ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This management’s discussionquarterly report on Form 10-Q contains statements about future events, including without limitation, information relating to business development activities, as well as capital spending, financing sources and analysis includes “forward-looking statements”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. We intendamended (the “Exchange Act”). These statements can sometimes be identified by our use of forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. When used in this report, the words “anticipate,” “believe,” “estimate,”such as “expect,” “should,” “intend,“may,” “plan”“will,” “anticipate,” “estimate,” or “intend” and other similar expressions as they relate to Grande Communications Holdings, Inc.words or its subsidiaryphrases. Similarly, statements that describe our objectives, plans or our managementgoals are intended to identify theseor may be forward-looking statements. All of theThese statements we make regardinginvolve known and unknown risks, uncertainties and other factors which may cause our expectedactual results, performance or achievements to be different from any future financial position and operating results, our business strategy, our financing plans, forecasted trends relating to the markets in which we operate and similar matters are forward-looking statements. We cannot assure you that our expectationsperformance or achievements expressed or implied by these statements. You should review carefully all of the information, in these forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various factors,this quarterly report on Form 10-Q, including the financial statements.
These risks and uncertainties include, without limitation, those discussed below and under the caption “Item 1A. RiskItem 4A. “Risk Factors” in our Annual Reportannual report on Form 10-K filed with the SEC on March 31, 2008. Any20, 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 contained:
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 reflecton Form 10-Q are not necessarily all of the important factors that could cause our current views with respectactual 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 and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity.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.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, 2007,2008, included in our Annual Report on Form 10-K filed with the SEC on March 31, 2008.20, 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.
Overview
Grande’s primary business is providing a bundled package of cable television (“video”), telephone (“voice”),video, voice, and broadband Internet (“HSD”)HSD and other services to residential and small and medium-sized 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 September 30, 2007March 31, 2008 and 2008,2009, we had the ability to market services to 339,678340,554 and 340,048340,999 distinct homes and businesses over our networks, respectively, and had 144,889147,267 and 146,513146,433 residential and business customers, respectively. Our operatingOperating revenues from bundled services were $49.3$41.1 million and $51.9$43.6 million for the three months ended September 30, 2007March 31, 2008 and 2008, respectively, and $147.6 million and $153.9 million for the nine months ended September 30, 2007 and 2008, respectively.
Grande was founded in November 1999 and was funded with $232 million of initial equity capital to pursue a retail strategy of constructing broadband networks in order to offer bundled video, voice, and HSD services to customers. Operating revenues from bundled services were $38.9 million and $42.2 million for the three months ended September 30, 2007 and 2008, respectively, and $115.5 million and $125.3 million for the nine months ended September 30, 2007 and 2008,2009, respectively. We have continued to grow our bundled services to commercial business customers which increased 26%by 22% to $6.3$6.7 million during the three months ended September 30, 2008 from $5.0March 31, 2009 compared to $5.5 million during the three months ended September 30, 2007 and increased 22% to $17.6 million during the nine months ended September 30, 2008 from $14.4 million during the nine months ended September 30, 2007.
We have derived an increasing percentage of our revenues from our bundled services and we expect this trend to continue. Because of our local networks and existing fixed infrastructure, we believe we can continue to grow our business within the markets in which we currently operate.
In addition, we have leveraged our retail metro network build-out with the 2003 acquisition of a long haul fiber optic network primarily located in Texas, to allow us to provide broadband transport services to medium and large enterprises and communications carriers. Operating revenues for broadband transport services were $2.4$2.6 million and $3.9$3.1 million for the three months ended September 30, 2007March 31, 2008 and 2008, respectively, and $7.2 million and $9.3 million for the nine months ended September 30, 2007 and 2008,2009, 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 $8.0$6.2 million and $5.8$5.1 million for the three months ended September 30, 2007March 31, 2008 and 2008, respectively, and $24.9 million and $19.3 million for the nine months ended September 30, 2007 and 2008,2009, respectively.
Our network services are primarily provided using our existing infrastructure and personnel with minimal incremental operating costs and capital expenditures for maintenance.personnel. By leveraging our brand, communications infrastructure, voice and data volume, and personnel that predominatelypredominantly support our core retail business and its products, 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. However, we had positive Adjusted EBITDA during the past five years as well as for each of the three and nine months ended September 30, 2007 and 2008. See “Non-GAAP Financial Measures” below for a discussion of this non-GAAP measure of our operating performance as well as our use of Adjusted EBITDA.
Our financial results depend upon many factors that significantly affect our results of operations including, without limitation:
general economic conditions, including the availability of, and our ability to obtain additional funding, if necessary,
our ability to obtain 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.
On January 18, 2008, we issued a press release announcing thatAs previously announced, our board of directors hadhas authorized the Company to explore all of its strategic alternatives to enhance shareholderstockholder value. The board of directors is workingwill continue to work with the Company’s management team and its legal and financial advisors to evaluate the Company’s available alternatives. We have engaged Waller Capital Partners LLC to assist us in exploring strategic alternatives. There can be no assurance that the exploration of strategic alternatives will result in the Company adopting or approving any strategic alternative. We undertake no obligation to make any further announcements regarding the exploration of strategic alternatives unless and until a final decision is made.
We have incurred net losses for the past five years and 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 months ended March 31, 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.
Our financial results depend upon many factors that significantly affect our results of operations including, without limitation:
general economic conditions, including the availability of, and our ability to obtain additional funding, if necessary;
our ability to obtain and retain enough customers for our services to offset the costs of operating our networks;
our ability to compete effectively depends on our ability to keep pace with advances in technology and maintain high-quality services at prices generally equal to or below those charged by our competitors; and
increasing programming and other costs.
