 | | | 441 | | | 13,091 | | | 13 | | | 508,736 | | | (5 | ) | | (390,225 | ) | | 118,960 | | | | 439,527 | | | $ | 441 | | | | 13,091 | | | $ | 13 | | | $ | 508,736 | | | | — | | | | (500 | ) | | $ | (5 | ) | | $ | (390,225 | ) | | $ | 118,960 | |
| Exercise of common stock options | | | — | | | | — | | | 85 | | | | — | | | 3 | | | — | | | | — | | | 3 | | | | — | | | | — | | | | 85 | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | 3 | |
| Stock compensation | | | — | | | | — | | | | — | | | | — | | | 573 | | | — | | | | — | | | 573 | | | | — | | | | — | | | | — | | | | — | | | | 573 | | | | — | | | | — | | | | — | | | | — | | | | 573 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (50,532 | ) | | | (50,532 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (50,532 | ) | | | (50,532 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2007 | | 439,527 | | | 441 | | | 13,176 | | | 13 | | | 509,312 | | | (5 | ) | | (440,757 | ) | | 69,004 | | | | 439,527 | | | | 441 | | | | 13,176 | | | | 13 | | | | 509,312 | | | | — | | | | (500 | ) | | | (5 | ) | | | (440,757 | ) | | | 69,004 | |
| Exercise of common stock options | | | — | | | | — | | | 108 | | | | — | | | 6 | | | — | | | | — | | | 6 | | | | — | | | | — | | | | 108 | | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | — | | | | 6 | |
| Stock compensation | | | — | | | | — | | | | — | | | | — | | | 378 | | | — | | | | — | | | 378 | | | | — | | | | — | | | | — | | | | — | | | | 378 | | | | — | | | | — | | | | — | | | | — | | | | 378 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (50,360 | ) | | | (50,360 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (50,360 | ) | | | (50,360 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2008 | | | 439,527 | | | $ | 441 | | | | 13,284 | | | $ | 13 | | | $ | 509,696 | | | $ | (5 | ) | | $ | (491,117 | ) | | $ | 19,028 | | | | 439,527 | | | | 441 | | | | 13,284 | | | | 13 | | | | 509,696 | | | | — | | | | (500 | ) | | | (5 | ) | | | (491,117 | ) | | | 19,028 | |
| Stock compensation | | | | — | | | | — | | | | — | | | | — | | | | 417 | | | | — | | | | — | | | | — | | | | — | | | | 417 | |
| Repurchase of common stock | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (680 | ) | | | (7 | ) | | | — | | | | (7 | ) |
| Repurchase of preferred stock | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (11,039 | ) | | | — | | | | — | | | | — | | | | — | |
| Other | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | 5 | |
| Net income | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,337 | | | | 4,337 | |
| Balance as of December 31, 2009 | | | | 439,527 | | | $ | 441 | | | | 13,284 | | | $ | 13 | | | $ | 510,118 | | | | (11,039 | ) | | | (1,180 | ) | | $ | (12 | ) | | $ | (486,780 | ) | | $ | 23,780 | |
The accompanying notes are an integral part of these consolidated financial statements.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | For the year ended December 31, | | | For the year ended December 31, | |
| | | | | | | | | | | | 2007 | | | 2008 | | | 2009 | |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (141,637 | ) | | $ | (50,532 | ) | | $ | (50,360 | ) | |
| Adjustment to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | | |
| Net income (loss) | | | $ | (50,532 | ) | | $ | (50,360 | ) | | $ | 4,337 | |
| Adjustment to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | |
| Depreciation | | 55,775 | | | 56,335 | | | 59,141 | | | | 56,335 | | | | 59,141 | | | | 42,867 | |
| Amortization of intangible and other assets | | 262 | | | 417 | | | 257 | | | | 417 | | | | 257 | | | | 183 | |
| Amortization of deferred financing costs | | 1,000 | | | 1,025 | | | 1,052 | | | | 1,025 | | | | 1,052 | | | | 739 | |
| Provision for bad debts | | 3,514 | | | 3,301 | | | 3,363 | | | | 3,301 | | | | 3,363 | | | | 2,019 | |
| Amortization of debt discounts/premiums | | 1,109 | | | 1,237 | | | 1,289 | | | | 1,237 | | | | 1,289 | | | | 1,025 | |
| Non-cash compensation expense | | 377 | | | 573 | | | 378 | | | | 573 | | | | 378 | | | | 417 | |
| Net gain on sale/disposal of assets | | (2,353 | ) | | (76 | ) | | (764 | ) | | | (76 | ) | | | (764 | ) | | | (304 | ) |
| Goodwill impairment | | 93,639 | | | | — | | | | — | | |
| Gain on deconsolidation of subsidiary | | | | — | | | | — | | | | (49,198 | ) |
| Loss on early extinguishment of debt | | | | — | | | | — | | | | 7,139 | |
| Equity in loss from investment in Grande Investment L.P. | | | | — | | | | — | | | | 1,414 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | (1,848 | ) | | (3,853 | ) | | (2,516 | ) | | | (3,853 | ) | | | (2,516 | ) | | | 1,971 | |
| Prepaid expenses and other assets | | 781 | | | (299 | ) | | (660 | ) | | | (299 | ) | | | (660 | ) | | | (317 | ) |
| Accounts payable | | (1,432 | ) | | 1,377 | | | (372 | ) | | | 1,377 | | | | (372 | ) | | | (14 | ) |
| Accrued liabilities and interest payable | | 103 | | | 1,647 | | | 610 | | | | 1,647 | | | | 610 | | | | 10,303 | |
| Deferred revenue | | 112 | | | 629 | | | 1,728 | | |
| Deferred rent | | | 285 | | | | (40 | ) | | | (51 | ) | |
| | | | | | | | | | | | | | |
| Deferred revenue and deferred rent | | | | 589 | | | | 1,677 | | | | (3,650 | ) |
| Net cash provided by operating activities | | | 9,687 | | | | 11,741 | | | | 13,095 | | | | 11,741 | | | | 13,095 | | | | 18,931 | |
| | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | (30,886 | ) | | (35,290 | ) | | (29,766 | ) | | | (35,290 | ) | | | (29,766 | ) | | | (13,902 | ) |
| Cash transferred with deconsolidation of subsidiary | | | | — | | | | — | | | | (28,603 | ) |
| Proceeds from sale of assets | | 3,274 | | | 638 | | | 481 | | | | 638 | | | | 481 | | | | 278 | |
| Proceeds from sales tax refunds | | 922 | | | 1,130 | | | 349 | | |
| Maturities of short term investments | | 350 | | | | — | | | | — | | |
| Proceeds from sales tax refunds on prior purchases of equipment | | | | 1,130 | | | | 349 | | | | — | |
| Other investing activity | | | (47 | ) | | | (67 | ) | | | — | | | | (67 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
| Net cash used in investing activities | | | (26,387 | ) | | | (33,589 | ) | | | (28,936 | ) | | | (33,589 | ) | | | (28,936 | ) | | | (42,227 | ) |
| | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments of long-term debt and capital lease obligations | | | | (4,305 | ) | | | (4,989 | ) | | | (5,329 | ) |
| Proceeds from sale leaseback arrangement | | | | — | | | | — | | | | 4,532 | |
| Net proceeds from borrowings | | 30,581 | | | 30,054 | | | | — | | | | 30,054 | | | | — | | | | 123 | |
| Proceeds from sale leaseback arrangement | | 7,373 | | | | — | | | | — | | |
| Payments of long-term debt and capital lease obligations | | (3,193 | ) | | (4,305 | ) | | (4,989 | ) | |
| Deferred financing costs | | (86 | ) | | (165 | ) | | | — | | | | (165 | ) | | | — | | | | — | |
| Net borrowings (repayments) on zero-balance cash account | | (758 | ) | | 451 | | | (326 | ) | | | 454 | | | | (320 | ) | | | (2,102 | ) |
| Other financing activity | | | 12 | | | | 3 | | | | 6 | | |
| | | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 33,929 | | | | 26,038 | | | | (5,309 | ) | | | 26,038 | | | | (5,309 | ) | | | (2,776 | ) |
| | | | | | | | | | | | | | |
| Net change in cash and cash equivalents | | 17,229 | | | 4,190 | | | (21,150 | ) | | | 4,190 | | | | (21,150 | ) | | | (26,072 | ) |
| Cash and cash equivalents, beginning of year | | | 26,719 | | | | 43,948 | | | | 48,138 | | | | 43,948 | | | | 48,138 | | | | 26,988 | |
| | | | | | | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 43,948 | | | $ | 48,138 | | | $ | 26,988 | | | $ | 48,138 | | | $ | 26,988 | | | $ | 916 | |
| | | | | | | | | | | | | | |
| Non-cash investing and financing activity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividend from Grande Operating for 14% senior note repayment | | | $ | — | | | $ | — | | | $ | (208,163 | ) |
| Investment in Grande Investment L.P. | | | $ | — | | | $ | — | | | $ | (30,277 | ) |
| Capital lease obligations | | $ | 8,341 | | | $ | 461 | | | $ | 4,023 | | | $ | 461 | | | $ | 4,023 | | | $ | 4,336 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Supplemental disclosure: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash paid for interest | | $ | 22,886 | | | $ | 26,502 | | | $ | 28,701 | | | $ | 26,502 | | | $ | 28,701 | | | $ | 15,010 | |
| Cash paid for franchise taxes | | $ | 180 | | | $ | — | | | $ | — | | |
| Cash paid for income taxes | | $ | — | | | $ | — | | | $ | 1,099 | | | $ | — | | | $ | 1,099 | | | $ | 896 | |
The accompanying notes are an integral part of these consolidated financial statements.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC.Inc. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background and Basis of Presentation
The primaryOn September 14, 2009, the closing date of the transactions contemplated by that certain recapitalization agreement, dated August 27, 2009, by and among Grande Communications Holdings, Inc., a Delaware corporation and predecessor-in-interest to Rio Holdings, Inc., a Nevada Corporation (“Holdings”), Grande Communications Networks, Inc., a Delaware corporation, predecessor–in-interest to Grande Communications Networks LLC, a Delaware limited liability company and our wholly-owned subsidiary prior to the closing (“Grande Operating”), ABRY Partners VI, L.P., a Delaware limited partnership (“ABRY”), Grande Investment L.P., a Delaware limited partnership and wholly-owned subsidiary of ABRY (“Ultimate Parent”), Grande Parent LLC, a Delaware limited liability company and wholly-owned subsidia ry of Ultimate Parent (“Parent”), ABRY Partners, LLC, a Delaware limited liability company and Rio GP, LLC, a Delaware limited liability company and wholly-owned subsidiary of Holdings (“Rio GP”), which provides for the recapitalization of Grande Operating (the “Recapitalization Agreement”) and pursuant to the terms of the Recapitalization Agreement, we completed the following transactions:
(1) On September 10, 2009, Grande Operating converted to a Delaware limited liability company that is disregarded for Federal income tax purposes, and Holdings extinguished any and all intercompany receivables between it and Grande Operating simultaneous with the conversion;
(2) On September 11, 2009, Grande Operating distributed to Holdings cash in the amount of approximately $1.0 million for Holdings’ future working capital needs;
(3) On September 14, 2009, Holdings contributed assets used in the operation of the business to Grande Operating and Grande Operating assumed liabilities arising from operation of the business;
(4) On September 14, 2009, ABRY, ABRY Investment Partnership, L.P. and Grande Manager LLC, a newly formed wholly-owned subsidiary of ABRY (“Grande Manager”) contributed cash in the amount of approximately $92.3 million to Ultimate Parent (which was ultimately contributed to Grande Operating) in return for a general partner interest and a limited partner interest representing approximately 75.3% of the common equity of Ultimate Parent;
(5) On September 14, 2009, ABRY contributed cash in the amount of approximately $19.2 million to Ultimate Parent (which was ultimately contributed to Grande Operating) in return for a preferred limited partnership interest of Ultimate Parent;
(6) On September 14, 2009, Holdings contributed all of the outstanding membership interests of Grande Operating to Ultimate Parent (which was contributed to Parent) in return for the issuance to Rio GP of a general partner interest of Ultimate Parent representing approximately 24.7% of the common equity of Ultimate Parent;
(7) On September 14, 2009, Grande Operating received net proceeds of approximately $103.8 million under a new credit facility arranged by ABRY, consisting of a $103.8 million term loan and a $18.7 million revolving credit facility; and
(8) On September 14, 2009, Holdings assigned the note purchase agreement discussed in Footnote No. 10 below to Grande Operating which repurchased 99.4% of Holdings’ outstanding 14% senior secured notes due 2011 (“Holdings senior notes”) pursuant to a note purchase agreement entered into with the Requisite Bondholders (defined below), and Grande Operating redeemed all of the remaining Holdings senior notes outstanding held by the remaining holders pursuant to the mandatory redemption provisions of the Indenture (defined below), and the Indenture was discharged and paid off certain outstanding capital lease obligations using the net proceeds from the equity and debt financing transactions.
