UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 |
For the transition period from to
Commission file number 333-115602
Grande Communications Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 74-3005133 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
401 Carlson Circle, San Marcos, TX | 78666 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number including area code: (512) 878-4000
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). * Yes ¨ No ¨
* The registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrant’s Common Stock outstanding as of July 31, 2009 was 12,104,072.
GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
Index
Page No. | ||||
Part I. | 1 | |||
Item 1. | 1 | |||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Item 2 | 11 | |||
Item 3. | 23 | |||
Item 4T. | 24 | |||
Part II. | 25 | |||
Item 1. | 25 | |||
Item 1A. | 25 | |||
Item 2. | 25 | |||
Item 3. | 25 | |||
Item 4. | 25 | |||
Item 5. | 25 | |||
Item 6. | 26 | |||
27 |
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, 2008 | June 30, 2009 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents, net of restricted cash of $3,129 | $ | 26,988 | $ | 27,802 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,311 and $1,024 | 17,047 | 16,044 | ||||||
Prepaid expenses and other current assets | 2,090 | 2,668 | ||||||
Total current assets | 46,125 | 46,514 | ||||||
Property, plant and equipment, net of accumulated depreciation of $368,907 and $397,454 | 223,034 | 202,558 | ||||||
Intangible assets, net of accumulated amortization of $1,661 and $1,782 | 1,154 | 1,033 | ||||||
Debt issue costs, net | 3,203 | 2,677 | ||||||
Restricted cash | 3,129 | 3,129 | ||||||
Deposits and other long-term assets | 790 | 747 | ||||||
Total assets | $ | 277,435 | $ | 256,658 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 13,111 | $ | 12,971 | ||||
Accrued liabilities | 15,938 | 14,682 | ||||||
Accrued interest payable | 6,755 | 6,755 | ||||||
Deferred revenue and customer deposits | 7,598 | 8,242 | ||||||
Current portion of long-term debt | 1,655 | 1,110 | ||||||
Current portion of capital lease obligations | 4,405 | 5,570 | ||||||
Total current liabilities | 49,462 | 49,330 | ||||||
Deferred rent | 1,177 | 1,142 | ||||||
Deferred revenue | 4,759 | 5,108 | ||||||
Capital lease obligations, net of current portion | 13,380 | 13,668 | ||||||
Long term debt, net of current portion | 189,629 | 190,115 | ||||||
Total liabilities | 258,407 | 259,363 | ||||||
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 | ||||||
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 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, 13,284,072 shares issued, and 12,784,072 and 12,104,072 shares outstanding, as of December 31, 2008 and June 30, 2009, respectively | 13 | 13 | ||||||
Additional paid-in capital | 509,696 | 509,813 | ||||||
Treasury stock, at cost | (5 | ) | (12 | ) | ||||
Accumulated deficit | (491,117 | ) | (512,960 | ) | ||||
Total stockholders’ equity (deficit) | 19,028 | (2,705 | ) | |||||
Total liabilities and stockholders’ equity | $ | 277,435 | $ | 256,658 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Operating revenues | $ | 52,009 | $ | 50,984 | $ | 101,896 | $ | 102,747 | ||||||||
Operating expenses: | ||||||||||||||||
Cost of revenues (excluding depreciation and amortization) | 18,113 | 18,172 | 34,968 | 36,365 | ||||||||||||
Selling, general and administrative | 23,017 | 19,394 | 45,807 | 40,262 | ||||||||||||
Provision for doubtful accounts | 797 | 654 | 1,421 | 1,268 | ||||||||||||
Depreciation and amortization | 13,869 | 15,330 | 28,539 | 30,822 | ||||||||||||
Total operating expenses | 55,796 | 53,550 | 110,735 | 108,717 | ||||||||||||
Operating loss | (3,787 | ) | (2,566 | ) | (8,839 | ) | (5,970 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 166 | 6 | 495 | 24 | ||||||||||||
Interest expense, net of capitalized interest | (7,770 | ) | (7,945 | ) | (15,562 | ) | (15,836 | ) | ||||||||
Net gain on sale/disposal of assets | 487 | 148 | 517 | 282 | ||||||||||||
Other income | — | 253 | — | 241 | ||||||||||||
Total other income (expense) | (7,117 | ) | (7,538 | ) | (14,550 | ) | (15,289 | ) | ||||||||
Loss before income tax expense | (10,904 | ) | (10,104 | ) | (23,389 | ) | (21,259 | ) | ||||||||
Income tax expense | (290 | ) | (292 | ) | (569 | ) | (584 | ) | ||||||||
Net loss | $ | (11,194 | ) | $ | (10,396 | ) | $ | (23,958 | ) | $ | (21,843 | ) | ||||
Basic and diluted net loss per share | $ | (0.88 | ) | $ | (0.82 | ) | $ | (1.88 | ) | $ | (1.71 | ) | ||||
Basic and diluted weighted average number of common shares outstanding | 12,762 | 12,732 | 12,748 | 12,758 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended June 30, | ||||||||
2008 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (23,958 | ) | $ | (21,843 | ) | ||
Adjustment to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation | 28,416 | 30,701 | ||||||
Amortization of intangible and other assets | 123 | 130 | ||||||
Amortization of deferred financing costs | 526 | 526 | ||||||
Provision for doubtful accounts | 1,421 | 1,268 | ||||||
Amortization of debt discounts/premiums | 621 | 720 | ||||||
Non-cash compensation expense | 208 | 117 | ||||||
Net gain on sale/disposal of assets | (517 | ) | (282 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (565 | ) | (233 | ) | ||||
Prepaid expenses and other assets | (989 | ) | (535 | ) | ||||
Accounts payable | 2,074 | 318 | ||||||
Accrued liabilities and interest payable | (2,055 | ) | (1,256 | ) | ||||
Deferred rent, revenue and customer deposits | 841 | 409 | ||||||
Net cash provided by operating activities | 6,146 | 10,040 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (16,241 | ) | (9,869 | ) | ||||
Proceeds from sale of assets | 244 | 237 | ||||||
Proceeds from sales tax refunds | 349 | — | ||||||
Net cash used in investing activities | (15,648 | ) | (9,632 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from sale leaseback arrangement | — | 4,532 | ||||||
Net proceeds from borrowings | — | 123 | ||||||
Payments of long-term debt and capital lease obligations | (2,567 | ) | (3,791 | ) | ||||
Net borrowings (repayments) on zero-balance cash account | (731 | ) | (458 | ) | ||||
Other financing activity | 5 | — | ||||||
Net cash provided by (used in) financing activities | (3,293 | ) | 406 | |||||
Net change in cash and cash equivalents | (12,795 | ) | 814 | |||||
Cash and cash equivalents, beginning of period | 48,138 | 26,988 | ||||||
Cash and cash equivalents, end of period | $ | 35,343 | $ | 27,802 | ||||
Non-cash investing and financing activity: | ||||||||
Capital lease obligations | $ | 160 | $ | 4,336 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Background and Basis of Presentation
The primary business of Grande Communications Holdings, Inc. (“Holdings”) and its consolidated subsidiary, Grande Communications Networks, Inc. (“Grande Operating Company” collectively, the “Company”) is 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 provides 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 provides broadband transport services to medium and large enterprises and communication carriers. The Company also provides network services by offering telecommunications and HSD products to medium and large enterprises and communication carriers within wholesale markets.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”) that permit reduced disclosure for interim periods. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments necessary for a fair presentation of the financial position of the Company as of June 30, 2008 and 2009, and for the three and six months ended June 30, 2008 and 2009. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. The December 31, 2008 balance sheet is derived from the audited financial statements for the year ended December 31, 2008. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2008 and notes thereto, together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report for the year ended December 31, 2008 on Form 10-K filed with the SEC on March 20, 2009. Further, in connection with preparation of the condensed consolidated financial statements and in accordance with the recently issued Statement of Financial Accounting Standards (“SFAS”) No. 165 Subsequent Events (“SFAS 165”), the Company evaluated subsequent events after the balance sheet date of June 30, 2009 through the date of filing of this quarterly report on Form 10-Q with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of Grande Communications Holdings, Inc.’s wholly owned subsidiary. All inter-company transactions and balances have been eliminated. Preparation of financial statements in conformity with 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 Company may undertake in the future. Actual results may ultimately differ from these estimates.