Availability of Capital
As described more fully under “Liquidity and Capital Resources” below, we expect that current principal sources of capital going forward will primarily be cash on hand and cash flow from operations. If we do not continue to increase the number of customers and the average prices received for our services, cash flow from operations will be adversely effected and cash on hand will decline. If our cash position falls below the $20 million required by the covenant set forth in the indenture between the Company and U.S. Bank National Association, as Indenture Trustee, dated March 23, 2004 (“Indenture”), we will be prohibited from making certain capital expenditures. Cash and cash equivalents at March 31, 2009 were approximately $36.8 million and were approximately $24.2 at April 30, 2009 subsequent to the interest payment on the senior notes. 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 March 31, 2010.
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, apartment unitsapartments and condominium units, passed by our networks. As of September 30, 2007March 31, 2008 and 2008,2009, our networks passed 339,678340,554 and 340,048340,999 marketable homes, respectively, and we had 144,889147,267 and 146,513146,433 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 September 30, 2007March 31, 2008 and 2008,2009, we had 306,070315,483 and 317,751317,778 connections, respectively.
Operating Data —Bundled Services
| | | Quarter Ended | | | Quarter Ended | |
| | | September 30, 2007 | | | December 31, 2007 | | | March31, 2008 | | | June 30, 2008 | | | September 30, 2008 | | | March 31, 2008 | | | June 30, 2008 | | | September 30, 2008 | | | December 31, 2008 | | | March 31, 2009 | |
| Operating Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marketable homes passed | | 339,678 | | | 340,058 | | | 340,554 | | | 340,443 | | | 340,048 | | | | 340,554 | | | | 340,443 | | | | 340,048 | | | | 340,681 | | | | 340,999 | |
| Customers | | 144,889 | | | 145,675 | | | 147,267 | | | 146,265 | | | 146,513 | | | | 147,267 | | | | 146,265 | | | | 146,513 | | | | 146,210 | | | | 146,433 | |
| Number of connections: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Video | | 98,047 | | | 99,453 | | | 101,481 | | | 100,578 | | | 101,673 | | | | 101,481 | | | | 100,578 | | | | 101,673 | | | | 101,864 | | | | 101,744 | |
| Voice | | 114,670 | | | 114,303 | | | 115,635 | | | 115,095 | | | 115,078 | | | | 115,635 | | | | 115,095 | | | | 115,078 | | | | 114,512 | | | | 113,208 | |
| HSD and other | | 93,353 | | | | 95,125 | | | | 98,367 | | | | 99,099 | | | | 101,000 | | | | 98,367 | | | | 99,099 | | | | 101,000 | | | | 101,502 | | | | 102,826 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total connections | | | 306,070 | | | | 308,881 | | | | 315,483 | | | | 314,772 | | | | 317,751 | | | | 315,483 | | | | 314,772 | | | | 317,751 | | | | 317,878 | | | | 317,778 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Average monthly revenue per: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer – bundled services | | $ | 91.12 | | | $ | 90.64 | | | $ | 93.49 | | | $ | 95.43 | | | $ | 96.22 | | | $ | 93.49 | | | $ | 95.43 | | | $ | 96.22 | | | $ | 98.09 | | | $ | 99.34 | |
| Video connection | | 54.80 | | | 55.78 | | | 57.81 | | | 58.31 | | | 57.45 | | | | 57.81 | | | | 58.31 | | | | 57.45 | | | | 58.16 | | | | 60.49 | |
| Voice connection | | 40.88 | | | 40.34 | | | 40.60 | | | 40.85 | | | 41.38 | | | | 40.60 | | | | 40.85 | | | | 41.38 | | | | 41.15 | | | | 40.58 | |
| HSD and other connection | | 31.58 | | | 32.27 | | | 33.31 | | | 34.46 | | | 35.11 | | | | 33.31 | | | | 34.46 | | | | 35.11 | | | | 36.65 | | | | 36.80 | |
Results of Operations (in millions)
| | | Three Months Ended March 31, | |
| | | 2008 | | | Percent of Operating Revenues | | | 2009 | | | Percent of Operating Revenues | | | 2008 to 2009 Variance | |
| Consolidated Financial Data: | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | |
| Video | | $ | 17.4 | | | | 35 | % | | $ | 18.4 | | | | 35 | % | | $ | 1.0 | |
| Voice | | | 14.0 | | | | 28 | | | | 13.9 | | | | 27 | | | | (0.1 | ) |
| HSD and other | | | 9.7 | | | | 19 | | | | 11.3 | | | | 22 | | | | 1.6 | |
| Bundled services | | | 41.1 | | | | 82 | | | | 43.6 | | | | 84 | | | | 2.5 | |
| Broadband transport services | | | 2.6 | | | | 5 | | | | 3.1 | | | | 6 | | | | 0.5 | |
| Network services | | | 6.2 | | | | 13 | | | | 5.1 | | | | 10 | | | | (1.1 | ) |
| Total operating revenues | | | 49.9 | | | | 100 | | | | 51.8 | | | | 100 | | | | 1.9 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues (excluding depreciation and amortization) | | | 16.9 | | | | 34 | | | | 18.2 | | | | 35 | | | | 1.3 | |
| Selling, general and administrative | | | 22.8 | | | | 46 | | | | 20.9 | | | | 40 | | | | (1.9 | ) |
| Provision for doubtful accounts | | | 0.6 | | | | 1 | | | | 0.6 | | | | 1 | | | | — | |
| Depreciation and amortization | | | 14.7 | | | | 29 | | | | 15.5 | | | | 30 | | | | 0.8 | |
| Total operating expenses | | | 55.0 | | | | 110 | | | | 55.2 | | | | 106 | | | | 0.2 | |