On September 17, 2009, Grande Communications Holdings, Inc. merged with and into its wholly-owned subsidiary, Rio Holdings, Inc., a Nevada corporation, for the purpose of changing Holdings’ state of incorporation from Delaware to Nevada (the “Reincorporation”). The Reincorporation was accomplished pursuant to an Agreement and Plan of Merger, dated September 2, 2009, which was approved by the requisite Grande Communications Holdings, Inc. stockholders by written consent. The Reincorporation did result in the change of name of Grande Communication Holdings, Inc. to Rio Holdings, Inc. The Reincorporation did not result in any further change in the business, management, fiscal year, office locations, assets, liabilities, or employees of Holdings beyond those that resulted from the recapitali zation transactions.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In January 2010, Holdings filed a Form 15 with the SEC to suspend its reporting obligations under the Exchange Act. As a result of filing the Form 15, Holdings’ obligation to file certain reports and forms including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K has been suspended. We expect that this Annual Report on Form 10-K for the year ended December 31, 2009 will be the last filing made by Holdings under the Exchange Act.
Prior to the closing of the recapitalization transaction on September 14, 2009, the primary business of Holdings and its then consolidated subsidiary, Grande Communications Networks, Inc. (collectively, the “Company”) isOperating was providing a bundled package of cable television (“video”), telephone (“voice”), and broadband Internet (“HSD”) and other services to residential and business customers in Texas. The Company providesGrande Operating provided these services in seven markets in the state of Texas using local broadband networks that the Company acquired and/or constructed. In addition, the Company providesGrande Operating provided broadband transport services to medium and large enterprises and communication carriers. The CompanyGrande Operating also providesprovided network services by offering telecommunications and HSD products to medium and large enterprises and communication carriers within wholesale markets.m arkets.
As a result of the closing of the recapitalization transaction, Holdings does not have any operations or material assets other than the ownership of its general partner interest of Ultimate Parent, through its wholly-owned subsidiary, Rio GP. Further, Holdings only has two persons serving as officers, Michael L. Wilfley and Walter K.L. “Scott” Ferguson, Jr., and no employees.
The accompanying consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements include the accounts of Grande Communications Holdings, Inc.’s wholly owned subsidiary., a predecessor-in-interest to Rio Holdings, Inc., and its consolidated subsidiary, Grande Communications Networks, Inc., a predecessor-in-interest to Grande Communications Networks LLC, prior to the closing of the recapitalization transactions on September 14, 2009. Subsequent to September 14, 2009, the consolidated financial statements include the accounts of Rio Holdings, Inc. and its consolidated subsidiary, Rio GP LLC and the equity in earnings of Ultimate Parent which is accounted for under the equity method. All inter-company transactions and balances have been eliminated.
Certain reclassifications have been made to prior year amounts to conform to current year classifications. Provision for doubtful accounts is presented separately in the accompanying consolidated statements of operations instead of being included in selling, general and administrative expense. This change in presentation resulted in an increase in provision for doubtful accounts and a decrease in selling, general and administrative expense of $3.5 million and $3.3 million for the yearsyear ended December 31, 2006 and 2007, respectively.2007.
As described under Note 8 “Long Term Debt” below, the Company’s 14% senior notes due April 1, 2011 (“senior notes”) are governed by the indenture between the Company and U.S. Bank National Association, as Indenture Trustee, dated March 23, 2004 (“Indenture”). The Indenture contains a covenant restricting certain capital expenditures if such expenditures would result in the Company having less than $20 million in cash and cash equivalents after giving effect to such expenditures. If cash and cash equivalents fall below $20 million, the Company would not be permitted to make certain capital expenditures until such time as cash and cash equivalents, including such proposed certain capital expenditures, increase above $20 million. If the Company made certain capital expenditures that would cause cash and cash equivalents to fall below $20 million, the Company would be required to notify the Trustee of such default. If the Company receives notification from the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding senior notes, the Company would have 60 days to comply with the covenant. If after 60 days, the Company has not complied with the covenant, the senior notes may be declared due and payable immediately by notice from the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding senior notes. This covenant could adversely affect the Company’s ability to make planned capital expenditures. Cash and cash equivalents were $27.0 million at December 31, 2008.
The Company expects that the available cash and cash equivalents and cash generated from operations will be sufficient to fund existing operations, planned capital spending and other commitments over the next twelve months through December 31, 2009. The Company also believes that it will manage its cash position above $20 million in accordance with the covenant set forth in the Indenture over the next twelve months through December 31, 2009. The Company’s current business plan is based on estimates regarding expected future costs and expected revenues. Actual costs may exceed or revenues may fall short of the estimates, the estimates may change, and future developments may affect the estimates. Any of these factors may increase the need for funds, which would require the Company to consider asset sales or seek additional financing to fund operations, to undertake initiatives not contemplated by the current business plan or obtain additional cushion against possible shortfalls. Future financings may include a range of different sizes or types of financing, including capital lease transactions and the sale of additional debt or equity securities. These financings could increase the Company’s level of indebtedness or result in dilution to the equity holders. Additionally, the Company can call the existing senior notes at any time giving the Company the near term ability to refinance the senior notes in the event better pricing and terms were available to the Company in the market. However, the Company may not be able to raise additional funds on favorable terms or at all. The Company’s ability to obtain additional financing depends on several factors, including future market conditions and the state of the credit markets; the Company’s success or lack of success in penetrating the markets the Company serves and growing overall income; the Company’s future creditworthiness; and restrictions contained in agreements with the Company’s investors or lenders, including the restrictions contained in the Indenture.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2. Summary of Significant Accounting Policies
Accounting Estimates
Preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the CompanyHoldings may undertake in the future. Actual results may ultimately differ from these estimates.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Subsequent to the Transactions Contemplated by the Recapitalization Agreement:
Equity Investment
Investments in which Holdings has the ability to exercise significant influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. Income (loss) from investments accounted for under the equity method of accounting represent the prorata share of Holdings’ equity in earnings and losses of the investee.
These investments are evaluated for impairment. An impairment loss would be recorded whenever a decline in the value of an equity investment or investment carried at cost below its carrying amount is determined to be other than temporary. In judging “other than temporary,” Holdings considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and Holdings’ long-term intent of retaining the investment in the investee.
Prior to the Transactions Contemplated by the Recapitalization Agreement (and on-going as applicable):
Cash and Cash Equivalents
The Company considers allAll highly liquid investments with original maturities of three months or less are considered to be cash and cash equivalents.
As a result of the Company’sGrande Operating’s cash management system, checks issued but not presented to the banks for payment may create negative book cash balances (zero-balance accounts). Such negative balances are included in accounts payable and total $4.0$3.6 million and $3.6$0 million as of December 31, 20072008 and 2008,2009, respectively.
The Company hasGrande Operating had entered into letter of credit agreements that restrict the use of cash. This restricted cash consistsconsisted of cash maintained in a money market bank account. Restricted cash was approximately $3.1 million and $0 million as of both December 31, 20072008 and 20082009, respectively, and is included in the caption “restricted cash” in the accompanying consolidated balance sheets.
Accounts Receivable
Accounts receivable arewere recorded at their net realizable values. The Company usesGrande Operating used estimates to determine the allowance for doubtful accounts and recordsrecorded an accounts receivable reserve for known collectibilitycollectability issues, as such issues relaterelated to specific transactions or customer balances. These estimates arewere based on historical collection experience, current trends, credit policy and a percentage of the Company’s customer accounts receivable. In determining these percentages, the Company looksGrande Operating looked at historical write-offs of the receivables. The Company writesGrande Operating wrote off accounts receivable when it becomesbecame apparent based upon age or customer circumstances that such amounts willwould not be collected.
Property, Plant and Equipment
The Company’sGrande Operating’s industry iswas capital intensive and a large portion of the Company’stheir resources iswere spent on capital activities associated with building our network. Property, plant and equipment reflectsreflected the original cost of acquisition or construction, including costs associated with network construction and initial customer installations. Direct labor costs directly associated with capital projects arewere capitalized. The Company capitalizes directDirect labor costs associated with personnel were capitalized based upon allocations of time devoted to network construction and customer installation activities. Costs capitalized as part of initial customer installations includeincluded materials, direct labor, and certain indirect costs. These indirect costs arewere associated with the activities of personnel who assistassisted in connecting and activating the new service and consistconsiste d of compensation and overhead costs associated with these support functions. Capitalized internal direct labor and overhead costs were approximately $8.3 million, $8.5 million, $7.6 million and $7.6$6.0 million, during the years ended December 31, 2006, 2007, 2008 and 2008,2009, respectively. Capitalized labor and overhead costs arewere depreciated along with the physical assets to which they relate,related, which havehad lives of three to ten years depending on the type of asset.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The costs of disconnecting service at a customer’s dwelling or reconnecting service to a previously installed dwelling arewere charged to operating expense in the period incurred.
Construction and other materials arewere valued at the lower of cost or market (determined on a weighted-average basis) and includeincluded customer premise equipment and certain plant construction materials. These items arewere transferred to the telecommunications plant when installed and activated.
Expenditures for repairs and maintenance arewere charged to expense when incurred. Expenditures for major renewals and betterments, which extendextended the useful lives of existing equipment, arewere capitalized and depreciated. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation arewas removed from the accounts and any resulting gain or loss iswas recognized in the statements of operations.
Depreciation iswas calculated on the straight-line method based on the useful lives of the various classes of depreciable property. Assets recorded under capital leases arewere amortized over the lesser of the life of the underlying asset or the lease term and such amortization iswas included with depreciation and amortization expense. The average estimated lives of depreciable property, plant and equipment are:were:
| Communications plant | 7 to 10 years |
| Computer equipment | 3 years |
| Software, including general purpose and network | 3 years |
| Buildings | 20 years |
| Leasehold improvements | 5 years |
| Assets under capital lease | 3 to 20 years |
| Furniture, fixtures and vehicles | 5 to 7 years |
| Other | 5 to 7 years |
Goodwill
The Company follows the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (SFAS 142), which recognizes that since goodwill and certain intangible assets may have indefinite useful lives, these assets are not amortized but are to be evaluated at least annually for impairment.