As previously announced, the Company’s board of directors and the Company has been exploring all of the Company’s strategic alternatives to enhance stockholder value. On June 9, 2009, Holdings entered into a non-binding letter of intent (the “Letter of Intent”) with ABRY Partners, LLC (“ABRY”). Pursuant to the terms of the Letter of Intent, Holdings and ABRY agreed to negotiate binding definitive agreements relating to a proposed recapitalization of Grande Operating Company. Although the Letter of Intent expired by its terms on June 30, 2009 and has not been extended, Holdings and ABRY are continuing to negotiate definitive agreements. The Letter of Intent contemplated that the recapitalization would include the following transactions, based upon certain assumptions and subject to certain adjustments:
(1) | The contribution by ABRY Partners VI, L.P., a fund managed by ABRY (“ABRY VI”), and certain co-investors designated by ABRY of cash to a newly formed wholly owned subsidiary of ABRY VI (“Newco I”) in return for common and preferred equity in Newco I; |
(2) | The contribution by Holdings of all the outstanding equity of Grande Operating Company to a newly formed wholly owned subsidiary of Newco I (“Newco II”) in return for common equity in Newco I; |
(3) | The entry by Grande Operating Company into a new credit facility arranged by ABRY consisting of a term loan and a revolving credit facility; and |
(4) | Using a portion of the net proceeds from the equity and debt financing transactions, the repurchase and redemption of all of Holdings’ outstanding 14% Senior Secured Notes due April 2011 (“senior notes”) and payoff of certain outstanding capital lease obligations. |
Upon the closing of the recapitalization transactions, based upon certain assumptions and subject to certain adjustments, including the amount of Holdings’ indebtedness, transaction expenses, cash and cash equivalents and working capital, it is expected that a majority of the outstanding common equity of Newco I will be owned, directly and indirectly, by ABRY VI and the remaining common equity of Newco I will be owned, directly or indirectly, by Holdings. All of the outstanding shares or common stock and preferred stock of Holdings will remain outstanding. ABRY would control Newco I, Newco II and Grande Operating Company.
There can be no assurance that we will be able to satisfactorily negotiate and enter into definitive agreements with ABRY and, even if we are able to enter into definitive agreements with ABRY, there can be no assurance that the recapitalization transactions will be consummated. The entry into definitive agreements with respect to the recapitalization transactions and the closing of the transactions contemplated by such agreements is subject to a number of conditions, including, but not limited to, (i) satisfactory completion by ABRY of its due diligence review; (ii) preparation, negotiation and execution by Holdings and ABRY of definitive agreements satisfactory to both, (iii) approval by Holdings’ board of directors and stockholders, (iv) the receipt of required consents, authorizations and approvals from the Federal Communications Commission and applicable state public utility commissions governing telecommunications businesses, (v) the receipt of contractually-required third-party consents, (vi) the repayment of all of Holdings’ outstanding senior notes and payoff of certain of its outstanding capital lease obligations using a portion of the net proceeds from the equity and debt financing transactions and (vii) other customary conditions, including the absence of any law or government order prohibiting the closing of the transactions contemplated by such definitive agreements.
As described under Note 5 “Long Term Debt” below, 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 $27.8 million at June 30, 2009. As discussed above, as part of the proposed recapitalization transactions, it is expected that a portion of the net proceeds from the equity and debt financing transactions would be used to repurchase and redeem all of Holdings’ outstanding senior notes.
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 June 30, 2010. The Company also believes that over the next twelve months through June 30, 2010 it will manage its cash position above $20 million in accordance with the covenant restricting certain capital expenditures set forth in the Indenture. The Company’s current business plan is based on our estimates regarding expected future costs and expected revenues and does not assume the consummation of the proposed recapitalization transactions or the sale of any non-core assets. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates, including if the recapitalization transactions are consummated. 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. In addition to the equity and debt financing transactions that would be part of the proposed recapitalization transactions, 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 directly or indirectly result in dilution to our equity holders. Additionally, as part of the proposed recapitalization transactions, a portion of the net proceeds from the equity and debt financing transactions will be used to repurchase and redeem all of Holdings’ outstanding senior notes. Even if the recapitalization transactions are not consummated, we can redeem our outstanding 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. However, we may not be able to raise additional funds on favorable terms or at all. The consummation of the recapitalization transactions is subject to a number of factors and conditions discussed above. If the recapitalization transactions are not consummated, 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.
Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheets for cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate 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 senior notes and borrowing rates currently available to the Company for equipment and vehicle financing with similar terms and maturities:
December 31, 2008 | June 30, 2009 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
(in millions) | ||||||||||||||||
14% Senior Notes | $ | 189.3 | $ | 142.3 | $ | 190.0 | $ | 148.1 | ||||||||
Equipment and vehicle financing | 2.0 | 2.0 | 1.2 | 1.2 |
Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 165, Subsequent Events (“SFAS 165”). 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 for the Company 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”) Statement of Financial Accounting Standard (“SFAS”) No. 107-1 and Accounting Principles Board 28-1 “Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial 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 Company adopted the provisions of FSP No. 107-1 in the second quarter of 2009.