| Operating loss | | | (5.1 | ) | | | (10 | ) | | | (3.4 | ) | | | (6 | ) | | | 1.7 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 0.3 | | | | 1 | | | | — | | | | — | | | | (0.3 | ) |
| Interest expense, net of capitalized interest | | | (7.8 | ) | | | (16 | ) | | | (7.9 | ) | | | (15 | ) | | | (0.1 | ) |
| Net gain on sale/disposal of assets | | | 0.1 | | | | — | | | | 0.1 | | | | — | | | | — | |
| Other expense | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total other income (expense) | | | (7.4 | ) | | | (15 | ) | | | (7.8 | ) | | | (15 | ) | | | (0.4 | ) |
| Loss before income tax expense | | | (12.5 | ) | | | (25 | ) | | | (11.2 | ) | | | (21 | ) | | | 1.3 | |
| Income tax expense | | | (0.3 | ) | | | (1 | ) | | | (0.3 | ) | | | (1 | ) | | | — | |
| Net loss | | $ | (12.8 | ) | | | (26 | )% | | $ | (11.5 | ) | | | (22 | )% | | $ | 1.3 | |
Results of Operations (dollars in millions)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2007 | | | Percent of Operating Revenues | | | 2008 | | | Percent of Operating Revenues | | | Variance | | | 2007 | | | Percent of Operating Revenues | | | 2008 | | | Percent of Operating Revenues | | | Variance | |
| Consolidated Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Video | | $ | 16.0 | | | | 32 | % | | $ | 17.4 | | | | 33 | % | | $ | 1.4 | | | $ | 47.6 | | | | 32 | % | | $ | 52.5 | | | | 34 | % | | $ | 4.9 | |
| Voice | | | 14.2 | | | | 29 | | | | 14.3 | | | | 28 | | | | 0.1 | | | | 42.3 | | | | 29 | | | | 42.4 | | | | 27 | | | | 0.1 | |
| HSD and other | | | 8.7 | | | | 18 | | | | 10.5 | | | | 20 | | | | 1.8 | | | | 25.6 | | | | 17 | | | | 30.4 | | | | 20 | | | | 4.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bundled services | | | 38.9 | | | | 79 | | | | 42.2 | | | | 81 | | | | 3.3 | | | | 115.5 | | | | 78 | | | | 125.3 | | | | 81 | | | | 9.8 | |
| Broadband transport services | | | 2.4 | | | | 5 | | | | 3.9 | | | | 8 | | | | 1.5 | | | | 7.2 | | | | 5 | | | | 9.3 | | | | 6 | | | | 2.1 | |
| Network services | | | 8.0 | | | | 16 | | | | 5.8 | | | | 11 | | | | (2.2 | ) | | | 24.9 | | | | 17 | | | | 19.3 | | | | 13 | | | | (5.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating revenues | | | 49.3 | | | | 100 | | | | 51.9 | | | | 100 | | | | 2.6 | | | | 147.6 | | | | 100 | | | | 153.9 | | | | 100 | | | | 6.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues | | | 16.9 | | | | 34 | | | | 17.8 | | | | 34 | | | | 0.9 | | | | 51.0 | | | | 35 | | | | 52.8 | | | | 34 | | | | 1.8 | |
| Selling, general and administrative | | | 22.9 | | | | 47 | | | | 24.7 | | | | 48 | | | | 1.8 | | | | 67.6 | | | | 46 | | | | 70.5 | | | | 46 | | | | 2.9 | |
| Provision for doubtful accounts | | | 0.9 | | | | 2 | | | | 0.9 | | | | 2 | | | | — | | | | 2.2 | | | | 1 | | | | 2.4 | | | | 1 | | | | 0.2 | |
| Depreciation and amortization | | | 14.9 | | | | 30 | | | | 15.7 | | | | 30 | | | | 0.8 | | | | 41.9 | | | | 28 | | | | 44.2 | | | | 29 | | | | 2.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 55.6 | | | | 113 | | | | 59.1 | | | | 114 | | | | 3.5 | | | | 162.7 | | | | 110 | | | | 169.9 | | | | 110 | | | | 7.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating loss | | | (6.3 | ) | | | (13 | ) | | | (7.2 | ) | | | (14 | ) | | | (0.9 | ) | | | (15.1 | ) | | | (10 | ) | | | (16.0 | ) | | | (10 | ) | | | (0.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 0.5 | | | | 1 | | | | 0.1 | | | | — | | | | (0.4 | ) | | | 1.2 | | | | 1 | | | | 0.6 | | | | 0.5 | | | | (0.6 | ) |
| Interest expense, net of capitalized interest | | | (7.7 | ) | | | (16 | ) | | | (7.7 | ) | | | (15 | ) | | | — | | | | (21.2 | ) | | | (14 | ) | | | (23.3 | ) | | | (15 | ) | | | (2.1 | ) |
| Net gain on sale of assets | | | 0.2 | | | | 1 | | | | 0.2 | | | | 1 | | | | — | | | | 0.5 | | | | — | | | | 0.7 | | | | 0.5 | | | | 0.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total other income (expense) | | | (7.0 | ) | | | (14 | ) | | | (7.4 | ) | | | (14 | ) | | | (0.4 | ) | | | (19.5 | ) | | | (13 | ) | | | (22.0 | ) | | | (14 | ) | | | (2.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss before income tax expense | | | (13.3 | ) | | | (27 | ) | | | (14.6 | ) | | | (28 | ) | | | (1.3 | ) | | | (34.6 | ) | | | (23 | ) | | | (38.0 | ) | | | (24 | ) | | | (3.4 | ) |
| Income tax expense | | | (0.3 | ) | | | (1 | ) | | | (0.3 | ) | | | (1 | ) | | | — | | | | (0.8 | ) | | | (1 | ) | | | (0.8 | ) | | | (1 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (13.6 | ) | | | (28 | )% | | $ | (14.9 | ) | | | (29 | )% | | $ | (1.3 | ) | | $ | (35.4 | ) | | | (24 | )% | | $ | (38.8 | ) | | | (25 | )% | | $ | (3.4 | ) |
Operating Revenues. OperatingOur operating revenues increased $2.6$1.9 million, or 5%4%, during the three months ended September 30, 2008 and increased $6.3 million, or 4%, during the nine months ended September 30, 2008. TheMarch 31, 2009. This increase during the three months ended September 30, 2008 was driven primarily by a $3.3$2.5 million increase in bundled services revenue and a $1.5$0.5 million increase in broadband transport services revenue, partially offset by a $2.2$1.1 million decrease in our revenues from network services.