The Company used a two-step process to test for impairment of the carrying value of goodwill in accordance with SFAS 142. The first step of the process compared the fair value of each reporting unit with the carrying value of the reporting unit, including any goodwill. The Company utilized discounted cash flow and other valuation methodologies to determine the fair value of each reporting unit. If the fair value of each reporting unit exceeded the carrying amount of the reporting unit, goodwill is deemed not to be impaired in which case the second step in the process is unnecessary. If the carrying amount exceeded fair value, the Company performed the second step to measure the amount of impairment. Any impairment is measured by comparing the implied fair value of goodwill, calculated per SFAS 142, with the carrying amount of goodwill at the reporting unit, with the excess of the carrying amount over the fair value recognized as an impairment. During 2006, the annual goodwill impairment tests resulted in an impairment of $93.6 million and as a result, all goodwill was written off as of December 31, 2006.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible Assets
Intangible assets are accounted for in accordance with SFAS 142. The Company classifies intangible assetswere capitalized as definite-lived or indefinite-lived intangible assets. As of December 31, 2008, definite-lived intangibles includeincluded multiple family dwelling unit (“MDU”) exclusive access rights, which arewere amortized over the respective lives of the agreements, typically seven to eighteen years. The CompanyDefinite-lived intangible assets were periodically reviewsreviewed for the appropriateness of the amortization periods related to its definite-lived assets. The Company does not currently have anyperiods. There are no intangible assets classified as indefinite-lived.
The Company testsDefinite-lived intangible assets were tested for possible impairment of definite-lived intangible assets whenever events or changes in circumstances, such as a reduction in operating cash flow or a dramatic change in the manner that the asset iswas intended to be used indicatesindicated that the carrying amount of the asset iswas not recoverable. If indicators exist, the Company comparesexisted, the undiscounted cash flows related to the asset were compared to the carrying value of the asset. If the carrying value iswas greater than the undiscounted cash flow amount, an impairment charge iswas recorded in the statements of operations for amounts necessary to reduce the carrying value of the asset to fair value. There were no impairments recognized on other definite-lived intangible assets during 2006, 2007, 2008 or 2008.2009.
Long-Lived Assets
The Company evaluates its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets.Long-lived assets classified as held and used by the Company arewere reviewed for impairment whenever events or changes in circumstances indicateindicated that their net book value maywould not be recoverable. When such factors and circumstances exist, the Company comparesexisted, the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives were compared against their respective carrying amounts. Impairment, if any, iswas based on the excess of the carrying amount over the fair value of those assets and iswas recorded in the period in which the determination was made.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition
Revenue from residential and business customers iswas principally derived from bundled packages of video, voice, HSD and other services. Bundled services revenue consistsconsisted of fixed monthly fees and usage based fees for long distance service and iswas recorded as revenue in the period the service iswas provided. Revenues arewere recognized when services arewere provided, regardless of the period in which they arewere billed. Amounts billed in advance arewere reflected in the balance sheet as deferred revenue and arewere deferred until the service iswas provided. Installation revenues obtained from bundled service connections arewere recognized in accordance with ASC 922, Entertainment – Cable Television, formerly SFAS No. 51, Financial Reporting by Television Cable Companies, as the connections arewere completed since installation revenues recognized arewere less than the related direct selling costs. Installation costs arewere included in property, plant, and equipment and depreciated over the estimated life of communications plant. Local governmentalGovernmental authorities imposeimposed franchise fees on the majority of the Company’sGrande Operating’s franchises of up to a federally mandated maximum of 5% of annual gross revenues derived from the operation of the cable television system to provide cable television services, as provided in the franchise agreements.services. Such fees arewere collected on a monthly basis from the Company’sGrande Operating’s customers and periodically remitted to local franchise authorities. Franchise fees collected and paid of approximately $2.5 million, $2.9 million, $3.2 million, and $3.2$2.4 million during the years ended December 31, 2006, 2007, 2008, and 2008,2009, respectively, arewere reported as revenues and cost of revenues, respectively. The Federal Communications Commission imposesimposed a tax on interstate and international long distance calls to fund telephone service for the poor, and to support telecommunications services for libraries, schools, and rural health care providers. Such taxes arewere collected on a monthly basis from the Company’sGrande Operating’s customers and periodically remitted to the Universal Service Fund (“USF”). Sales and other taxes imposed by governmental authorities arewere also collected on a monthly basis from the Company’sGrande Operating’s customers and periodically remitted to governmental authorities. Revenue iswas presented net of the applicable USF, sales and other taxes.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue from broadband transport services iswas principally derived from providing medium and large enterprises and communication carriers with access to the Company’sGrande Operating’s metro area networks and point-to-point circuits on the Company’sits long-haul fiber optic network. Revenue from network services iswas principally derived from switched carrier services and managed modem services. Broadband transport and network services revenue consistsconsisted of fixed monthly fees and usage based fees and iswas recorded as revenue in the period the service iswas provided. Amounts billed in advance arewere reflected in the balance sheet as deferred revenue and arewere deferred until the service iswas provided. Revenue also includesincluded upfront non-recurring fees for construction, installation and configuration services that arewas deferred andan d recognized over the related service contract period.
In instances where multiple deliverables are sold contemporaneously to the same counterparty, the Company follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Specifically, if the Company enterssuch as when Grande Operating entered into sales contracts for the sale of multiple products or services, then the Company evaluatesan evaluation determined whether it hashad objective fair value evidence for each deliverable in the transaction. If the Company hasGrande Operating had objective fair value evidence for each deliverable of the transaction, then it accountsaccounted for each deliverable in the transaction separately, based on the revenue recognition policies outlined above. The residual method iswas used when no fair value iswas available for the deliverable. For example, this would occur when the Company entersGrande Operating entered into an agreement for service that includes the Companyincluded providing equipment in connection with the service and the subscriber paying an installation fee as well as monthly charges.charges . Because the Company isGrande Operating was providing both a product and a service, revenue iswas allocated to the product and monthly subscription service based on relative fair value and revenue iswas allocated to installation services using the residual method. To date, product revenues havewere not been significant.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Advertising Costs
The Company expenses allAll advertising costs were expensed as incurred. Total advertising expense for 2006, 2007, 2008 and 20082009 was approximately $2.6 million, $2.5 million, $2.7 million and $2.7$1.7 million, respectively, and iswas reflected as a component of selling, general and administrative expense in the accompanying consolidated statements of operations.
Debt Issuance Costs
Debt issuance costs arewere amortized over the life of the related indebtedness using a method that approximates the effective interest method. Amortization expense related to debt issuance costs charged to interest expense was approximately $1.0 million, $1.1 million and $0.7 million during both the years ended December 31, 20062007, 2008 and 20072009, respectively. On September 14, 2009, all of the outstanding Holdings senior notes have been redeemed or repurchased and the indenture that governed the terms of the Holdings senior notes was discharged. As a result of these transactions, the remaining unamortized debt issuance costs of approximately $1.1$1.5 million duringwas written off and included in the year ended December 31, 2008.$7.1 million loss on early extinguishment of the Holdings senior notes in the accompanying consolidated statement of operations.
Income Taxes
The CompanyHoldings utilizes the liability method of accounting for income taxes, as set forth in ASC 740, Income Taxes, formerly SFAS No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse (see Note 79 “Income Taxes”).
Effective January 1, 2007, the state of Texas changed its method of taxation from a franchise tax, which was based on taxable capital, to a tax based on gross margin. This change resulted in a different financial statement presentation of the tax to the state of Texas. Prior to January 1, 2007, the Texas franchise tax expense was included as a component of selling, general and administrative expense in the accompanying condensed consolidated statements of operations. The gross margin tax is presented as income tax expense during the years ended December 31, 2007 and 2008.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net Loss Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares outstanding and the number of equivalent shares which would be issued related to the stock options and warrants using the treasury method, and convertible preferred stock using the if-converted method, unless such additional equivalent shares are anti-dilutive.
For the years ended December 31, 2006, 2007 and 2008, the Company reported a net loss, therefore, the following equivalent shares of common stock were not included in the computation of diluted EPS, as their effect was anti-dilutive:
| | | 2006 | | | 2007 | | | 2008 | |
| Convertible preferred stock | | | 439,527,511 | | | | 439,527,511 | | | | 439,527,511 | |
| Common stock warrants | | | 59,575,248 | | | | 152,107,016 | | | | 152,107,016 | |
| Common stock options | | | 51,967,818 | | | | 51,557,894 | | | | 44,447,340 | |
| Series H preferred stock options | | | 13,479,726 | | | | 27,514,521 | | | | 25,200,330 | |
| | | | | | | | | | | | | |
| Total anti-dilutive shares | | | 499,102,759 | | | | 670,706,942 | | | | 661,282,197 | |
Stock Based Compensation
As of December 31, 2008,Prior to the Company hastransactions contemplated by the Recapitalization Agreement, Holdings had a stock-based employee compensation plan, which is described more fully in Note 9. Prior to January 1, 2006, the Company accounted for the plan under the recognition11. Compensation expense was measured and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. Prior to the adoption of SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”), the Company used the minimum value method of measuring stock options for the pro forma disclosure under SFAS 123. Effective January 1, 2006, the Company adopted therecognized based on estimated fair value recognition provisions of SFAS 123(R), using the prospective transition method. Under that transition method, compensation cost recognized in 2006, 2007 and 2008 includes compensation costvalues for all share-based payments granted subsequentawards made to January 1, 2006,employees and directors based on the grant-date estimated fair value estimated in accordance with the provisions of SFAS 123(R).value. Compensation expense calculated under SFAS 123(R) iswas amortized to compensation expense on a straight-line basis over the vesting period of the underlying stock option grants.
In connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, after October 9, 2009, we had no outstanding options to purchase any equity of Holdings and the employee compensation plan automatically terminated on February 24, 2010.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheets for cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximateapproximated fair value due to the short-term nature of the instruments. Fair value of the following debt instruments was estimated based on trading activity for the Holdings senior notes and borrowing rates currently available to the Company for equipment financing with similar terms and maturities:
| | | December 31, 2008 | |
| | | Carrying Amount | | | Estimated Fair Value | |
| | | (in millions) | |
| 14% Senior Notes | | $ | 189.3 | | | $ | 142.3 | |
| Equipment financing | | | 2.0 | | | | 2.0 | |
| | | December 31, 2007 | | | December 31, 2008 | |
| | | Carrying Amount | | | Estimated Fair Value | | | Carrying Amount | | | Estimated Fair Value | |
| | | (in millions) | |
| 14% Senior Notes | | $ | 188.0 | | | $ | 194.7 | | | $ | 189.3 | | | $ | 142.3 | |
| Equipment financing | | | 3.6 | | | | 3.6 | | | | 2.0 | | | | 2.0 | |
Recent Accounting Pronouncements
Fair Value MeasurementsOn July 1, 2009, Holdings adopted SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” which was incorporated into Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles.” This new accounting standard identifies the ASC as the authoritative source of GAAP in the United States. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The adoption of this new accounting standard did not have an impact on the financial position, results of operations, or cash flows; however references to the ASC are included within the financial statements.
On January 1, 2008, the Company adopted certainIn May 2009, FASB issued SFAS 165, which was incorporated into ASC 855, “Subsequent Events.” The provisions of SFAS 165 set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may have occurred for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The provisions of SFAS 165 became effective on April 1, 2009 and are being applied prospectively beginning in the second quarter of 2009.
In April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157, 107-1 and Accounting Principles Board 28-1 “Interim Disclosures about Fair Value Measurements (“of Financial Instruments,” which was incorporated into FASB ASC 825, “Financial Instruments.” The FSP amends SFAS 157”), which establishes the authoritative definitionNo. 107 “Disclosures about Fair Value of fair value, sets out a framework for measuring fair value and expands the requiredFinancial Instruments” to require an entity to provide disclosures about fair value measurement. The provisions of SFAS 157 adopted on January 1, 2008 relate to financial assets and liabilities, as well as other assets and liabilities carried at fair value on a recurring basis and did not have a material impact on the Company’s consolidatedinstruments in interim financial statements. The provisions of FAS 157 related to other nonfinancial assets and liabilities will be effective for the Company on January 1, 2009, and will be applied prospectively. These provisions are not expected to have any impact on the Company’s historical consolidated financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS 141(R) also includes a substantial number of new disclosure requirements. SFAS 141(R)information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The provisions of FSP No. 107-1 were adopted in the second quarter of 2009.