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) is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.
2. 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 three and six months ended June 30, 2008 and 2009, 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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Convertible preferred stock | 439,527,511 | 439,527,511 | 439,527,511 | 439,527,511 | ||||||||||||
Common stock warrants | 152,107,016 | 152,107,016 | 152,107,016 | 152,107,016 | ||||||||||||
Common stock options | 44,799,120 | 38,630,415 | 46,206,250 | 39,760,898 | ||||||||||||
Series H preferred stock options | 25,576,168 | 22,252,211 | 25,995,639 | 22,460,045 | ||||||||||||
Total anti-dilutive shares | 662,009,815 | 652,517,153 | 663,836,416 | 653,855,470 |
3. Accrued Liabilities
Accrued liabilities consist of the following:
December 31, 2008 | June 30, 2009 | |||||||
(in thousands) | ||||||||
Accrued property taxes | $ | 3,829 | $ | 1,910 | ||||
Accrued compensation | 2,660 | 2,293 | ||||||
Accrued taxes—other | 3,171 | 3,457 | ||||||
Accrued programming | 3,045 | 3,426 | ||||||
Accrued other | 3,233 | 3,596 | ||||||
Accrued liabilities | $ | 15,938 | $ | 14,682 |
4. Income Taxes
The Company utilizes the liability method of accounting for income taxes, as set forth in Statement of Financial Accounting Standards 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.
The Company’s effective income tax rate for the interim periods presented is based on management’s estimate of the Company’s effective tax rate for the applicable year and differs from the federal statutory income tax rate primarily due to nondeductible permanent differences, state income taxes and changes in the valuation allowance for deferred income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company 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. 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.
5. Long Term Debt
14% Senior Secured Notes
Long-term Debt. In March 2004, Holdings completed a private placement offering for 136,000 units, each consisting of (1) $1,000 of senior notes due April 1, 2011 and (2) a warrant to purchase 100.336 shares of common stock. The 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 senior notes are governed by the indenture between the Company and U.S. Bank National Association, as Indenture Trustee, dated March 23, 2004.
In March 2006 and July 2007, Holdings 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.
Holdings’ subsidiary, Grande Communications Networks, Inc. (the “Subsidiary Guarantor”), 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. Holdings is a holding company with no independent assets and conducts all of its operations through the Subsidiary Guarantor and is therefore dependent on the receipt of funds from the Subsidiary Guarantor to pay the interest and principal on the senior notes. Limitations or restrictions contained in the Indenture could adversely affect Holdings’ ability to make such payments on the senior notes.
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 the Subsidiary Guarantor’s property and assets, including substantially all of its property, plant and equipment.
The senior notes may be redeemed, at Holdings’ 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 | |||
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 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 the Company’s ability to:
● | incur additional indebtedness, issue disqualified capital stock (as defined in the Indenture) and, in the case of restricted subsidiaries, issue preferred stock; |
● | create liens on assets; |
● | 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; |
● | place restrictions on the ability of restricted subsidiaries to pay dividends or make other payments to the Company; 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 the Company’s 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.
As discussed above, as part of the proposed recapitalization transactions, it is expected that a portion of the net proceeds from the equity and debt financing transactions will be used to repurchase and redeem all of Holdings’ outstanding senior notes.
6. Commitments and Contingencies
Capital Leases
During January 2009, the Company sold various customer premise equipment for $4.5 million cash. Concurrent with the sale, the Company leased the customer premise equipment back for a period of two years at a monthly rental of $0.2 million. The Company also has an option to repurchase the customer premise equipment for its then fair value at the expiration of the lease. The transaction has been recorded as a financing transaction rather than as a sale, and the customer premise equipment and related accounts will continue to be recognized in the accompanying financial statements. The gain on sale of the customer premise equipment of $0.8 million has been deferred and will be recognized over the term of the lease.
The future minimum lease payments under the terms of the related lease agreement as of June 30, 2009 are as follows (in thousands):
2009 | $ | 1,163 | ||
2010 | 2,325 | |||
2011 | 581 | |||
Total minimum lease payments | $ | 4,069 |
Legal Proceedings
The Company is subject to litigation in the normal course of business. However, there are no pending proceedings that are currently anticipated to have a material adverse effect on the Company’s business, financial condition or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including property, business, auto liability, general liability, directors and officers, workers’ compensation and an umbrella policy. The Company 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 basis. The Company estimates the liability for claims incurred but not yet reported 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; therefore, losses are recognized when incurred.
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 the Company’s contributions to the USF program based on the Company’s 2004, 2005 and 2006 revenues. The draft audit report concluded that the Company underreported or misclassified certain telecommunications service revenues, resulting in a total contribution shortfall of $5.4 million for the 2005, 2006 and 2007 reporting years. The Company 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 process and through litigation in courts, as necessary. Resolution of these significant unresolved matters, or positions taken by USAC during future audits, could have a material impact in future periods on the Company’s liquidity and financial results, including the Company’s ability to maintain compliance with the covenants contained within the Indenture.
7. Subsequent Events
During July 2009, we entered into a purchase agreement with a vendor for the purchase of a minimum of $1.8 million in telecommunications services through September 2010. If we do not make the minimum purchases through the expiration or termination of this agreement, we will be required to pay a fee up to 50% of the remaining unfulfilled amount.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains statements about future events, including without limitation, the consummation of the recapitalization transactions, information relating to business development activities, as well as capital spending, financing sources and the effects of regulation and increased competition. 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, uncertainties 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 quarterly report on Form 10-Q, including the financial statements.
These risks and uncertainties include, without limitation, those discussed under Item 4A. “Risk Factors” in our annual report on Form 10-K filed with the SEC on March 20, 2009 and those discussed below under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, the following important factors could affect future results, causing actual results to differ materially from those expressed in the forward-looking statements:
● | our ability to satisfactorily negotiate and enter into definitive agreements with ABRY; |
● | the recapitalization transactions will not close; |
● | our dependence on existing management; |
● | general economic conditions, including the availability of, and our ability to obtain additional funding, if necessary; |
● | an act of terrorism in the United States of America; |
● | changes in federal or state telecommunications laws or the administration of such laws; |
● | 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. |
These factors and the other risk factors discussed in this quarterly report on Form 10-Q 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 quarterly report on Form 10-Q are made only as of the date of this quarterly report. We cannot ensure that any projected results or events will be achieved. We have no intention, and disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future results or otherwise, except as required by law.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management’s discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included herewith and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements and Notes thereto for the three-year period ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC on March 20, 2009.