The increase during the nine months ended September 30, 2008 was driven primarily by a $9.8 million increase in bundled services revenue and a $2.1 million increase in broadband transport services revenue, partially offset by a $5.6 million decrease in our revenues from network services.
Operating revenues for our bundled services increased $3.3$2.5 million, or 8%6%, during the three months ended September 30, 2008 and increased $9.8 million, or 8%, during the nine months ended September 30, 2008.March 31, 2009. The increased revenues from bundled services for both the reporting periods were primarily due to an increase in the average monthly revenue per connection as described below for the annual cable rate increases, an increase in average HSD rates as customers choose higher speed service offerings, and, to a 4%lesser extent a 1% growth in the number of connections, from 306,070315,483 as of September 30, 2007March 31, 2008 to 317,751317,778 as of September 30, 2008, and from the cable rate increases described below.March 31, 2009. The additional connections and revenues resulted primarily from the continued increase in penetration of existing marketable homes and businesses and to a lesser extent, sales to new marketable homes built during the period from OctoberApril 1, 20072008 through September 30, 2008.March 31, 2009.
Operating revenues for our video services increased $1.4$1.0 million, or 9%6%, during the three months ended September 30, 2008 and increased $4.9 million, or 10%, during the nine months ended September 30, 2008. During the three and nine months ended September 30, 2008, approximately 35%March 31, 2009. Approximately 69% of the $1.4$1.0 million increase and approximately 29% of the $4.9 million increase, respectively, in video revenues was due to our annual rate increase, which occurred in January 2008,2009, with the remainder due to increased connections and an increased number of customers adding premium services and advanced services, such as HD and DVR. Video services to ourrevenues from commercial business customers increased 50% toremained flat at $0.3 million during both the three months ended September 30,March 31, 2008 from $0.2 million during the three months ended September 30, 2007 and increased 50% to $0.9 million during the nine months ended September 30, 2008 from $0.6 million during the nine months ended September 30, 2007.2009.
Operating revenues for our voice services increaseddecreased $0.1 million, or 1%, during the three months ended September 30, 2008 and increased $0.1 million during the nine months ended September 30, 2008. During the three and nine months ended September 30, 2008,March 31, 2009. While we have experienced a $0.4 million and $1.1 million decrease respectively, in residential voice services to residential customersrevenue 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. However,line, our voice services torevenues from commercial business customers have increased $0.5 million, or 14%, to $4.0$4.1 million during the three months ended September 30, 2008 from $3.5March 31, 2009 compared to $3.6 million during the three months ended September 30, 2007 and increased 12% to $11.5 million during the nine months ended September 30, 2008 from $10.3 million during the nine months ended September 30, 2007.March 31, 2008.
Operating revenues for our HSD and other services increased $1.8$1.6 million, or 21%16%, during the three months ended September 30, 2008 and increased $4.8 million, or 19%, during the nine months ended September 30, 2008. During the three and nine months ended September 30, 2008, the increases in HSD and other services wereMarch 31, 2009 primarily due to a 11% and 9%10% increase in average monthly revenue per connection respectively, as customers chosechoose higher speed service offerings. Operating revenues for our HSD and other services for both reporting periods also increased due to an 8% growthofferings as well as a 5% increase in the number of connections,connections. HSD services revenues from 93,353 as of September 30, 2007 to 101,000 as of September 30, 2008. HSD and other services to our commercial business customers increased 54%$0.7 million, or 44%, to $2.0$2.3 million during the three months ended September 30, 2008 from $1.3March 31, 2009 compared to $1.6 million during the three months ended September 30, 2007 and increased 49% to $5.2 million during the nine months ended September 30, 2007 from $3.5 million during the nine months ended September 30, 2007.March 31, 2008.
Operating revenues for our broadband transport services increased $1.5$0.5 million, or 63%19%, during the three months ended September 30, 2008 and increased $2.1 million, or 29%, during the nine months ended September 30, 2008. The increased revenues from broadband transport services for both the reporting periods were theMarch 31, 2009 as a result of an increase in construction revenuevolume from existing customers as well as moderate new customer growth.