In November 2008, the FASB issued guidance under EITF 08-6, “Equity Method Investment Accounting Considerations,” which was incorporated into FASB ASC 323-10, “Investments – Equity Method and Joint Ventures.” This guidance clarifies how to business combinationsaccount for whichcertain transactions and impairment considerations involving equity method investments. Specifically, this guidance notes: 1) an entity shall measure its equity method investment initially at cost; 2) an equity method investor is required to recognize other-than-temporary impairments of an equity method investment in accordance with paragraph 35-32A and an equity method investor shall not separately test an investee’s underlying indefinite-lived intangible asset(s) for impairment; and 3) an equity method investor shall account for a share issuance by an i nvestee as if the acquisition dateinvestor had sold a proportionate share of its investment and any gain or loss to the investor resulting from an investee’s share issuance shall be recognized in earnings. This guidance is effective on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This guidance was adopted prospectively beginning January 1, 2009. We expect SFAS 141(R) will have anOn the date of adoption, there was no impact on our accounting for future business combinations once adopted but the effect is dependent upon the acquisitions that are made in the future.to Holdings’ financial position or results of operations.
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. Equity Investment and Gain on Deconsolidation of Subsidiary
On September 14, 2009, Holdings contributed all of the outstanding membership interests of Grande Operating to Grande Investment L.P. in return for a noncontrolling general partner interest of Grande Investment L.P. representing approximately 24.7% of the common equity of Grande Investment L.P. ABRY, ABRY Investment Partnership, L.P. and Grande Manager LLC, a newly formed wholly-owned subsidiary of ABRY (“Grande Manager”) contributed cash to Grande Investment L.P. in return for a general partner interest and a limited partner interest representing approximately 75.3% of the common equity of Grande Investment L.P. As a result of the deconsolidation of Grande Operating from such transaction, we recorded a gain of $49.3 million. Such gain was determined based upon the fair value of our acquired 24.7% interest in Grande Investmen t L.P. and the carrying value of Holdings’ investment in Grande Operating as of the date of the transactions. The carrying value of Holdings’ investment in Grande Operating included a reduction for the non-cash dividend to Holdings related to the repurchase and redemption of the Holdings senior notes by Grande Operating. Refer to Footnote No. 10 for a discussion of the Holdings senior notes.
Equity investment consisted of the following for the year ended December 31, 2009:
| | | 2009 | |
| Carrying value, beginning of year | | $ | — | |
| Acquisition of interest in Grande Investment L.P. at fair value | | | 24,221 | |
| Equity in loss from Grande Investment L.P. | | | (1,414 | ) |
| Carrying value, end of year | | $ | 22,807 | |
The following is the summarized financial data of Grande Operating, the indirect wholly-owned subsidiary of Grande Investment L.P., of which Holdings owns 24.7%, at December 31, 2009 and for the period from acquisition, September 14, 2009, through December 31, 2009, in thousands:
| Current assets | | $ | 33,120 | |
| Noncurrent assets | | | 252,209 | |
| Current liabilities | | | 37,875 | |
| Noncurrent liabilities | | | 116,110 | |
| Revenues | | | 57,153 | |
| Operating loss | | | (1,724 | ) |
| Net loss | | | (5,726 | ) |
The portion of Holdings’ 24.7% interest in equity in loss for the period from acquisition, September 14, 2009, through December 31, 2009 is approximately $1,414.
Holdings records its investment in Grande Investment L.P. under the equity method of accounting and as such presents its prorata share of the equity in earnings and losses of Grande Investment L.P. within its year end reported results.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. Net Income (Loss) Per Share
Net income (loss) per share was computed by dividing net income (loss) by weighted average shares outstanding using the following:
| | | Year Ended December 31, | |
| | | 2007 | | | 2008 | | | 2009 | |
| Basic and Diluted EPS: | | | | | | | | | |
| Net income (loss) available to common stockholders | | $ | (50,532 | ) | | $ | (50,360 | ) | | $ | 4,337 | |
| | | | | | | | | | | | | |
| Weighted Average Shares Outstanding – Basic and Diluted: | | | | | | | | | | | | |
| Weighted average common stock outstanding | | | 12,610 | | | | 12,765 | | | | 12,428 | |
| Dilutive effect of participating convertible preferred stock | | | — | | | | — | | | | 439,528 | |
| Weighted average shares outstanding – basic and diluted | | | 12,610 | | | | 12,765 | | | | 451,956 | |
The following equivalent shares of common stock were out of the money and were not included in the computation of diluted EPS, as their effect was anti-dilutive:
| | Year Ended December 31, 2009 | |
| Common stock warrants | | | 152,107,016 | |
| Common stock options | | | 29,413,838 | |
| Series H preferred stock options | | | 17,523,402 | |
| Total anti-dilutive shares | | | 199,044,256 | |
For the years ended December 31, 2007 and 2008, Holdings reported a net loss; therefore, the following equivalent shares of common stock were not included in the computation of diluted EPS, as their effect was anti-dilutive:
| | | Year Ended December 31, | |
| | | 2007 | | | 2008 | |
| Convertible preferred stock | | | 439,527,511 | | | | 439,527,511 | |
| Common stock warrants | | | 152,107,016 | | | | 152,107,016 | |
| Common stock options | | | 51,557,894 | | | | 44,447,340 | |
| Series H preferred stock options | | | 27,514,521 | | | | 25,200,330 | |
| Total anti-dilutive shares | | | 670,706,942 | | | | 661,282,197 | |
5. Allowance for Doubtful Accounts
The activity in the Company’s allowance for doubtful accounts for the years ending December 31, 2006, 2007, 2008 and 20082009 was as follows:
| | | Balance at Beginning of Year | | | Charged to Costs and Expenses | | | Write-offs | | | Sale of Controlling Interest in Subsidiary | | | Balance at End of Year | |
| | | (in thousands) | | | | | | | | | | | | | |
| 2007 | | $ | 1,193 | | | $ | 3,301 | | | $ | (3,356 | ) | | | — | | | $ | 1,138 | |
| 2008 | | | 1,138 | | | | 3,363 | | | | (3,190 | ) | | | — | | | | 1,311 | |
| 2009 | | | 1,311 | | | | 2,019 | | | | (2,479 | ) | | | (851 | ) | | | — | |
RIO HOLDINGS, INC. & SUBSIDIARY
| | | Balance at Beginning of Year | | | Charged to Costs and Expenses | | | Write-offs | | | Balance at End of Year | |
| | | (in thousands) | |
| 2006 | | $ | 1,442 | | | $ | 3,514 | | | $ | (3,763 | ) | | $ | 1,442 | |
| 2007 | | | 1,193 | | | | 3,301 | | | | (3,356 | ) | | | 1,193 | |
| 2008 | | | 1,138 | | | | 3,363 | | | | (3,190 | ) | | | 1,311 | |
4.6. Property, Plant and Equipment
Property, plant and equipment consist of the following as of December 31, 20072008 and 2008:2009:
| | | 2008 | | | 2009 | |
| | | (in thousands) | |
| Communications plant | | $ | 481,036 | | | $ | — | |
| Computer equipment | | | 6,518 | | | | — | |
| Software, including general purpose and network | | | 31,810 | | | | — | |
| Buildings, leasehold improvements and land | | | 4,667 | | | | — | |
| Furniture, fixtures and vehicles | | | 3,990 | | | | — | |
| Other equipment | | | 24,523 | | | | — | |
| Assets under capital leases | | | 28,288 | | | | — | |
| Construction in process | | | 2,069 | | | | — | |
| Construction inventory | | | 9,040 | | | | — | |
| | | | 591,941 | | | | — | |
| Less—accumulated depreciation | | | (368,907 | ) | | | — | |
| Property, plant and equipment, net | | $ | 223,034 | | | $ | — | |
| | | 2007 | | | 2008 | |
| | | (in thousands) | |
| Communications plant | | $ | 455,145 | | | $ | 481,036 | |
| Computer equipment | | | 6,517 | | | | 6,518 | |
| Software, including general purpose and network | | | 31,491 | | | | 31,810 | |
| Buildings, leasehold improvements and land | | | 4,487 | | | | 4,667 | |
| Furniture, fixtures and vehicles | | | 4,308 | | | | 3,990 | |
| Other equipment | | | 23,937 | | | | 24,523 | |
| Assets under capital leases | | | 24,668 | | | | 28,288 | |
| Construction in process | | | 3,534 | | | | 2,069 | |
| Construction inventory | | | 8,749 | | | | 9,040 | |
| | | | | | | | | |
| | | | 562,836 | | | | 591,941 | |
| Less—accumulated depreciation | | | (313,526 | ) | | | (368,907 | ) |
| | | | | | | | | |
| Property, plant and equipment, net | | $ | 249,310 | | | $ | 223,034 | |
5.7. Intangible Assets
Definite-lived intangible assets consistconsisted of the following as of December 31, 20072008 and 20082009 (in thousands):
| | | | | 2008 | | | 2009 | |
| | | Life | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| MDU exclusive access rights | | 7 – 18 years | | $ | 2,815 | | | $ | (1,661 | ) | | $ | — | | | $ | — | |
| | | | 2007 | | | 2008 | |
| | Life | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| MDU exclusive access rights | 7 – 18 years | | $ | 2,815 | | | $ | (1,417 | ) | | $ | 2,815 | | | $ | (1,661 | ) |
No impairments of intangible assets were recognized during 2006, 2007, 2008 or 2008.2009.
Amortization expense was $0.3$0.4 million, $0.4$0.2 million and $0.2 million for the years ending December 31, 2006, 2007, 2008 and 2009, respectively.
8. Accrued Liabilities
Accrued liabilities consisted of the following as of December 31, 2008 respectively. The weighted average remaining life for the MDU exclusive access rights intangible asset is approximately 5 years. Amortization expense associated with the net carrying value of definite-lived intangible assets is estimated to be $0.2 million in 2009 through 2012 and $0.1 million in 2013.2009:
| | | 2008 | | | 2009 | |
| | | (in thousands) | |
| Accrued property taxes | | $ | 3,829 | | | $ | — | |
| Accrued compensation | | | 2,660 | | | | — | |
| Accrued taxes—other | | | 3,171 | | | | — | |
| Accrued programming | | | 3,045 | | | | — | |
| Accrued other | | | 3,233 | | | | 15 | |
| Accrued liabilities | | $ | 15,938 | | | $ | 15 | |
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6. Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 2007 and 2008:
| | | 2007 | | | 2008 | |
| | | (in thousands) | |
| Accrued property taxes | | $ | 4,405 | | | $ | 3,829 | |
| Accrued compensation | | | 2,801 | | | | 2,660 | |
| Accrued taxes—other | | | 2,662 | | | | 3,171 | |
| Accrued programming | | | 2,587 | | | | 3,045 | |
| Accrued other | | | 2,873 | | | | 3,233 | |
| | | | | | | | | |
| Accrued liabilities | | $ | 15,328 | | | $ | 15,938 | |
7.9. Income Taxes
As of December 31, 2008, the Company2009, Holdings had federal net operating loss carry-forwards of approximately $467$448.9 million. The net operating loss carry-forwards will expire beginning in 2020 if not utilized.