Unless we indicate otherwise, references below to “we,” “us,” “our,” “the Company” and “Grande” mean Grande Communications Holdings, Inc. and its consolidated subsidiary, Grande Communications Networks, Inc., taken as a whole, references to “Holdings” means Grande Communications Holdings, Inc. and references to “Grande Operating Company” are to Grande Communications Networks, Inc.
Overview
Grande’s primary business is providing a bundled package of video, voice, and HSD and other services to residential and business customers in Texas. We provide these services in seven markets in the state of Texas using local broadband networks that we acquired and/or constructed.
We refer to the homes and businesses that our network is 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 are the number of residential and business units, such as single residential homes, apartment units and condominium units, passed by our networks. Since 2001, we have grown our marketable homes passed through acquisitions and the construction of our networks. The expansion of our networks has, in turn, allowed us to pursue a retail strategy of offering bundled video, voice and HSD services to residential and business customers. As of June 30, 2008 and 2009, we had the ability to market services to 340,443 and 339,910 distinct homes and businesses over our networks, respectively, and had 146,265 and 144,166 residential and business customers, respectively. Operating revenues from bundled services were $42.0 million and $43.5 million for the three months ended June 30, 2008 and 2009, respectively, and $83.1 million and $87.1 million for the six months ended June 30, 2008 and 2009, respectively. We have continued to grow our bundled services to commercial business customers, which increased 21% to $7.0 million during the three months ended June 30, 2009 compared to $5.8 million during the three months ended June 30, 2008 and increased 21% to $13.7 million during the six months ended June 30, 2008 compared to $11.3 million during the six months ended June 30, 2008. We have derived an increasing percentage of our revenues from our bundled services and we expect this trend to continue.
In addition, we have leveraged our retail metro network build-out with the 2003 acquisition of a long haul fiber optic network to allow us to provide broadband transport services to medium and large enterprises and communications carriers. Operating revenues for broadband transport services were $2.8 million and $3.8 million for the three months ended June 30, 2008 and 2009, respectively, and $5.4 million and $6.9 million for the six months ended June 30, 2008 and 2009, 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, Inc. which had an established telephone and data network that has served as the Company’s platform for the provisioning of residential voice and HSD services and is also the platform that provides wholesale network services to medium and large enterprises and communications carriers in the wholesale market. Operating revenues for network services were $7.2 million and $3.7 million for the three months ended June 30, 2008 and 2009, respectively, and $13.4 million and $8.7 million for the six months ended June 30, 2008 and 2009, respectively.
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 believe that we have gained efficiencies of scale by offering telecommunications and HSD products into wholesale markets.
We have incurred net losses for the past five years and expect to continue to incur net losses in the future. As a result, the Company had federal net operating loss carry-forwards of approximately $467 million as of December 31, 2008 and 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 our lack of earnings history. 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. However, we had positive Adjusted EBITDA during the past five years as well as for each of the three and six months ended June 30, 2008 and 2009. 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.
As previously announced, our board of directors and the Company has been exploring all of the Company’s strategic alternatives to enhance stockholder value. On June 9, 2009, Holdings entered into the Letter of Intent with ABRY. Pursuant to the terms of the Letter of Intent, Holdings and ABRY agreed to negotiate binding definitive agreements relating to a proposed recapitalization of Grande Operating Company. Although the Letter of Intent expired by its terms on June 30, 2009 and has not been extended, Holdings and ABRY are continuing to negotiate definitive agreements. The Letter of Intent contemplated that the recapitalization would include the following transactions, based upon certain assumptions and subject to certain adjustments:
(1) | The contribution by ABRY Partners VI, L.P., a fund managed by ABRY VI, and certain co-investors designated by ABRY of cash to a newly formed wholly owned subsidiary of ABRY VI (“Newco I”) in return for common and preferred equity in Newco I; |
(2) | The contribution by Holdings of all the outstanding equity of Grande Operating Company to a newly formed wholly owned subsidiary of Newco I (“Newco II”) in return for common equity in Newco I; |
(3) | The entry by Grande Operating Company into a new credit facility arranged by ABRY consisting of a term loan and a revolving credit facility; and |
(4) | Using a portion of the net proceeds from the equity and debt financing transactions, the repurchase and redemption of all of Holdings’ outstanding senior notes and payoff of certain outstanding capital lease obligations. |
Upon the closing of the recapitalization transactions, based upon certain assumptions and subject to certain adjustments, including the amount of Holdings’ indebtedness, transaction expenses, cash and cash equivalents and working capital, it is expected that a majority of the outstanding common equity of Newco I will be owned, directly and indirectly, by ABRY VI and the remaining common equity of Newco I will be owned, directly or indirectly, by Holdings. All of the outstanding shares or common stock and preferred stock of Holdings will remain outstanding. ABRY would control Newco I, Newco II and Grande Operating Company.
There can be no assurance that we will be able to satisfactorily negotiate and enter into definitive agreements with ABRY and, even if we are able to enter into definitive agreements with ABRY, there can be no assurance that the recapitalization transactions will be consummated. The entry into definitive agreements with respect to the recapitalization transactions and the closing of the transactions contemplated by such agreements is subject to a number of conditions, including, but not limited to, (i) satisfactory completion by ABRY of its due diligence review; (ii) preparation, negotiation and execution by Holdings and ABRY of definitive agreements satisfactory to both, (iii) approval by Holdings’ board of directors and stockholders, (iv) the receipt of required consents, authorizations and approvals from the Federal Communications Commission and applicable state public utility commissions governing telecommunications businesses, (v) the receipt of contractually-required third-party consents, (vi) the repayment of all of Holdings’ outstanding senior notes and payoff of certain of its outstanding capital lease obligations using a portion of the net proceeds from the equity and debt financing transactions and (vii) other customary conditions, including the absence of any law or government order prohibiting the closing of the transactions contemplated by such definitive agreements.
Availability of Capital
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. Cash and cash equivalents at June 30, 2009 were approximately $27.8 million. As discussed above, as part of the proposed recapitalization transactions, it is expected that a portion of the net proceeds from the equity and debt financing transactions would be used to repurchase and redeem all of Holdings’ outstanding senior notes.
Marketable Homes Passed, Customers and Connections
We report 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 June 30, 2008 and 2009, our networks passed 340,443 and 339,910 marketable homes, respectively, and we had 146,265 and 144,166 residential and business customers, respectively.