Operating revenues for our network services decreased $2.2$1.1 million, or 28%,18% during the three months ended September 30, 2008 and decreased $5.6 million, or 22%, during the nine months ended September 30, 2008.March 31, 2009. The decrease during the three and nine months ended September 30, 2008in network services revenues was primarily related to decreases in revenue from data services of $0.7 million as the result of decreases in customer volume. We’ve also experienced a $1.7$0.3 million and $4.5 million, respectively, decrease in revenue from transmission services to carriers and other telecommunications companies due to a decrease in volume, partially offset by an increase in rates per minute. Common carrier traffic routed to us for termination is largely dependent on traffic routed to our common carrier customers by their customers. Competitive pricing pressures, business consolidations, and changing consumer preferences for voice services continue to evolve in the markets served by our other 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. In addition, during the three and nine months ended September 30, 2008 we’ve also experienced a decrease of $0.4 million and $1.1 million, respectively, in revenue from data services and a decrease of $0.1 million and $0.3 million, respectively, in revenue from national directory assistance service. Decreases in both data services and national directory assistance are the result of a decrease in customer volume. The decreases in network services were partially offset by an increase of $0.3 million in managed services during the nine months ended September 30, 2008 due to an increase in customer volume.
Cost of Revenues. Our cost of revenues increased $0.9$1.3 million, or 5%,8% during the three months ended September 30, 2008 and increased $1.8 million, or 4%, during the nine months ended September 30, 2008.March 31, 2009. Cost of revenues related to video services increased approximately $1.4$1.6 million during the three monthsyear ended September 30, 2008 and increased $3.9December 31, 2008. The increases in video services costs were partially offset by a decrease of $0.2 million during the nine months ended September 30, 2008. Otherin 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 $1.0 million during the three months ended September 30, 2008 and increased $2.4 million during the nine months ended September 30, 2008. These increases incosts. Other costs of revenues were partially offset by decreases inthat decreased $0.1 million related to costs associated with transmission services to carriers and other telecommunications companies and national directory assistance fees, which decreased $1.5 million during the three months ended September 30, 2008 and decreased $4.5 million during the nine months ended September 30, 2008.fees. 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 connections and on a per connection basis due to an increase in costs per channel.channel, 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 decrease or increase in access and other carrier fees related towere associated with costs that are variable usage-based costs, thatwhich increase or decrease or increase as customer usage varies.
Selling, General and Administrative (“SG&A”) Expense. Our selling, general and administrativeSG&A expense increased $1.8decreased $1.9 million, or 8%, during the three months ended September 30, 2007 and 2008, respectively, and increased $2.9 million, or 4%, during the nine months ended September 30, 2007 and 2008, respectively. IncludedMarch 31, 2009. SG&A expense decreased as a percentage of revenues from 46% to 40%. Decreases in selling, general and administrative expenses during the three and nine months ended September 30, 2008 are non-recurring expenses of $0.7 million and $1.5 million, respectively, incurred in association with the exploration of strategic alternatives to enhance shareholder value. Other increases in selling, general and administrativeSG&A expense during the three months ended September 30, 2008 related to sales and marketing, as well as a reduction in the amount of indirect overhead costs capitalized to construction projects, increases in employee commissions related to revenue initiatives,compensation, employee health carebenefits (primarily healthcare costs and other miscellaneous expenses that totaled approximately $2.2 million but such increases were partially offset by decreases in401k matching contributions), network repairs and maintenance, legal and other professional services, excluding the strategic exploration costs discussed above,software licensing fees, sales and marketing expenses, and other miscellaneous expenses that totaleddecreased a total of approximately $1.1$2.1 million. Other increasesThese decreases in selling, general and administrativeSG&A expense during the nine months ended September 30, 2008 related to increases in employee commissions related to revenue initiatives, employee healthcare costs, software licensing and warranty fees, as well as a reduction in the amount of indirect overhead costs capitalized to construction projects, and other miscellaneous expenses that totaled approximately $3.2 million but such increases were partially offset by decreasesan increase in legal and other professional services, excluding the strategic exploration costs discussed above, network repairs and maintenance, sales and marketing, non-cash compensation expense, employee travel, general insurance, property taxes and other miscellaneous expenses, that totaledwhich increased a total of approximately $1.8$0.2 million. During the three months ended March 31, 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 months ended March 31, 2009.
For the year ending December 31, 2008, weWe expect our selling, general and administrativeSG&A expense excluding the strategic exploration costs discussed above, to decrease as a percentage of revenue during the year ending December 31, 2009 as compared to the year ended December 31, 20072008 as we continue to focus on cost reductions and gain efficiencies.reductions.
Depreciation and Amortization Expense. Expense. Our depreciation and amortization expense increased $0.8 million, or 5%, during the three months ended September 30, 2008 and increased $2.3 million, or 5%, during the nine months ended September 30, 2008.March 31, 2009. The increase during the three and nine months ended September 30, 2008is related to capital lease transactions primarily associated with customer premise equipment and property, plant and equipment additions during the period from OctoberApril 1, 20072008 through September 30, 2008, primarily for customer premise equipment, long haul fiber optic network upgrades and capitalized labor expenses.March 31, 2009. Partially offsetting the increasesincrease 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 OctoberApril 1, 20072008 through September 30, 2008.March 31, 2009.
During the first quarter of 2007 and the second quarter of 2008, we received sales tax refunds as a result of a review of vendor invoices in the years 2004, 2005 and 2006. Because a portion of the sales taxes associated with those invoices were capitalized as property and equipment and were partially depreciated, $0.7 million and $0.2 million of the refund was applied as a reduction of depreciation expense, during the first quarter of 2007 and the second quarter of 2008, respectively.
Interest Expense. Interest expense, which includes interest incurred net of capitalized interest, remained flat at $7.7 million during both the three months ended September 30, 2007 and 2008 and increased $2.1 million, or 10%, during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. Our interest expense increased primarily due to the private placement of an additional $25.0 million of senior notes in the third quarter of 2007.
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.expense and other expense (income). EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We believe EBITDA and Adjusted EBITDA are often a useful measure of a company’s operating performance and isthat they are a significant basis used byfor our management to measureuse 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 inof 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.