Utilization of the net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets and liabilities as of December 31, 20072008 and 20082009 are as follows:
| | | 2008 | | | 2009 | |
| | | (in thousands) | |
| Deferred tax assets: | | | | | | |
| Amortizable assets | | $ | 4,416 | | | $ | — | |
| Deferred revenue | | | 1,900 | | | | — | |
| Other | | | 238 | | | | 121 | |
| Capital lease | | | 5,926 | | | | — | |
| Deferred rent | | | 412 | | | | — | |
| Reserves | | | 828 | | | | — | |
| Investment in Grande Investment L.P. | | | — | | | | 4,382 | |
| Net operating loss carry-forwards | | | 169,704 | | | | 157,102 | |
| Total deferred tax assets | | | 183,424 | | | | 161,605 | |
| Deferred tax liabilities: | | | | | | | | |
| Other | | | 251 | | | | — | |
| Depreciable assets | | | 16,510 | | | | — | |
| Total deferred tax liabilities | | | 16,761 | | | | — | |
| Net deferred tax asset | | | 166,663 | | | | 161,605 | |
| Less-valuation allowance | | | (166,663 | ) | | | (161,605 | ) |
| Total deferred taxes | | $ | — | | | $ | — | |
| | | 2007 | | | 2008 | |
| | | (in thousands) | |
| Deferred tax assets: | | | | | | |
| Amortizable assets | | $ | 6,254 | | | $ | 4,416 | |
| Deferred revenue | | | 1,824 | | | | 1,900 | |
| Other | | | 48 | | | | 238 | |
| Capital lease | | | 5,524 | | | | 5,926 | |
| Deferred rent | | | 430 | | | | 412 | |
| Reserves | | | 674 | | | | 828 | |
| Net operating loss carry-forwards | | | 152,679 | | | | 169,704 | |
| | | | | | | | | |
| Total deferred tax assets | | | 167,433 | | | | 183,424 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Other | | | — | | | | 251 | |
| Depreciable assets | | | 18,189 | | | | 16,510 | |
| | | | | | | | | |
| Total deferred tax liabilities | | | 18,189 | | | | 16,761 | |
| | | | | | | | | |
| Net deferred tax asset | | | 149,244 | | | | 166,663 | |
| Less-valuation allowance | | | (149,244 | ) | | | (166,663 | ) |
| | | | | | | | | |
| Total deferred taxes | | $ | — | | | $ | — | |
The CompanyHoldings has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance increaseddecreased approximately $17.4$5.1 million during the year ended December 31, 2008.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48), which was incorporated into ASC 740, Income Taxes. FIN 48 clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The CompanyHoldings adopted the provisions of FIN 48 as of January 1, 2007, and has reviewed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The CompanyHoldings has identifiedident ified its federal tax return and its state tax returns in Texas as “major” tax jurisdictions, as defined. The only periods subject to examination for the Company’sHoldings’ federal tax returns are the 20052006 through the 20082009 tax years. The periods subject to examination for the Company’sHoldings’ state tax returns in Texas are years 20042005 through 2008. The Company2009. Holdings believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48.
RIO HOLDINGS, INC. & SUBSIDIARY
The Company’sNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Holdings’ provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 35% to lossprofit (loss) before income taxes primarily as a result of the following for the years ended December 31:
| | | 2006 | | | 2007 | | | 2008 | |
| | | (in thousands) | |
| Computed at federal statutory rate | | $ | (49,468 | ) | | $ | (17,293 | ) | | $ | (17,240 | ) |
| State taxes, net of federal benefit | | | (1,415 | ) | | | 730 | | | | 716 | |
| Impact of change in state tax law | | | 9,688 | | | | (5,191 | ) | | | — | |
| Permanent items and other | | | (3,292 | ) | | | (99 | ) | | | 208 | |
| Impairment of nondeductible goodwill | | | 32,774 | | | | — | | | | — | |
| Valuation allowance | | | 11,713 | | | | 22,976 | | | | 17,418 | |
| | | | | | | | | | | | | |
| Provision for income taxes | | $ | — | | | $ | 1,123 | | | $ | 1,102 | |
8. Long Term Debt
Long-term debt consists of the following as of December 31, 2007 and 2008:| | | 2007 | | | 2008 | | | 2009 | |
| | | (in thousands) | |
| Computed at federal statutory rate | | $ | (17,293 | ) | | $ | (17,240 | ) | | $ | 1,820 | |
| State taxes, net of federal benefit | | | 730 | | | | 716 | | | | 562 | |
| Impact of change in state tax law | | | (5,191 | ) | | | — | | | | — | |
| Permanent items and other | | | (99 | ) | | | 208 | | | | 105 | |
| Conversion of Grande Operating to LLC and contribution of interest | | | — | | | | — | | | | 3,436 | |
| Valuation allowance | | | 22,976 | | | | 17,418 | | | | (5,058 | ) |
| Provision for income taxes | | $ | 1,123 | | | $ | 1,102 | | | $ | 865 | |
| | | 2007 | | | 2008 | |
| | | (in thousands) | |
| 14% senior notes | | $ | 193,000 | | | $ | 193,000 | |
| Equipment financing | | | 3,572 | | | | 1,971 | |
| Other | | | 24 | | | | 14 | |
| | | | | | | | | |
| | | | 196,596 | | | | 194,985 | |
| Less-current portion | | | (1,612 | ) | | | (1,655 | ) |
| | | | | | | | | |
| Long-term debt | | | 194,984 | | | | 193,331 | |
| Discounts and premiums, net | | | (4,990 | ) | | | (3,701 | ) |
| | | | | | | | | |
| Long-term debt, net of discounts and premiums | | $ | 189,994 | | | $ | 189,630 | |
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. Long Term Debt
Long-term debt consisted of the following as of December 31, 2008 and 2009:
| | | 2008 | | | 2009 | |
| | | (in thousands) | |
| 14% senior notes | | $ | 193,000 | | | $ | — | |
| Equipment financing | | | 1,971 | | | | — | |
| Other | | | 14 | | | | — | |
| | | | 194,985 | | | | — | |
| Less-current portion | | | (1,655 | ) | | | — | |
| Long-term debt | | | 193,330 | | | | — | |
| Discounts and premiums, net | | | (3,701 | ) | | | — | |
| Long-term debt, net of discounts and premiums | | $ | 189,629 | | | $ | — | |
14% Senior Secured Notes
Long-term Debt. In March 2004, the CompanyHoldings completed a private placement offering for 136,000 units, each consisting of (1) $1,000 of senior notes due April 1, 2011 (“Holdings senior notes”) and (2) a warrant to purchase 100.336 shares of common stock. The Holdings senior notes accrue interest at the rate of 14% per annum with the interest payable semi-annually in cash in arrears on April 1 and October 1. The Holdings senior notes are governed by the indenture between the CompanyHoldings and U.S. Bank National Association, as Indenture Trustee, dated March 23, 2004.
2004 (the “Indenture”). In March 2006 and July 2007, the CompanyHoldings raised net proceeds of approximately $30.5 million and $25.8 million, respectively, in a private placement of an additional $32 million and $25$2 5 million, respectively, in aggregate principal amount of Holdings senior notes. These additional Holdings senior notes were issued under the Indenture and are part of the same series of Holdings senior notes as those issued in March 2004.
Grande CommunicationsAs of September 14, 2009, there was outstanding an aggregate of $193 million principal amount of Holdings Inc.’s subsidiary, Grande Communications Networks, Inc. (the “Subsidiary Guarantor”), has unconditionally guaranteed, jointlysenior notes, pursuant to that certain Indenture, dated as of March 23, 2004, among Holdings, the guarantors named therein, and severally,U.S. Bank National Association, as trustee, as supplemented by that certain Supplemental Indenture No. 1, dated as of July 18, 2007, by and among Holdings, the payment ofguarantors party to the principal, premiumIndenture and interest (including any additionalthe trustee. Accrued but unpaid interest on the Holdings senior notes) onnotes as of September 14, 2009 was approximately $12.2 million. On August 18, 2009, Holdings entered into a senior secured basis. Grande Communicationsnote purchase agreement with Serengeti Overseas Ltd., Serengeti Partners LP, Goldman, Sachs & Co., Silver Point Capital Offshore Fund, Ltd., Silver Point Capital Fund, L.P., MAST OC I Master Fund L.P., MAST Cr edit Opportunities I Master Fund Limited, Whitney Private Debt Fund, L.P. (the “Requisite Bondholders”) who, in the aggregate, beneficially owned approximately $191.8 million in aggregate principal amount of the Holdings Inc. is a holding company with no independent assets and conducts all of its operations through a subsidiary and is therefore dependent on the receipt of funds from its subsidiary to pay the interest and principal on the senior notes. Limitations or restrictions contained inOn September 14, 2009, Holdings’ assigned this note purchase agreement to Grande Operating. Pursuant to the Indenture could adversely affect the Company’s ability to make such payments on the senior notes.
Thenote purchase agreement Grande Operating repurchased from these bondholders their Holdings senior notes and the Subsidiary Guarantor’s guarantees thereof are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in substantially allupon consummation of the Subsidiary Guarantor’s property and assets, including substantially all of its property, plant and equipment.
The senior notes may be redeemed, at the Company’s election, as a whole or from time to time in part at any time upon not less than 10 nor more than 60 days’ notice to each holder of senior notes to be redeemed, subject to the conditions and at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest and Liquidating Damages (as defined in the Indenture), if any, to the applicable redemption date.
| April 1, | | Percentage | |
| 2008 | | | 107.00 | % |
| 2009 | | | 103.50 | % |
| 2010 and thereafter | | | 100.00 | % |
If the Company experiences specific kinds of change of control events, each holder of senior notes may require the Company to repurchase all or any portion of such holder’s senior notesrecapitalization transactions at a purchase price equal to 101%of 101.5% of the principal amount of the seniorsuch notes, plus accrued and unpaid interest thereon through the purchase date, which is 200 basis points lower than what would have otherwise been required under the redemption provisions of the Indenture. In addition, the Requisite Bondholders waive d any and all registration rights they may have had with respect to the dateHoldings senior notes or any outstanding equity securities of repurchase.
Holdings. ABRY provided a limited guarantee of the performance by Holdings of its obligations under the note purchase agreement, after the consummation of the recapitalization transactions. The Indenture contains covenants that, among other things, limitrepurchase of the Company’s ability to:
incur additional indebtedness, issue disqualified capital stock (as definedHoldings senior notes by Grande Operating was presented as a non-cash dividend to Holdings in the Indenture) and, in the case of restricted subsidiaries, issue preferred stock;
pay dividends on, redeem or repurchase capital stock or make other restricted payments;
make investments in other companies;
enter into transactions with affiliates;
enter into sale and leaseback transactions;
sell or make dispositions of assets;
these financial statements.GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
place restrictions onOn September 14, 2009, Holdings issued a mandatory redemption notice to all of the abilityremaining holders of restricted subsidiaries to pay dividends or make other paymentsthe Holdings senior notes, representing approximately $1.2 million in aggregate principal amount, which were not subject to the Company;note purchase agreement for the redemption of such notes, at a purchase price equal to 103.5% of the principal amount of such notes, plus accrued and
unpaid interest thereon to the redemption date. On September 14, 2009, Holdings assigned the repayment of the Holdings senior notes pursuant to the redemption notice to Grande Operating which redeemed these senior notes using the net proceeds from the transactions contemplated in the Recapitalization Agreement on such date and was presented as a non-cash dividend to Holdings in these financial statements.
engage in certain business activities.
In addition,All of the Indenture containsoutstanding Holdings senior notes have been redeemed or repurchased and the indenture that governed the terms of the Holdings senior notes was discharged. As a covenant restricting certain capital expenditures if such expenditures would result in us having less than $20of these transactions, we recognized a $7.1 million in cash and cash equivalents after giving effect to such expenditures. This covenant could adversely affectloss on early extinguishment of the Company’s ability to make planned capital expenditures.
Holdings senior notes. The Indenture also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness and material judgments and liabilities.