Because we deliver multiple services to our customers, we report our total number of connections for video, voice, HSD and other services in addition to our total number of customers. We count each video, voice, HSD and other service purchase as a separate connection. For example, a single customer who purchases video, voice and HSD service would count as three connections. Similarly, a single customer who purchases our HSD service and our voice service would count as two connections. We do 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 do record each purchase of an additional telephone line by a local telephone customer as an additional connection. As of June 30, 2008 and 2009, we had 314,772 and 312,464 connections, respectively.
Operating Data — Bundled Services
Quarter Ended | ||||||||||||||||||||
June 30, 2008 | September 30, 2008 | December 31, 2008 | March 31, 2009 | June 30, 2009 | ||||||||||||||||
Operating Data: | ||||||||||||||||||||
Marketable homes passed | 340,443 | 340,048 | 340,681 | 340,999 | 339,910 | |||||||||||||||
Customers | 146,265 | 146,513 | 146,210 | 146,433 | 144,166 | |||||||||||||||
Number of connections: | ||||||||||||||||||||
Video | 100,578 | 101,673 | 101,864 | 101,744 | 99,488 | |||||||||||||||
Voice | 115,095 | 115,078 | 114,512 | 113,208 | 111,292 | |||||||||||||||
HSD and other | 99,099 | 101,000 | 101,502 | 102,826 | 101,684 | |||||||||||||||
Total connections | 314,772 | 317,751 | 317,878 | 317,778 | 312,464 | |||||||||||||||
Average monthly revenue per: | ||||||||||||||||||||
Customer – bundled services | $ | 95.43 | $ | 96.22 | $ | 98.09 | $ | 99.34 | $ | 99.82 | ||||||||||
Video connection | 58.31 | 57.45 | 58.16 | 60.49 | 61.63 | |||||||||||||||
Voice connection | 40.85 | 41.38 | 41.15 | 40.58 | 40.01 | |||||||||||||||
HSD and other connection | 34.46 | 35.11 | 36.65 | 36.80 | 37.20 |
Results of Operations (in millions)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||
2008 | Percent of Operating Revenues | 2009 | Percent of Operating Revenues | Variance | 2008 | Percent of Operating Revenues | 2009 | Percent of Operating Revenues | Variance | |||||||||||||||||||||||||||||||
Consolidated Financial Data: | ||||||||||||||||||||||||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||||||||||||||||||
Video | $ | 17.7 | 34 | % | $ | 18.6 | 37 | % | $ | 0.9 | $ | 35.1 | 34 | % | $ | 37.1 | 36 | % | $ | 2.0 | ||||||||||||||||||||
Voice | 14.1 | 27 | 13.5 | 26 | (0.6 | ) | 28.1 | 28 | 27.3 | 27 | (0.8 | ) | ||||||||||||||||||||||||||||
HSD and other | 10.2 | 20 | 11.4 | 22 | 1.2 | 19.9 | 20 | 22.7 | 22 | 2.8 | ||||||||||||||||||||||||||||||
Bundled services | 42.0 | 81 | 43.5 | 85 | 1.5 | 83.1 | 82 | 87.1 | 85 | 4.0 | ||||||||||||||||||||||||||||||
Broadband transport services | 2.8 | 5 | 3.8 | 8 | 1.0 | 5.4 | 5 | 6.9 | 7 | 1.5 | ||||||||||||||||||||||||||||||
Network services | 7.2 | 14 | 3.7 | 7 | (3.5 | ) | 13.4 | 13 | 8.7 | 8 | (4.7 | ) | ||||||||||||||||||||||||||||
Total operating revenues | 52.0 | 100 | 51.0 | 100 | (1.0 | ) | 101.9 | 100 | 102.7 | 100 | 0.8 | |||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
Cost of revenues | 18.1 | 35 | 18.2 | 36 | 0.1 | 35.0 | 35 | 36.3 | 36 | 1.3 | ||||||||||||||||||||||||||||||
Selling, general and administrative | 23.0 | 44 | 19.4 | 38 | (3.6 | ) | 45.8 | 45 | 40.2 | 39 | (5.6 | ) | ||||||||||||||||||||||||||||
Provision for doubtful accounts | 0.8 | 1 | 0.7 | 1 | (0.1 | ) | 1.4 | 1 | 1.3 | 1 | (0.1 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | 13.9 | 27 | 15.3 | 30 | 1.4 | 28.5 | 28 | 30.8 | 30 | 2.3 | ||||||||||||||||||||||||||||||
Total operating expenses | 55.8 | 107 | 53.6 | 105 | (2.2 | ) | 110.7 | 109 | 108.6 | 106 | (2.1 | ) | ||||||||||||||||||||||||||||
Operating loss | (3.8 | ) | (7 | ) | (2.6 | ) | (5 | ) | 1.2 | (8.8 | ) | (9 | ) | (5.9 | ) | (6 | ) | 2.9 | ||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||||||||||
Interest income | 0.2 | — | — | — | (0.2 | ) | 0.5 | 0.5 | — | — | (0.5 | ) | ||||||||||||||||||||||||||||
Interest expense, net of capitalized interest | (7.8 | ) | (15 | ) | (7.9 | ) | (16 | ) | (0.1 | ) | (15.6 | ) | (15 | ) | (15.8 | ) | (15 | ) | (0.2 | ) | ||||||||||||||||||||
Net gain on sale/disposal of assets | 0.5 | 1 | 0.1 | — | (0.4 | ) | 0.5 | 0.5 | 0.3 | — | (0.2 | ) | ||||||||||||||||||||||||||||
Other income | — | — | 0.3 | 1 | 0.3 | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||||||||
Total other income (expense) | (7.1 | ) | (14 | ) | (7.5 | ) | (15 | ) | (0.4 | ) | (14.6 | ) | (14 | ) | (15.3 | ) | (15 | ) | (0.7 | ) | ||||||||||||||||||||
Loss before income tax expense | (10.9 | ) | (21 | ) | (10.1 | ) | (20 | ) | 0.8 | (23.4 | ) | (23 | ) | (21.2 | ) | (21 | ) | 2.2 | ||||||||||||||||||||||
Income tax expense | (0.3 | ) | (1 | ) | (0.3 | ) | — | — | (0.6 | ) | (1 | ) | (0.6 | ) | — | — | ||||||||||||||||||||||||
Net loss | $ | (11.2 | ) | (22 | )% | $ | (10.4 | ) | (20 | )% | $ | 0.8 | $ | (24.0 | ) | (24 | )% | $ | (21.8 | ) | (21 | )% | $ | 2.2 |
Three and Six Months Ended June 30, 2008 Compared to Three and Six Months Ended June 30, 2009
Operating Revenues. Our operating revenues decreased $1.0 million, or 2%, during the three months ended June 30, 2009 and increased $0.8 million, or 1%, during the six months ended June 30, 2009. The decrease during the three months ended June 30, 2009 was driven primarily by a $3.5 million decrease in our revenues from network services partially offset by increases in both bundled services revenue of $1.5 million and broadband transport services revenue of $1.0 million. The increase during the six months ended June 30, 2009 was driven primarily by increases in both bundled services revenue of $4.0 million and broadband transport services revenue of $1.5 million partially offset by a $4.7 million decrease in our revenues from network services.