We believe non-cash stock-based compensation is similar to amortization and interest expense, in that it is more useful to report EBITDA net of this amount to better measure operating performance in comparison to prior periods. However, because of the nature of these charges, we refer to EBITDA, net of non-cash stock-based compensation charges as “Adjusted EBITDA.”
Adjusted EBITDA decreased $0.2increased $2.5 million, or 2%26%, during the three months ended September 30, 2008 and increased $1.5 million, or 5%, during the nine months ended September 30, 2008.March 31, 2009. The decrease in Adjusted EBITDA during the three months ended September 30, 2008 was primarily due to $0.7 million of non-recurring expenses incurred in association with the exploration of strategic alternatives to enhance shareholder value, a $1.2 million increase in selling, general and administrative expenses, excluding stock-based compensation and strategic exploration costs, as well as a $0.9 million increase in costs of revenue, partially offset by a $2.6 million increase in operating revenues. The increase in Adjusted EBITDA during the nine months ended September 30, 2008 was primarily due to a $6.3$1.9 million increase in operating revenues as well as a $0.2combined decrease in provision for doubtful accounts and SG&A expense of approximately $1.9 million, increase in net gain on sale of assets,excluding stock-based compensation, partially offset by $1.5 million of non-recurring expenses incurred in association with the exploration of strategic alternatives to enhance shareholder value, a $1.7 million increase in selling, general and administrative expenses, excluding stock-based compensation and strategic exploration costs, and a $1.8$1.3 million increase in costs of revenues.
The reconciliation of EBITDA/Adjusted EBITDA to net loss is as follows:
| | | Three Months Ended March 31, | |
| | | 2008 | | | 2009 | |
| | | (in thousands) | |
| Net loss, as reported | | $ | (12,764 | ) | | $ | (11,447 | ) |
| Add back non-EBITDA/Adjusted EBITDA items included in net loss: | | | | | | | | |
| Interest income | | | (329 | ) | | | (18 | ) |
| Interest expense, net of capitalized interest | | | 7,792 | | | | 7,891 | |
| Income tax expense | | | 279 | | | | 292 | |
| Depreciation and amortization | | | 14,669 | | | | 15,492 | |
| EBITDA | | | 9,647 | | | | 12,210 | |
| Non-cash compensation expense | | | 113 | | | | 71 | |
| Other expense | | | — | | | | 12 | |
| Adjusted EBITDA | | $ | 9,760 | | | $ | 12,293 | |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2007 | | | 2008 | | | 2007 | | | 2008 | |
| | | (in thousands) | | | (in thousands) | |
| Net loss as reported | | $ | (13,637 | ) | | $ | (14,861 | ) | | $ | (35,431 | ) | | $ | (38,819 | ) |
| Add back non-EBITDA/Adjusted EBITDA items included in net loss: | | | | | | | | | | | | | | | | |
| Interest income | | | (539 | ) | | | (125 | ) | | | (1,244 | ) | | | (620 | ) |
| Interest expense, net of capitalized interest | | | 7,795 | | | | 7,738 | | | | 21,229 | | | | 23,300 | |
| Income tax expense | | | 281 | | | | 277 | | | | 841 | | | | 847 | |
| Depreciation and amortization | | | 14,946 | | | | 15,683 | | | | 41,843 | | | | 44,221 | |
| | | | | | | | | | | | | | | | | |
| EBITDA (1) | | | 8,846 | | | | 8,712 | | | | 27,238 | | | | 28,929 | |
| Non-cash compensation expense | | | 129 | | | | 92 | | | | 499 | | | | 299 | |
| | | | | | | | | | | | | | | | | |
| Adjusted EBITDA (1) | | $ | 8,975 | | | $ | 8,804 | | | $ | 27,737 | | | $ | 29,228 | |
(1) EBITDA and Adjusted EBITDA includes a net gain on sale of assets of $0.2 million during both the three months ended September 30, 2007 and 2008 and $0.5 million and $0.7 million during the nine months ended September 30, 2007 and 2008, respectively. Also included are non-recurring expenses of $0.7 million and $1.5 million during the three and nine months ended September 30, 2008, respectively, incurred in association with the exploration of strategic alternatives to enhance shareholder value.
Liquidity and Capital Resources
Sources and Uses of Funds
Since inception, we have been funded primarily with private equity investments and issuancesissuance of debt securities. Our current primary sources of liquidity are cash on hand and cash flows from operating activities.
As of September 30, 2008,March 31, 2009, we had total cash and cash equivalents of $37.5$36.8 million and $206 million of long-term debt and capital lease obligations of $211.9 million outstanding, including the current portion, and net of discounts and premiums of $4.0$3.4 million. In October 2008,On April 1, 2009, we paid $13.5 million of interest due on our senior notes.
As of September 30, 2008, we had net working capital of $1.2 million, compared to net working capital of $19.8 million as of December 31, 2007. The $18.6 million decrease in working capital resulted primarily from a $10.8 million decrease in current assets primarily due to the $13.5 million interest payment in April 2008 on our14% senior notes as well as a $7.8 million net increase in current liabilities, including the $6.8 million increase in accrued interest payable.due April 1, 2011 (“senior notes”).
Provided that we meet our cash flow projections in our current business plan and current economic market conditions do not continue to deteriorate as described under Part II, Item 1A. “Riskcaption “Item 1A Risk Factors” below,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 September 30, 2009. We believe thatMarch 31, 2010. As of March 31, 2009, we will not require additional financinghad a net working capital deficit of $(3.6) million, compared to a net working capital deficit of $(3.3) million as of December 31, 2008. The $0.3 million decrease in working capital resulted primarily from an $8.7 million increase in accrued interest payable on our senior notes and that we will manage our cash position above $20 million in accordance with the covenant set forthan increase in the Indenture over the next twelve months through September 30, 2009. current portion of capital lease obligations partially offset by a $9.2 million increase in current assets.