TheHoldings senior notes were issued with original offering discounts of $5.8 million in 2004 and $1.4 million in 2006 and at a premium of $1.0 million in 2007. These discounts and premiums are beingwere amortized to interest expense using the effective interest method over the term of the underlying notes. Net amortization of discounts and premiums was $1.1 million, $1.2 million, and $1.3 million, and $1.0 million in 2006, 2007, 2008, and 2008,2009, respectively.
The CompanyHoldings incurred debt issuance costs related to the issuances of the Holdings senior notes of $6.4 million in 2004, $0.1 million in 2006 and $0.2 million in 2007. Amortization of debt issuance costs was $1.0 million in both 2006 and 2007, and approximately $1.1 million in 2008.2008 and approximately $0.7 million in 2009.
Equipment Financing
During 2007, the CompanyGrande Operating completed equipment financing of $4.1 million with a term of 24 months, which was utilized for the purchase of network equipment. During December 2008, the term of the equipment financing was extended 12 months through March 2010. The financing iswas secured by the network equipment purchased with the proceeds of the borrowing and bearsbeared interest at an effective annual rate of approximately 15.3% with monthly payments equal to 4.2% multiplied by the total amount borrowed. This financingAs a result of the recapitalization transactions on September 14, 2009, this equipment is permitted underno longer included in the Indenture.accounts of Holdings.
Capitalized Interest
The Company capitalizes interestInterest expense incurred from debt utilized to fund the construction of the network.network was capitalized. The total amounts capitalized were approximately $2.2 million, $0.6 million, $0.3 million and $0.3$0.2 million, during the years ended December 31, 2006, 2007, 2008 and 2008,2009, respectively.
9.11. Stockholders’ Equity
Investor Rights Agreement
The Company has entered into an amendedIn connection with the recapitalization transactions, certain stockholders of Holdings have approved the Sixth Amended and restatedRestated Investor Rights Agreement. Prior to this amendment and restatement, the investor rights agreement with preferred stockholders and certain common stockholders. This investor rights agreement sets forth certain preemptive rights,provided for a broad range of registration rights transfer restrictionswith respect to the equity securities of Holdings, together with certain information rights and covenants.
Preemptive Rights. Each preferred stockholder partyrelated obligations of Holdings. In recognition of the changes resulting from the recapitalization transactions, the requisite parties to the investor rights agreement hashave expressly waived all such registration rights and obligations in the rightSixth Amended and Restated Investor Rights Agreement. The Sixth Amended and Restated Investor Rights Agreement continues to purchase its pro rata share of up to 85% ofprovide for the equity securities that the Company may propose to issue and sell in any future offering. This right does not apply to and terminates upon the effective date of the registration statement pertaining to the first firm commitment underwritten public offering with an offering price of at least $1.30 per share and gross proceeds to us of at least $150 million.following:
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Registration Rights. Preferred stockholders party | (i) | a voting agreement, under which certain groups of stockholders have the right to nominate one or more directors, and |
| (ii) | a right of first refusal on transfers to third parties and a preemptive right with respect to certain additional issuances of equity securities by Holdings. |
In addition to the existing transfer restrictions contained in the prior investor rights agreement, have the right to have their sharesSixth Amended and Restated Investor Rights Agreement includes additional transfer restrictions requiring the approval of stock registeredHoldings for any transfer of its equity securities that would (1) increase the number of record holders of any class of Holdings’ equity securities, (2) require registration of such equity securities under the Securities Act upon meeting certain minimum share and value thresholds for the shares to be registered. Once the thresholds for registration set forth in the investor rights agreement are met, such parties have the right to effect up to four long-form registrations (registrations using the Form S-1 or Form S-2 registration statement) and unlimited short-form registrations (registrations using the Form S-3 registration statement)of 1933, as long as two such short-form registrations have not already been effected in the previous twelve months, though the number of shares registered may be limited if an underwriter to an offering advises us that marketing factors require a limitation on the number of shares to be underwritten. Each holder of preferred stock partyamended, (3) subject Holdings to the investor rights agreement will also haveperiodic reporting requirements of the rightSecurities Exchange Act of 1934, as amended, or (4) subject Holdings to include its shares in athe registration statementrequirements of, or limit the Company files, though again the number of shares registered on behalf of such holder may be limited if an underwriter to an offering advises us that marketing factors require a limitation on the number of shares to be underwritten. The Company has also agreed to file a registration statement to register the securities held by the Series G preferred stockholders following the expiration or waiver of all lock-up arrangements entered into by the Series G preferred stockholders in connection with an initial public offering. The Company obtained a waiver from the preferred stockholdersavailability of any exemptions from registration rights that may be triggered in connection with the filing of any registration statements required to be filed pursuant to the terms of the registration rights agreement and the equity registration rights agreement.
Transfer Restrictions. Before a stockholder party to the investor rights agreement may sell, transfer or exchange its stock, it must offer the shares first to the Company and second to the preferred stockholders. A preferred stockholder also has the right to participate in a sale of stock by another preferred stockholder. These transfer restrictions do not apply to transfers of capital stock to (a) an affiliate or family member of the stockholder, (b) a partner, member or stockholder of the stockholder entity, (c) a distribution in connection with the dissolution, winding-up or liquidation of a stockholder or (d) a transferee of a stockholder by will or the laws of intestate succession.
Covenants. In addition to customary covenants, the Company agreed to reserve and keep available enough shares of common stock to allow for the conversion of all preferred stock into common stock and placed a ceiling on the number of shares of common stock available for issuance under, the stock option plan. TheInvestment Company also agreed to provide certain information to the stockholders party to the investor rights agreement and agreed to have each employee, officer and consultant sign a proprietary information and inventions agreement.Act of 1940, as amended.
Common Stock
In February 2000, the Company sold 11,410,000 shares of its $0.001 par value common stock. These shares are otherwise restricted as to their sale to a third party for a period ending the earlier of either an initial public equity offering or February 2010.
Preferred Stock
The Company’sHoldings’ $0.001 par value preferred stock may be issued from time to time in one or more series as determined by the Company’sHoldings’ board of directors.
The CompanyHoldings has authorized eight series of preferred stock, in alphabetical sequence from A to H (the “Preferred Stock”). As of December 31, 2008,2009, no shares of Series H preferred stock has been issued, however, options to acquire Series H preferred stock have been granted. See below under the caption “Equity Incentive Plan” for discussion of the options related to Series H preferred stock.
The Preferred Stock is convertible into common stock at any time at the option of the holders, and automatically convertible to common stock upon the Company’sHoldings’ sale of its common stock in a firm commitment underwritten public offering meeting certain pricing specifications. The number of shares of common stock into which the Preferred Stock are convertible is based on a conversion price which initially provides for the conversion of one share of Preferred Stock to one share of common stock. The conversion price is adjusted for certain dilutive issuances, such as stock splits, stock dividends, recapitalizations or similar events, so that the number of shares of common stock issuable upon conversion is increased or decreased in proportion to any increase or decrease in the aggregate shares of common stock outstanding. The Preferred Stock is entitled to participate equally in the payment of dividends, when and as declared by the board of directors, on an as-converted basis. Such stock also has voting rights on an as-converted basis.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The CompanyHoldings entered into the Series G Preferred Stock Purchase Agreement, dated October 27, 2003, with a number of investors under which the CompanyHoldings sold 34,615,330 shares of Series G Preferred Stock (“Series G”) to such investors for a purchase price of $1.30 per share, for gross proceeds of $44,999,999. Each share of Series G preferred stock was initially convertible into one share of common stock at the election of the holder, based on a conversion ratio as defined in the agreement, initially set at one to one and adjusted from time to time based on certain anti-dilution provisions. The CompanyHoldings has also issued warrants to purchase 138,461,320 shares of common stock in connection with this sale of Series G preferred stock. For every share of Series G preferred stock purchased by an investor, such investor received four Warrants to purchasep urchase one share of common stock at an initial exercise price of $0.01 per share of common stock. The warrants have a ten year life and are immediately exercisable. Each share of Series G preferred stock has voting rights equal to the number of shares of common stock into which the preferred stock could then be converted.
In the event of any liquidation, dissolution or winding up of the Company,Holdings, the holders of the Series G preferred stock are entitled to receive, prior and in preference to any distribution to the holders of any other series of preferred stock or common stock, $3.90 per share plus declared but unpaid dividends on such shares. Any amounts remaining, after the payment to the holders of Series G preferred stock, will be distributed to the holders of the other series of preferred stock, prior and in preference to any distribution to the holders of common stock, an amount per share, which ranges from $1.00 to $2.50, plus declared but unpaid dividends on such shares. Additionally, upon the closing of an underwritten public offering, the holders of Series G preferred stock are entitled to receive $3.90 per share of value under an automatic conversion,conversio n, with the right but not the obligation to receive $1.30 of the value in cash and the remainder in common stock. Upon such conversion, all declared but unpaid dividends shall be paid.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Purchase Warrants
The Company valued the common stock warrants issued in connection with the Series G Preferred Stock in 2003 were valued at $0.20 per warrant or $27,692,307 and recorded this amount in additional paid in capital. The assumptions used to value these warrants were as follows: Expected Life—2 years, Fair Value of Common Stock—$0.20, Dividend Yield—0%, Risk Free Interest Rate—3%.
Concurrent with the closing of theHoldings senior notes the Companyin 2004, Holdings issued warrants to acquire 13,645,696 shares of common stock at $0.01 per share. The Company valued the warrants issued in connection with theHoldings senior notes were valued at $2.6 million and recorded this amount in additional paid in capital. The assumptions used to value this warrant were as follows: Expected Life—12 years, Fair Value of Common Stock—$0.20, Dividend Yield—0%, Risk Free Interest Rate—3%. Amortization of debt discounts associated with the common stock warrants was approximately $0.3 million, during both 2006 and 2007 and approximately $0.4 million and $0.3 million during 2008.2007, 2008 and 2009, respectively.
Equity Incentive Plan
In connection with the closing of the transactions contemplated by the Recapitalization Agreement, Holdings cancelled all outstanding options to purchase 33,370,422 shares of common stock and options to purchase 21,300,000 shares of Series H preferred stock. As a result, after October 9, 2009, we had no outstanding options to purchase any equity of Holdings and the employee compensation plan automatically terminated on February 24, 2010.
On October 25, 2006, the board of directors of the CompanyHoldings approved and adopted the Grande Communications Holdings, Inc. Second Amended and Restated 2000 Stock Incentive Plan (the “2000 Stock Incentive Plan”). The stockholders approved the 2000 Stock Incentive Plan at the annual stockholders meeting on December 6, 2006. During the third quarter of 2008, the CompanyHoldings ceased granting options to all employees until otherwise determined.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Subject to the Plan. The number of shares of common stock that were available for issuance under the 2000 Stock Incentive Plan iswas the lesser of (i) 10% of all of the shares of capital stock on a fully diluted basis, as if all such shares of capital stock were converted to common stock or (ii) 82,000,000 shares of common stock. In addition, 30,000,000 shares of Series H preferred stock shall bewere available for issuance under the 2000 Stock Incentive Plan. Of the shares available for issuance under the 2000 Stock Incentive Plan, 30,000,000 shares of Series H preferred stock and 12,000,000 shares of common stock arewere designated as “Executive Compensation Shares”.Shares.” The maximum number of shares that may becould have been reserved for issue pursuant to incentive stock options under the 2000 Stock Incentive Plan maycould not exceed 82,000,000 shares of stock. As of December 31, 2008, approximately 38.7 million shares of common stock and approximately 6.8 million shares of Series H Preferred Stock were available for issuance under the 2000 Stock Incentive Plan (of which 4.5 million shares of common stock and 6.8 million shares of Series H preferred stock are available for issuance as Executive Compensation Shares).