Operating revenues for our video services increased $0.9 million, or 5%, during the three months ended June 30, 2009 and increased $2.0 million, or 6%, during the six months ended June 30, 2009. During the three and six months ended June 30, 2009, approximately 95% of the $0.9 million increase and approximately 82% of the $2.0 million increase, respectively, was due to our annual rate increase, which occurred in January 2009, with the remainder due to an increased number of customers adding premium services and advanced services, such as HD and DVR. Increases during both the three and six months ended June 30, 2009 were partially offset by a 1% decline in the number of connections, from 100,578 as of June 30, 2008 to 99,488 as of June 30, 2009. Video services revenues from commercial business customers remained flat at $0.3 million during both the three months ended June 30, 2008 and 2009 and increased $0.1 million, or 17%, from $0.6 million to $0.7 million during the six months ended June 30, 2008 and 2009, respectively.
Operating revenues for our voice services decreased $0.6 million, or 4%, during the three months ended June 30, 2009 and decreased $0.8 million, or 3%, during the six months ended June 30, 2009. While we have experienced a decrease in residential voice services revenue 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, our voice services revenues from commercial business customers have increased 11% from $3.8 million to $4.2 million during the three months ended June 30, 2008 and 2009, respectively, and increased 12% from $7.4 million to $8.3 million, during the six months ended June 30, 2008 and 2009, respectively.
Operating revenues for our HSD and other services increased $1.2 million, or 12%, during the three months ended June 30, 2009 and increased $2.8 million, or 14%, during the six months ended June 30, 2009. During the three and six months ended June 30, 2009, the increases in HSD and other services were primarily due to a 8% and 9% increase in average monthly revenue per connection, respectively, as customers choose higher speed service offerings as well as a 3% increase in the number of connections, from 99,099 as of June 30, 2008 to 101,684 as of June 30, 2009. HSD services revenues from commercial business customers increased 47% from $1.7 million to $2.5 million, during the three months ended June 30, 2008 and 2009, respectively, and increased 45% from $3.3 million to $4.8 million, during the six months ended June 30, 2008 and 2009, respectively.
Operating revenues for our broadband transport services increased $1.0 million, or 36%, during the three months ended June 30, 2009 and increased $1.5 million, or 28%, during the six months ended June 30, 2009 as a result of an increase in construction revenue, dark fiber leases as well as an increase in private line revenue from existing customers as well as moderate new customer growth.
Operating revenues for our network services decreased $3.5 million, or 49%, during the three months ended June 30, 2009 and decreased $4.7 million, or 35%, during the six months ended June 30, 2009. The decrease during both reporting periods was primarily related to a $2.8 million and $3.1 million decrease in revenue from termination services, respectively, to carriers and other telecommunications companies due to a decrease in volume as well as a decrease 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 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 also likely be reduced. We’ve also experienced decreases in revenue from data services of $0.5 million and $1.2 million during the three months ended June 30, 2008 and 2009, respectively, as the result of decreases in customer volume.
Cost of Revenues. Our cost of revenues increased $0.1 million, or 1%, during the three months ended June 30, 2009 and increased $1.3 million, or 4%, during the six months ended June 30, 2009. Cost of revenues related to video services increased approximately $1.3 million during the three months ended June 30, 2009 and increased $2.9 million during the six months ended June 30, 2009. 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 $0.9 million during the three months ended June 30, 2009 and increased $0.8 million during the six months ended June 30, 2009. These increases in costs of revenues were partially offset by decreases in costs associated with termination services to carriers and other telecommunications companies and national directory assistance fees, which decreased $2.2 million during the three months ended June 30, 2009 and decreased $2.3 million during the six months ended June 30, 2009. The increase in direct costs of video services is primarily due to programming costs increases, which have been increasing on an aggregate basis due to an increase in average connections during the six months ended June 30, 2009 and on a per connection basis due to an increase in costs per channel during both the three and six months ended June 30, 2009, as well as increases in retransmission fees. 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 increase in other costs supporting broadband transport services, voice services, HSD and other services, and certain network services is primarily related to: (a) an accrual 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; (b) an increase in broadband transport construction costs; and (c) a decrease in access and other carrier fees associated with costs that are variable usage-based costs, which increase or decrease as customer usage varies.
Selling, General and Administrative (“SG&A”) Expense. Our SG&A expense decreased $3.6 million, or 16%, from $23.0 million to $19.4 million, during the three months ended June 30, 2008 and 2009, respectively, and decreased $5.6 million, or 12%, from $45.8 million to $40.2 million, during the six months ended June 30, 2008 and 2009, respectively. 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. These actions were the primary driver in the decrease in employee compensation and benefits during the three and six months ended June 30, 2009. Also included in selling, general and administrative expenses are non-recurring expenses incurred in association with the exploration of strategic alternatives and the proposed recapitalization transactions of $0.8 million during both the three and six months ended June 30, 2008 and $0.6 million and $0.7 million during the three and six months ended June 30, 2009, respectively. Other decreases in selling, general and administrative expense during the three months ended June 30, 2009 related to employee healthcare costs, network repairs and maintenance, legal and other professional services, excluding the strategic exploration costs discussed above, property taxes, software licensing fees, and other miscellaneous expenses that totaled approximately $4.4 million. These decreases during the three months ended June 30, 2009 were partially offset by increases in sales and marketing expense, as well as a reduction in the amount of indirect overhead costs capitalized to construction projects, and other miscellaneous expenses that totaled approximately $1.0 million. Other decreases in selling, general and administrative expense during the six months ended June 30, 2009 related to employee healthcare costs, network repairs and maintenance, legal and other professional services, excluding the strategic exploration costs discussed above, property taxes, vehicle expense, employee travel, and other miscellaneous expenses that totaled approximately $6.9 million. These decreases during the six months ended June 30, 2009 were partially offset by a reduction in the amount of indirect overhead costs capitalized to construction projects and increases in other miscellaneous expenses that totaled approximately $1.4 million.