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 March 31, 2009 were approximately $36.8 million and were approximately $24.2 at April 30, 2009 subsequent to the interest payment on the senior notes.
Our current business plan is based on our estimates regarding expected future costs and expected revenues. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds, which would require us to consider asset sales or seek additional financing to fund our operations, to undertake initiatives not contemplated by our business plan or obtain additional cushion against possible shortfalls. Future financings may include a range of different sizes or types of financing, including capital lease transactions and the sale of additional debt or equity securities. These financings could increase our level of indebtedness or result in dilution to our equity holders. Additionally, we can call our existing senior notes at any time giving us the near term ability to refinance our bondssenior 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. Our ability to obtain additional financing depends on several factors, includingincluding: future market conditions and the state of the credit markets; our success or lack of success in penetrating our markets and growing our overall income; our future creditworthiness; and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the Indenture.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $14.2 million and $16.6 million forconsisted of the nine months ended September 30, 2007 and 2008, respectively. following components:
| | | Three Months ended March 31, |
| | | 2008 | | | 2009 |
| | | (in thousands) |
| Cash collected from customers | | $ | 51,620 | | | $ | 52,565 | |
| Interest income received | | | 329 | | | | 18 | |
| Payments to vendors and employees | | | (42,877 | ) | | | (39,003 | ) |
| Interest expense paid | | | (475 | ) | | | (526 | ) |
| Net cash provided by operating activities | | $ | 8,597 | | | $ | 13,054 | |
The $2.4 million increase in net cash provided by operating activities primarily reflects a $9.4 million increase in cash collected from customers as well as a $0.5 millionis due to the increase in proceeds from sales tax refunds attributed to operating activities. These increases in net cash provided by operating activities were partially offset by a $3.8 million increaserevenues and timing of collections. The decrease in payments to vendors and employees a $1.9 millionis the result of the decrease in SG&A expenses requiring cash outlays and the timing of cash payments partially offset by the increase in interest expense paid, a $1.1 million increase in income taxes paid, as well as a $0.7 million decrease in interest income received. The net cash flow activity related to operations consisted primarilycost of our operating results adjusted by changes in operating assets and liabilities and non-cash transactions including:revenues.
depreciation, amortization and accretion expense;
non-cash compensation expense;
non-cash interest expense;
provision for doubtful accounts; and
(gain) loss on sale/disposal of assets.
Cash Flows from Investing Activities
Our netNet cash used in investing activities forconsisted of the ninefollowing components:
| | | Three Months ended March 31, |
| | | 2008 | | | 2009 |
| | | (in thousands) |
| Purchases of property, plant and equipment | | $ | (8,545 | ) | | $ | (5,457 | ) |
| Proceeds from sale of assets | | | 84 | | | | 136 | |
| Net cash used in investing activities | | $ | (8,461 | ) | | $ | (5,321 | ) |
The decrease in capital expenditures during the three months ended September 30, 2007March 31, 2009 primarily related to a reduction in purchases of customer premise equipment and 2008 was $25.5 million and $22.5 million, respectively, and consisted primarilynetwork equipment. See “Capital Expenditures” below for a more detailed discussion of $27.2 million and $23.2 million in property, plant and equipment purchases, respectively, discussed below, partially offset by $1.1 million and $0.3 million of proceeds, respectively, from sales tax refunds applicable to capital assets and $0.6 million and $0.3 million of proceeds from sale of assets, respectively.expenditures.
Cash Flows from Financing Activities
Our cash flows from financing activities for the nine months ended September 30, 2007 and 2008 was $26.1 millionNet cash provided by financing activities and $4.8 million cash used in financing activities, respectively. Cash provided by(used in) financing activities consisted of $30.1the following components:
| | | Three Months ended March 31, |
| | | 2008 | | | 2009 |
| | | (in thousands) |
| Proceeds from sale leaseback arrangement | | $ | — | | | $ | 4,532 | |
| Payments of long-term debt and capital lease obligations | | | (1,259 | ) | | | (1,850 | ) |
| Net borrowings (repayments) on zero-balance cash account | | | (533 | ) | | | (594 | ) |
| Other financing activity | | | 5 | | | | — | |
| Net cash provided by (used in) financing activities | | $ | (1,787 | ) | | $ | 2,088 | |
During January 2009, the Company sold various customer premise equipment for $4.5 million proceeds from borrowings duringcash. Concurrent with the nine months ended September 30, 2007. Cash used in financing activitiessale, the Company leased the customer premise equipment back for the nine months ended September 30, 2007 and 2008 consisteda period of $3.1 million and $3.9 million in payments on long-term debt and capital leases, respectively, as well as $0.7 million and $0.9 million net repayments, respectively, on zero-balance bank cash accounts.two years at a monthly rental of $0.2 million.
Capital Expenditures
We had capital expenditures of approximately $27.2$8.5 million and $23.2$5.5 million, including capitalized interest, during the ninethree months ended September 30, 2007March 31, 2008 and 2008,2009, respectively. These capital expenditures relate to: network construction; initial installation costs; the purchase of customer premise equipment, such as cable set-top boxes and cable modems; corporate and network equipment, such as switching and transport equipment; and billing and information systems. The decrease in capital expenditures during the three months ended March 31, 2009 primarily related to a reduction in purchases of customer premise equipment 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. We anticipate spending approximately $31 million, excluding capitalized interest, in capital expenditures duringDuring the year ending December 31, 2008.2009, the Company intends to manage its capital expenditures in accordance with the covenant set forth in the Indenture to ensure that cash is not less than $20 million.