Eligibility. Officers, employees, directors, consultants or advisers to the Company arewere eligible to participate in the plan. The 2000 Stock Incentive Plan providesprovided that the Executive Compensation Shares maycould be issued to the Chief Executive Officer of Grande Communications Holdings, Inc. (predecessor-in-interest to Rio Holdings, Inc.). The Restated Certificate of Incorporation of Grande Communications Holdings, Inc., however, providesprovided that the Executive Compensation Shares maycould only be issued to the Chief Executive Officer of the CompanyHoldings or any other independent director, officer or key employee, as approved by the board of directors from time to time.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Awards Under the Plan. The Company mayHoldings could award “incentive stock options” and “non-statutory stock options” under the 2000 Stock Incentive Plan (in either case the CompanyHoldings refers to such awards as the option(s)).
Incentive Stock Options. Incentive stock options awarded under the 2000 Stock Incentive Plan must have an exercise price of at least 100% of the fair market of the stock on the date of grant. In the case of an employee who ownsowned more than 10% of voting power, the exercise price will bewould have been the greater of the aggregate par value of the stock and at least 110% of the fair market value of the stock on the date of grant.
Non-Statutory Stock Options. The Company canHoldings could award non-statutory stock options to any person eligible under the 2000 Stock Incentive Plan. The minimum exercise price for non-statutory stock options under the 2000 Stock Incentive Plan iswas 85% of the fair market value of the stock on the date of grant, provided, however, that (i) if the grantee ownsowned more than 10% of the voting power, the exercise price willwould be the greater of the aggregate par value of the stock and at least 110% of the fair market value of the stock on the date of grant, (ii) to the extent that the option iswas intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended, the exercise price willwould be the greater of the aggregate par value of the stock and at least 100% of the fair market value of the stock on the date of grant.
Vesting. Options and restricted stock awards vestvested as determined by the board of directors and as stated in the individual’s Award Agreement. Vesting iswas subject to a participant’s continued employment or service with the Company.service. Vesting of such options arewere subject to acceleration upon a Change of Control, as defined in the 2000 Stock Incentive Plan, unless the board of directors exercisesexercised the right to cancel vested options or the option agreement provides otherwise. Generally, unless a specific option agreement provides otherwise, the options with respect to shares of stock that are not Executive Compensation Shares provideprovided for a vesting of the total number of option shares over a four year period, commencing with vesting of 25% of the option shares on the first anniversary of the vesting start date, and an additional 25% for each of the three following anniversariesanniv ersaries of that date. Generally, unless a specific option agreement providesprovided otherwise, the options for Executive Compensation Shares vestvested as follows: (i) 25% of the total option shares on the first anniversary of the vesting start date, (ii) 2.1% of the option shares on the last day of each of the first 35 months after such first anniversary, and (iii) 1.5% of the option shares on the last day of the 36th month after such first anniversary.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Valuation assumptions
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) using the prospective transition method. Under that transition method, compensation cost recognized in 2006, 2007 and 2008 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Prior to the adoption of SFAS 123(R), the Company used the minimum value method of measuring stock options for the pro forma disclosure under SFAS 123.
The fair value of each Series H preferred stock option award granted from the Company’s stock option plan during the yearsyear ended December 31, 2006 and 2007 was estimated at the date of grant using the Black-Scholes-Merton option pricing model, assuming no expected dividends and the weighted average assumptions in the following table. No Series H preferred stock options were issued during 2008.2008 or 2009. For common stock options issued during 2006, 2007 and 2008, the value of the underlying common stock was zero; therefore, no fair value was assigned to those options. No common stock options were issued during 2009.
| 2007 |
| Expected volatility | 75% |
| Expected life in years | 6.25 |
| Risk-free interest rate | 3.45%-4.92% |
| | | 2006 | | | 2007 | |
| Expected volatility | | | 75 | % | | | 75 | % |
| Expected life in years | | | 6.25 | | | | 6.25 | |
| Risk-free interest rate | | | 4.58%-5.23 | % | | | 3.45%-4.92 | % |
Expected life of option: The Company’s expected life of optionoptions represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the simplified method provided in Staff Accounting Bulletin No. 107 and historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and historical option exercise behavior and employee termination.
RIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Risk free interest rate: Based on the U.S. Treasury yield curve in effect at the time of the grant.
Expected volatility of stock: Based on the volatility of similar entities (referred to as guideline companies). In evaluating similarity, the Company considered factors such as industry, stage of life cycle, size and financial leverage.leverage were considered.
Dividends: The Black-Scholes-Merton valuation model includes a single expected dividend yield as an input. The CompanyHoldings has not issued any dividends and is prohibited to issue dividends under the Indenture.date.
Estimated forfeitures: When estimating forfeitures, the Company considered historical forfeiture behavior, as well as other factors.factors were considered.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of option activity under the 2000 Stock Incentive Plan during the year ended December 31, 20082009 is presented in the following table.
| | | Common Stock Options | | | Preferred Stock Options | |
| | | Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (years) | | | Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (years) | |
| Outstanding as of December 31, 2008 | | | 41,399,472 | | | $ | 0.06 | | | | 4.7 | | | | 23,224,999 | | | $ | 0.10 | | | | 7.3 | |
| Granted | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
| Exercised | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
| Expired | | | (39,023,965 | ) | | | 0.06 | | | | | | | | (23,150,599 | ) | | | 0.10 | | | | | |
| Forfeited | | | (2,375,507 | ) | | | 0.05 | | | | | | | | (74,400 | ) | | | 0.10 | | | | | |
| Outstanding as of December 31, 2009 | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
| Vested as of December 31, 2009 | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
| Exercisable as of December 31, 2009 | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
| | | Common Stock Options | | | Preferred Stock Options | |
| | | Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (years) | | | Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (years) | |
| Outstanding as of December 31, 2007 | | | 51,228,618 | | | $ | 0.08 | | | | 5.6 | | | | 27,775,000 | | | $ | 0.10 | | | | 8.5 | |
| Granted | | | 1,058,000 | | | | 0.05 | | | | | | | | — | | | | — | | | | | |
| Exercised | | | (108,132 | ) | | | 0.05 | | | | | | | | — | | | | — | | | | | |
| Expired | | | (8,793,360 | ) | | | 0.18 | | | | | | | | (1,870,833 | ) | | | 0.10 | | | | | |
| Forfeited | | | (1,985,654 | ) | | | 0.05 | | | | | | | | (2,679,168 | ) | | | 0.10 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding as of December 31, 2008 | | | 41,399,472 | | | | 0.06 | | | | 4.7 | | | | 23,224,999 | | | | 0.10 | | | | 7.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Vested as of December 31, 2008 | | | 34,983,849 | | | | 0.07 | | | | 4.2 | | | | 14,868,743 | | | | 0.10 | | | | 7.2 | |
| Exercisable as of December 31, 2008 | | | 34,855,599 | | | | 0.07 | | | | 4.2 | | | | 11,368,743 | | | | 0.10 | | | | 7.1 | |
The following table summarizes information concerning option activity during the years ended December 31, 2006, 2007, 2008 and 2008:2009:
| | | 2007 | | | 2008 | | | 2009 | |
| Common Stock Options: | | | | | | | | | |
| | | | | | | | | | |
| Weighted average fair value of options granted | | $ | — | | | $ | — | | | $ | — | |
| Intrinsic value of options exercised | | | — | | | | — | | | | — | |
| Fair value of options vested based on grant date fair value | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Preferred Stock Options: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average fair value of options granted | | $ | 0.06 | | | | N/A | | | | N/A | |
| Intrinsic value of options exercised | | | N/A | | | | N/A | | | | N/A | |
| Fair value of options vested based on grant date fair value | | $ | 661,537 | | | $ | 443,410 | | | $ | 358,262 | |
RIO HOLDINGS, INC. & SUBSIDIARY
| | | 2006 | | | 2007 | | | 2008 | |
| | | | | | | | | | |
| Common Stock Options: | | | | | | | | | |
| | | | | | | | | | |
| Weighted average fair value of options granted | | $ | 0.02 | | | $ | — | | | $ | — | |
| Intrinsic value of options exercised | | | — | | | | — | | | | — | |
| Fair value of options vested based on grant date fair value | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Preferred Stock Options: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average fair value of options granted | | $ | 0.07 | | | $ | 0.06 | | | | N/A | |
| Intrinsic value of options exercised | | | N/A | | | | N/A | | | | N/A | |
| Fair value of options vested based on grant date fair value | | $ | 70,000 | | | $ | 661,537 | | | $ | 443,410 | |
On May 3, 2006, the compensation committee of the board of directors approved the repricing of all common stock options outstanding to current employees to an exercise price of $0.05 per share. The Company recognized no additional compensation expense as a result of this modification due to the options having no fair value.
Total compensation costs related to stock options were $0.4$0.6 million, $0.6$0.4 million and $0.4 million for the years ended December 31, 2006, 2007, 2008 and 2008,2009, respectively. As of December 31, 2008, $0.3 million2009, based on accelerated vesting of all shares due to change of control provisions, no unrecognized compensation costs related to non-vested option grants are expected to be recognized over the course of the following three years.were remaining. Upon share option exercise, new shares arewere issued as opposed to treasury shares.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10.12. Commitments and Contingencies
Capital Leases
The Company hasPrior to the transactions contemplated by the Recapitalization Agreement, Grande Operating had entered into significant capital leases for office buildings and billing software. In 2007 andDuring 2008, the CompanyGrande Operating entered into capital leases to finance the purchase of various customer premise equipment and computer software and equipment. The leases expireexpired in varying years through 2024. During 2009, Grande Operating sold various customer premise equipment for $4.5 million cash. Concurrent with the sale, Grande Operating leased the customer premise equipment back for a period of two years at a monthly rental of $0.2 million. As a result of the recapitalization transactions on September 14, 2009, these capital leases are no longer included in the accounts of Holdings.
Capital leases consistconsisted of the following as of December 31, 20072008 and 2008:2009:
| | | 2008 | | | 2009 | |
| | | (in thousands) | |
| Capital leases | | $ | 17,785 | | | $ | — | |
| Less-current portion | | | (4,405 | ) | | | — | |
| Capital leases, net of current portion | | $ | 13,380 | | | $ | — | |
| | | 2007 | | | 2008 | |
| | | (in thousands) | |
| Capital leases | | $ | 17,140 | | | $ | 17,785 | |
| Less-current portion | | | (3,548 | ) | | | (4,405 | ) |
| | | | | | | | | |
| Capital leases, net of current portion | | $ | 13,592 | | | $ | 13,380 | |
ScheduledThere are no future payments for the capital leases as of December 31, 2008 are as follows (in thousands):2009.
| 2009 | | $ | 5,963 | |
| 2010 | | | 2,926 | |
| 2011 | | | 1,772 | |
| 2012 | | | 1,748 | |
2013 and thereafter | | | 18,647 | |
| | | | | |
| Total minimum lease payments | | | 31,056 | |
| Amounts representing interest | | | (13,271 | ) |
| | | | | |
| Present value of net minimum lease payments | | | 17,785 | |
| Less current maturities | | | (4,405 | ) |
| | | | | |
| Total long term capital lease | | $ | 13,380 | |
Operating Leases
The Company leasesPrior to the transactions contemplated by the Recapitalization Agreement, Grande Operating leased office space and other assets for varying periods. Leases that expire are evaluated for renewal based on operational necessity.
Certain of the Company’s operating leases provideprovided for payments that, in some cases, increaseincreased over the life of the lease. In accordance with SFAS No. 13, Accounting for Leases, rentalRental expense for the Company’s operating leases iswas recognized on a straight-line basis for all operating leases including those with escalation clauses. The aggregate of the minimum annual payments iswas expensed on a straight-line basis over the term of the related lease without consideration of renewal option periods. The lease agreements containcontained provisions that require the Companyrequired Grande Operating to pay for normal repairs and maintenance, property taxes, and insurance.