We expect our SG&A expense to decrease as a percentage of revenue during the year ending December 31, 2009 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 $1.4 million, or 10%, during the three months ended June 30, 2009 and increased $2.3 million, or 8%, during the six months ended June 30, 2009. The increases were related to capital lease transactions primarily associated with customer premise equipment and property, plant and equipment additions during the period from July 1, 2008 through June 30, 2009. Partially offsetting the increase 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 period from July 1, 2008 through June 30, 2009.
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 and other expense (income). 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 that they are a significant basis for our management to use in measuring 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.
Adjusted EBITDA increased $2.3 million, or 22%, during the three months ended June 30, 2009 and increased $4.8 million, or 24%, during the six months ended June 30, 2009. The increase in Adjusted EBITDA during the three months ended June 30, 2009 was primarily due to a combined decrease in provision for doubtful accounts and SG&A expense of approximately $3.7 million, excluding non-cash compensation expense, partially offset by a $1.0 million decrease in revenues, a $0.4 million decrease in net gain on sale/disposal of assets, as well as a $0.1 million increase in costs of revenues. The increase in Adjusted EBITDA during the six months ended June 30, 2009 was primarily due to a combined decrease in provision for doubtful accounts and SG&A expense of approximately $5.6 million, excluding non-cash compensation expense, as well as a $0.8 million increase in revenues partially offset by a $1.3 million increase in costs of revenues and a $0.2 million decrease in net gain on sale/disposal of assets.
The reconciliation of EBITDA/Adjusted EBITDA to net loss is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Net loss as reported | $ | (11,194 | ) | $ | (10,396 | ) | $ | (23,958 | ) | $ | (21,843 | ) | ||||
Add back non-EBITDA/Adjusted EBITDA items included in net loss: | ||||||||||||||||
Interest income | (166 | ) | (6 | ) | (495 | ) | (24 | ) | ||||||||
Interest expense, net of capitalized interest | 7,770 | 7,945 | 15,562 | 15,836 | ||||||||||||
Income tax expense | 290 | 292 | 569 | 584 | ||||||||||||
Depreciation and amortization | 13,869 | 15,330 | 28,539 | 30,822 | ||||||||||||
EBITDA | 10,569 | 13,165 | 20,217 | 25,375 | ||||||||||||
Non-cash compensation expense | 94 | 46 | 208 | 117 | ||||||||||||
Other income | — | (253 | ) | — | (241 | ) | ||||||||||
Adjusted EBITDA | $ | 10,663 | $ | 12,958 | $ | 20,425 | $ | 25,251 |
Liquidity and Capital Resources
Sources and Uses of Funds
Since inception, we have been funded primarily with private equity investments, issuance of debt securities and cash provided by operating activities. Our current primary sources of liquidity are cash on hand and cash flows from operating activities. As of June 30, 2009, we had total cash and cash equivalents of $27.8 million and long-term debt and capital lease obligations of $210.5 million outstanding, including the current portion, and net of discounts and premiums of $3.0 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 caption “Item 1A Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on March 20, 2009, 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 June 30, 2010. As of June 30, 2009, we had a net working capital deficit of $(2.8) million, compared to a net working capital deficit of $(3.3) million as of December 31, 2008. The $0.5 million increase in working capital resulted primarily from a $0.4 million increase in current assets and a $1.4 million decrease in accounts payable and accrued liabilities partially offset by a $0.6 million increase in deferred revenue and a $0.6 million increase in the current portion of long-term debt and capital lease obligations.
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. Cash and cash equivalents at June 30, 2009 were approximately $27.8 million. As discussed above, as part of the proposed recapitalization transactions, it is expected that a portion of the net proceeds from the equity and debt financing transactions would be used to repurchase and redeem all of Holdings’ outstanding senior notes.
Our current business plan is based on our estimates regarding expected future costs and expected revenues and does not assume the consummation of the proposed recapitalization transactions or the sale of any non-core assets. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates, including if the recapitalization transactions are consummated. 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. In addition to the equity and debt financing transactions that would be part of the proposed recapitalization transactions, 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 directly or indirectly result in dilution to our equity holders. Additionally, as part of the proposed recapitalization transactions, a portion of the net proceeds from the equity and debt financing transactions will be used to repurchase and redeem all of Holdings’ outstanding senior notes. Even if the recapitalization transactions are not consummated, we can redeem our outstanding 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. However, we may not be able to raise additional funds on favorable terms or at all. The consummation of the recapitalization transactions is subject to a number of factors and conditions discussed above. If the recapitalization transactions are not consummated, 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 consisted of the following components:
Six Months ended June 30, | |||||||||
2008 | 2009 | ||||||||
(in thousands) | |||||||||
Cash collected from customers | $ | 101,784 | $ | 102,923 | |||||
Interest income received | 418 | 24 | |||||||
Other income received | — | 241 | |||||||
Sales tax refund received | 626 | — | |||||||
Payments to vendors and employees | (81,256 | ) | (77,459 | ) | |||||
Interest expense paid | (14,415 | ) | (14,590 | ) | |||||
Income taxes paid | (1,011 | ) | (1,099 | ) | |||||
Net cash provided by operating activities | $ | 6,146 | $ | 10,040 |
The increase in cash collected from customers is due to the increase in operating revenues and timing of collections. The decrease in payments to vendors and employees is the result of the decrease in SG&A expenses requiring cash outlays and the timing of cash payments partially offset by the increase in cost of revenues.
Cash Flows from Investing Activities
Net cash used in investing activities consisted of the following components:
Six Months ended June 30, | |||||||||
2008 | 2009 | ||||||||
(in thousands) | |||||||||
Purchases of property, plant and equipment | $ | (16,241 | ) | $ | (9,869 | ) | |||
Proceeds from sale of assets | 244 | 237 | |||||||
Proceeds from sales tax refunds | 349 | — | |||||||
Net cash used in investing activities | $ | (15,648 | ) | $ | (9,632 | ) |
The decrease in capital expenditures during the six months ended June 30, 2009 primarily related to 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.
Cash Flows from Financing Activities
Net cash provided by (used in) financing activities consisted of the following components:
Six Months ended June 30, | |||||||||
2008 | 2009 | ||||||||
(in thousands) | |||||||||
Proceeds from sale leaseback arrangement | $ | — | $ | 4,532 | |||||
Net proceeds from borrowings | — | 123 | |||||||
Payments of long-term debt and capital lease obligations | (2,567 | ) | (3,791 | ) | |||||
Net borrowings (repayments) on zero-balance cash account | (731 | ) | (458 | ) | |||||
Other financing activity | 5 | — | |||||||
Net cash provided by (used in) financing activities | $ | (3,293 | ) | $ | 406 |
During January 2009, the Company sold various customer premise equipment for $4.5 million cash. Concurrent with the sale, the Company leased the customer premise equipment back for a period of two years at a monthly rental of $0.2 million.