FutureSubsequent to the transactions contemplated by the Recapitalization Agreement, there are no outstanding operating leases and therefore, no future minimum rental payments required under thepayments.
Total rental expense for all operating leases was approximately $5.4 million, $5.2 million and $3.8 million for 2007, 2008 and 2009, respectively.
Other Contingencies
In June 2009, the Universal Service Administration Company (“USAC,”) which administers the Universal Service Fund (“USF”) on behalf of the Federal Communications Commission, provided an initial draft of findings in an audit of Grande Operating’s contributions to the USF program based on its 2004, 2005 and 2006 revenues. The draft audit report was subsequently finalized in October 2009 and concluded that have initialGrande Operating underreported or remaining non-cancelable lease termsmisclassified certain telecommunications service revenues, resulting in excessa total contribution shortfall of one year$4.2 million for the 2005, 2006 and 2007 reporting years. Grande Operating disagrees with the majority of the USAC audit report and believes it has meritorious defenses for the prior USF filings and intends to vigorously defend them during the dispute process, appellate p rocess and through litigation in courts, as of December 31, 2008, are as follows (in thousands):
| 2009 | | $ | 4,012 | |
| 2010 | | | 2,902 | |
| 2011 | | | 2,200 | |
| 2012 | | | 1,948 | |
| 2013 and thereafter | | | 8,947 | |
| | | | | |
| Total minimum lease payments | | $ | 20,009 | |
| | | | | |
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Total rental expensePursuant to the terms of the recapitalization agreement, liabilities in connection with the USAC Audit and certain other regulatory liabilities of Grande Operating, if not repaid by Holdings prior to the sale of Ultimate Parent will reduce the distributions that would otherwise be made to Rio GP on its Class A Common Units in such sale. In the event the results of the USAC Audit have not been finally determined and any related appeal has not been resolved by the time of a sale of Ultimate Parent and the acquiror in such sale requires Grande Operating or any of its affiliates to indemnify such acquiror and/or Grande Operating for all operating leases was approximately $5.8 million, $5.4 millionliability in connection with the USAC Audit arising from any period prior to September 14, 2009 that exceeds the amount of liability accrued at September 14, 2009 and $5.2 millionany amount reimbursed or refunded to Grande Operating in connection with the USAC Audit, Rio GP agreed to provide such indemnification in an amount not to exceed Rio GP’s net cash proceeds in connection with such sale, and agreed that a portion of such proceeds in an amount sufficient to satisfy such indemnification obligation may be placed in escrow to serve as a source for 2006, 2007payment of any such indemnification obligation.
Guarantee
In connection with the closing of the Recapitalization Agreement, Grande Operating entered into the First Amendment to Lease to that certain Lease Agreement, dated August 7, 2003, with respect to certain premises located in Corpus Christi, Texas, Odessa, Texas, San Marcos, Texas and 2008, respectively.Waco, Texas with GRC (TX) Limited Partnership to modify certain provisions of the Lease Agreement to permit a change of control of the tenant group and certain other related transactions (the “August 2003 Lease Amendment”). In addition, Grande Operating entered into a First Amendment to Lease to that certain Lease Agreement dated June 24, 2004 with respect to certain premises located in San Marcos, Texas with GRC-II Limited Partnership to modify certain provisions of the Lease Agreement to permit a change of control of the tenant group and certain other related transactions (the “June 2004 Lease Amendment” and together with the August 2003 Lease, the “Lease Amendments”).
Franchise AgreementsAs a condition to entering into the Lease Amendments, Rio GP was added as an additional guarantor under each of the existing Guaranty and Build-Outs
Suretyship Agreement originally given by Holdings pursuant to the First Amendment to Guaranty and Suretyship Agreement by and between GRC (TX) Limited Partnership, GRC-II (TX) Limited Partnership, Holdings, and Rio GP. Holdings was also required to enter into the First Amendment to Guaranty and Suretyship Agreement with respect to both Leases (each a “Guarantee” and, together, the “Guarantees”). The State of Texas passed a law in late 2005 allowing cable operators to file for a state issued certificate of franchise authority (“SICFA”)guarantees are for the provisionfull and timely payment of cable televisionlease payments pertaining to the August 2003 Lease Amendment and video services in Texas rather than negotiating with each individual municipality for such a right. On October 25, 2005, the Public Utility CommissionJune 2004 Lease Amendment. Based on management’s assessment, fair value of Texas, (“PUCT”), approved Grande’s application for a SICFA to provide cable TV service in twenty-seven municipalities and in eleven unincorporated areas of Texas. When the SICFAguarantee was approved, all of Grande’s municipal cable TV franchises were terminated.
Under the SICFA, among other things, Grande makes quarterly franchise fee payments to each municipality where it provides cable TV service of five percent of its gross cable service revenues and reports its subscriber count in each municipality. Franchise fees collected from the Company’s customers and remitted to local franchise authorities were approximately $2.5 million, $2.9 million, and $3.2 million during the years endednot significant at December 31, 2006, 2007, and 2008, respectively, and are reported as revenues and cost of revenues, respectively.2009.
Legal Proceedings
The Company is subject to litigation in the normal course of business. However, thereThere are no pending proceedings whichthat are currently anticipated to have a material adverse effect on the Company’sHoldings’ business, financial condition or results of operations.
Insurance
The CompanyHoldings currently carries insurance coverage for directors and officers liability. Prior to the transactions contemplated by the Recapitalization Agreement, Grande Operating carried a broad range of insurance coverage, including property, business, auto liability, general liability, directors and officers, workers’ compensation and an umbrella policy. The CompanyHoldings and Grande Operating has not incurred significant claims or losses on any of these insurance policies.
The Company utilizes self-insurance with respect to employee medical coverage. Such self-insurance is provided in connection with a plan that includes certain stop-loss coverage on a per employee and total claims basis. The Company estimates the liability for claims based on Company experience. Additionally, the Company utilizes self-insurance for its distribution line equipment. Management believes that the risk of loss related to this equipment is not significant.
Maintenance Agreements
The Company has entered into numerous agreements for the maintenance of leased fiber optic capacity. Future amounts due under these agreements as of December 31, 2008 are as follows (in thousands):
| 2009 | | $ | 1,227 | |
| 2010 | | | 1,046 | |
| 2011 | | | 1,046 | |
| 2012 | | | 1,046 | |
| 2013 and thereafter | | | 8,325 | |
| | | | | |
| Total | | $ | 12,690 | |
GRANDE COMMUNICATIONSRIO HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Purchase Commitments
During January 2005, the Company entered into a minimum purchase agreement with a vendor, as amended, for the purchase of $5.6 million of fiber optic equipment and installation and maintenance services through December 31, 2008. If the Company does not make the minimum purchases through the expiration or termination of this agreement, the Company will be required to pay a fee of 30% of the remaining unfulfilled amount. Purchases under this agreement were $1.0 million, $0.5 million, and $0.2 million during the years ended December 31, 2006, 2007 and 2008, respectively. Approximately $2.2 million remains outstanding as of December 31, 2008. The Company is currently in the process of finalizing an extension of the purchase agreement through December 31, 2009.
Employment Agreements
The Company hasPrior to the transactions contemplated by the Recapitalization Agreement, Grande Operating entered into employment agreements with three of the Company’sits senior executives for an indefinite term, subject to continued employment with Grande Operating. As a result of the Company. Astransactions contemplated by the Recapitalization Agreement, Messrs. Wilfley, and Chestnutt’s positions were eliminated and their separation from Grande Operating occurred in September and November 2009, respectively. Mr. Ferguson resigned as officer of December 31, 2008, estimated benefits that would have been payableHoldings and Grande Operating but has continued his employment with Grande Operating through a transition period. The liability for payment of severance pursuant to the senior executives if an event triggering a termination without causeindividual separation agreements was assumed by the Company or for good reason by the senior executive had occurred was $0.9 million in the aggregate.Grande Operating.
11.13. Concentration of Credit Risk
Certain financial instruments potentially subject the CompanyHoldings to concentrations of credit risk. These financial instruments consist primarily of trade receivables, cash and temporary cash investments.
The Companycash. Holdings places its cash and temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. The Company also periodically evaluates the creditworthiness of the institutions with which it invests.institutions. At December 31, 2008, the Company2009, Holdings does maintain certain invested balances in excess of federally insured limits.
The Company’s trade receivables reflect a customer base primarily centered in Texas. The Company routinely assesses the financial strength of its customers and generally does not require collateral. As a consequence, concentrations of credit risk are limited.
12.14. Employee Benefit Plan
The Company hasPrior to the transactions contemplated by the Recapitalization Agreement, Grande Operating had a 401(k) plan for its employees. All employees over the age of 18 arewere eligible to participate in the plan. The Plan providesprovided for discretionary matching by the Company.Grande Operating. During 2006, 2007 and 2008, the CompanyGrande Operating made discretionary matching cash contributions to the plan of approximately $0.7 million in 2006 and approximately $0.8 million in both 2007 and 2008. Effective January 2009, until otherwise determined, the CompanyGrande Operating suspended matching employees’ contributions to the 401(k) plan, applicable to all employees, as part of a company wide cost reduction initiative.
GRANDE COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13.15. Quarterly Financial Information—Unaudited
| 2007 | | 1st Quarter (1) | | | 2nd Quarter (1) | | | 3rd Quarter | | | 4th Quarter | | |
| 2008 | | | 1st Quarter | | | 2nd Quarter | | | 3rd Quarter | | | 4th Quarter | |
| Revenues | | $ | 48,395 | | | $ | 49,852 | | | $ | 49,348 | | | $ | 49,551 | | | $ | 49,886 | | | $ | 52,009 | | | $ | 51,963 | | | $ | 51,413 | |
| Operating loss | | (3,195 | ) | | (5,554 | ) | | (6,304 | ) | | (6,618 | ) | | | (5,052 | ) | | | (3,787 | ) | | | (7,180 | ) | | | (3,742 | ) |
| Net loss | | (9,736 | ) | | (12,058 | ) | | (13,637 | ) | | (15,101 | ) | | | (12,764 | ) | | | (11,194 | ) | | | (14,861 | ) | | | (11,541 | ) |
| Basic and diluted loss per common share | | (0.77 | ) | | (0.96 | ) | | (1.08 | ) | | (1.20 | ) | | | (1.00 | ) | | | (0.88 | ) | | | (1.16 | ) | | | (0.90 | ) |
| 2008 | | 1st Quarter | | | 2nd Quarter | | | 3rd Quarter | | | 4th Quarter | |
| Revenues | | $ | 49,886 | | | $ | 52,009 | | | $ | 51,963 | | | $ | 51,413 | |
| Operating loss | | | (5,052 | ) | | | (3,787 | ) | | | (7,180 | ) | | | (3,742 | ) |
| Net loss | | | (12,764 | ) | | | (11,194 | ) | | | (14,861 | ) | | | (11,541 | ) |
| Basic and diluted loss per common share | | | (1.00 | ) | | | (0.88 | ) | | | (1.16 | ) | | | (0.90 | ) |
(1) The presentation of Texas gross margin tax has been reclassified to conform to current presentation. Texas gross margin tax is presented separately as income tax expense instead of being included in sales, general and administrative expense.| 2009 | | 1st Quarter | | | 2nd Quarter | | | 3rd Quarter | | | 4th Quarter | |
| Revenues | | $ | 51,763 | | | $ | 50,984 | | | $ | 41,207 | | | $ | — | |
| Operating income (loss) | | | (3,404 | ) | | | (2,566 | ) | | | (7,811 | ) | | | 2 | |
| Net income (loss) | | | (11,447 | ) | | | (10,396 | ) | | | 27,196 | | | | (1,016 | ) |
| Basic and diluted income (loss) per share | | | (0.90 | ) | | | (0.82 | ) | | | 0.06 | | | | (0.08 | ) |