Capital Expenditures
We had capital expenditures of approximately $16.2 million and $9.9 million, including capitalized interest, during the six months ended June 30, 2008 and 2009, respectively. These capital expenditures relate to: network construction; initial customer 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 decrease in capital expenditures during the six months ended June 30, 2009 primarily related to 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. As discussed above, as part of the proposed recapitalization transactions, it is expected that a portion of the net proceeds from the equity and debt financing transactions would be used to repurchase and redeem all of Holdings’ outstanding senior notes.
Contractual Obligations and Commercial Commitments
During the six months ended June 30, 2009, our aggregate contractual obligations decreased approximately $14.7 million compared to those previously described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the caption “Contractual Obligations and Commercial Commitments” included in Grande’s Annual Report on Form 10-K for the year ended December 31, 2008, primarily as a result of a $13.5 million interest payment on the senior notes and $7.7 million in payments on equipment financing, capital and operating leases and maintenance and purchase obligations. These payments are partially offset by increases in obligations of $6.5 million primarily related to a new vehicle financing, purchase commitment for telecommunications services, a customer premise equipment capital lease and vehicle and office equipment operating leases as well as renewals of certain real estate operating leases.
We are obligated to make payments under a variety of contracts and other commercial arrangements, including the following:
Long-term Debt and Equipment Financing. In March 2004, Holdings completed a private placement offering for 136,000 units, with each unit consisting of (1) $1,000 of 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, Holdings 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.
Holdings’ subsidiary, Grande Communications Networks, Inc. (the “Subsidiary Guarantor”), 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 the Subsidiary Guarantor’s property and assets, including substantially all of its property, plant and equipment.
The senior notes may be redeemed, at Holdings 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 | |||
2009 | 103.50 | % | ||
2010 and thereafter | 100.00 | % |
If Holdings experiences specific kinds of change of control events, each holder of senior notes may require Holdings 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.
As discussed above, as part of the proposed recapitalization transactions, it is expected that a portion of the net proceeds from the equity and debt financing transactions would be used to repurchase and redeem all of Holdings’ outstanding senior notes.
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, 2009. 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 balance as of June 30, 2009 was $2.2 million. Subsequent to June 30, 2009, we entered into a purchase agreement with a vendor for the purchase of a minimum of $1.8 million in telecommunications services through September 2010. If we do not make the minimum purchases through the expiration or termination of this agreement, we will be required to pay a fee up to 50% of the remaining unfulfilled amount.
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 Part III, Item 10 “Executive Compensation” under the caption “Employment Agreements, Severance Benefits and Change in Control Provisions” included in Grande’s Annual Report on Form 10-K for the year ended December 31, 2008.
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.
There have been no material changes to the critical accounting policies and estimates previously described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the caption “Critical Accounting Policies and Estimates” included in Grande’s Annual Report on Form 10-K for the year ended December 31, 2008.
Recent Accounting Pronouncements
See Note 1 to the accompanying consolidated financial statements for other accounting standards adopted in 2009 and accounting standards not yet adopted.
Also refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the caption “Recent Accounting Pronouncements” included in our Annual Report on Form 10-K for the year ended December 31, 2008.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no significant changes to our market risk since December 31, 2008.
ITEM 4T. | CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive 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 June 30, 2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2009, our disclosure controls and procedures are effective. 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.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2009, there was no change in our internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, 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.
PART II
OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
We are subject to litigation in the normal course of our business. However, there are no pending proceedings which are currently anticipated to have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. | RISK FACTORS |
Except for the risk factor set forth below, there have been no material changes to the risk factors previously described in Part I, Item 1A “Risk Factors” included in Grande’s Annual Report on Form 10-K for the year ended December 31, 2008.
If the proposed recapitalization transactions are not consummated, our business, liquidity and financial condition could be harmed.
There can be no assurance that we will be able to satisfactorily negotiate and enter into definitive agreements with ABRY and, even if we are able to enter into definitive agreements with ABRY, there can be no assurance that the recapitalization transactions will be consummated. The entry into definitive agreements with respect to the recapitalization transactions and the closing of the transactions contemplated by such agreements is subject to a number of conditions, including, but not limited to, (i) satisfactory completion by ABRY of its due diligence review; (ii) preparation, negotiation and execution by Holdings and ABRY of definitive agreements satisfactory to both, (iii) approval by Holdings’ board of directors and stockholders, (iv) the receipt of required consents, authorizations and approvals from the Federal Communications Commission and applicable state public utility commissions governing telecommunications businesses, (v) the receipt of contractually-required third-party consents, (vi) the repayment of all of Holdings’ outstanding senior notes and payoff of certain of its outstanding capital lease obligations using a portion of the net proceeds from the equity and debt financing transactions and (vii) other customary conditions, including the absence of any law or government order prohibiting the closing of the transactions contemplated by such definitive agreements.
If the proposed recapitalization transactions are not consummated, our need for funds may increase, 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. 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.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
ITEM 5. | OTHER INFORMATION |
None
ITEM 6. | EXHIBITS |
Unless designated by an asterisk indicating that such document has been filed herewith, the Exhibits listed below have been heretofore filed by the Company pursuant to Section 13 or 15(d) of the Exchange Act and are hereby incorporated herein by reference to the pertinent prior filing.
Exhibit No. | Description | |
3.1 | Restated Certificate of Incorporation of Grande Communications Holdings, Inc. (previously filed as exhibit 3.1 to Form 10-K dated March 31, 2006). | |
3.2 | Bylaws of Grande Communications Holdings, Inc. (previously filed as exhibit 3.2 to Form S-1 dated May 18, 2004). | |
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). | |
10.1 | Form of Indemnification Agreement entered into by each Member of the Registrant’s Board of Directors and each of Registrant’s Officers (previously filed as exhibit 10.1 to Form 8-K dated July 22, 2009). | |
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) promulgated under the Exchange Act. | |
31.2* | Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) promulgated under the Exchange Act. | |
32.1* | Certification pursuant to Rule 13a – 14(b) promulgated under the Exchange Act and 18 U.S.C. Section 1350. |
___________
* | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Grande Communications Holdings, Inc. | ||
(Registrant) | ||
Date: August 13, 2009 | By: | /s/ MICHAEL L. WILFLEY |
Michael L. Wilfley | ||
Chief Financial Officer | ||
(Duly Authorized Officer and Principal Financial Officer) |
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