Contractual Obligations and Commercial Commitments
During the ninethree months ended September 30, 2008,March 31, 2009, our aggregate contractual obligations decreased approximately $20.9$2.5 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, 2007,2008, primarily as a result of $13.5 million interest payment on the senior notes and $8.9$3.6 million in payments on equipment financing, capital and operating leases and maintenance and purchase obligations. These payments areobligations partially offset by increases in obligations of $1.5$6.1 million primarily related to a new customer premise equipment capital lease and vehicle operating leases,and office equipment operating leases and computer capital 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, the CompanyGrande Communications Holdings, Inc. (“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, weHoldings 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 our subsidiary’sthe Subsidiary Guarantor’s property and assets, including substantially all of its property, plant and equipment.
The senior notes may be redeemed, at ourHoldings 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 | % |
| April 1, | | Percentage |
| 2008 | 107.00% |
| 2009 | 103.50% |
| 2010 and thereafter | 100.00% |
If we experienceHoldings experiences specific kinds of change of control events, each holder of senior notes may require usHoldings to repurchase all or any portion of such holder’s senior notes at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest to the date of repurchase.
| The Indenture contains covenants that, among other things, limit our ability to: |
incur additional indebtedness, issue disqualified capital stock (as defined in the Indenture) and, in the case of our restricted subsidiaries, issue preferred stock;
create liens on our assets;
pay dividends on, redeem or repurchase our capital stock or make other restricted payments;
make investments in other companies;
enter into transactions with affiliates;
enter into sale and leaseback transactions;
sell or make dispositions of assets;
place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; and
engage in certain business activities.
In addition, the Indenture contains a covenant restricting certain capital expenditures if such expenditures would result in us having less than $20 million in cash and cash equivalents after giving effect to such expenditures. This covenant could adversely affect our ability to make planned capital expenditures.
The Indenture also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness and material judgments and liabilities.
During 2007, we completed equipment financing of $4.1 million with a term of 24 months which was utilized for the purchase of network equipment. During December 2008, the term of the equipment financing was extended 12 months through March 2010. The financing is secured by the network equipment purchased with the proceeds of the borrowing and bears interest at an effective annual rate of approximately 15.3% with monthly payments equal to 4.2% multiplied by the total amount borrowed. This financing is permitted under the Indenture governing the senior notes.
Capital Leases. We lease office and facilities space under leasing arrangements. We also have certain capital leases for customer premise equipment, telecom switching equipment, software, computers and office equipment.
Operating Leases. We lease office space, vehicles and other assets for varying periods. Leases that expire are evaluated for renewal based on operational necessity.
Maintenance Agreements. We have numerous agreements for the maintenance of leased fiber optic capacity.
Purchase Commitments. During January 2005, we entered into a minimum purchase agreement, as amended, with a vendor for the purchase of fiber optic equipment and installation and maintenance services through January 2008. During March 2008, we entered into Amendment No. 1 to the minimum purchase agreement extending the term of the purchase commitment through December 31, 2008.2009. 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 March 31, 2009 was $2.2 million.
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, 2007.2008.
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, 2007.2008.
Recent Accounting Pronouncements
ReferIn April 2009, the Financial Accounting Standards Board (“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 “Recent Accounting Pronouncements” includedrequire an entity to provide disclosures about fair value of financial instruments in Management’sinterim 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. This Statement does not impact the consolidated financial results as it is disclosure-only in nature. The Company will include the required disclosures in its quarter ending June 30, 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.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”. Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No. 141, “Business Combinations” which was superseded by SFAS No. 141(R) (see previous paragraph). The FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. This FSP was adopted effective 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.
In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets”. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the consolidated financial statements.
In November 2008, the FASB ratified EITF Issue 08-7, “Accounting for Defensive Intangible Assets”. A defensive intangible asset is an asset acquired in a business combination or in an asset acquisition that an entity does not intend to actively use. According to the guidance, defensive intangible assets are considered to be a separate unit of account and valued based on their highest and best use from the perspective of an external market participant. The company adopted EITF 08-7 on January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of the business combinations subject to this statement.
Also refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of OperationOperation” under the caption “Recent Accounting Pronouncements” included in our Annual Report on Form 10-K for the year ended December 31, 2007.2008.
| QUANTITATIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposureThere have been no significant changes to our market risk relates primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed income securities. We invest only with high credit quality issuers and we do not use derivative financial instruments in our investment portfolio. We do not believe that a significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.since December 31, 2008.
| CONTROLSCONTROLS 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 Securities Exchange Act of 1934)Act) as of September 30, 2008.March 31, 2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2008,March 31, 2009, our disclosure controls and procedures are effective in timely alerting themeffective. Disclosure controls and procedures are controls and other procedures that are designed to materialensure that information relating to Grande required to be includeddisclosed in this reportour reports filed under the Exchange Act, is recorded, processed, summarized and reported, within the othertime 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 we file or submitare filed under the Securities Exchange Act, of 1934.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 September 30, 2008,March 31, 2009, there werewas no changeschange in our internal control over financial reporting that havehas materially affected, or that areis reasonably likely to materially affect, our internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures and internal controlscontrol 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.
OTHER INFORMATION
We are subject to litigation in the normal course of our business. However, there are no pending proceedings thatwhich are currently anticipated to have a material adverse effect on our business, financial condition or results of operations.
Except for the risk factor set forth below, thereThere 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, 2007.2008.
The current turmoil | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
| DEFAULTS UPON SENIOR SECURITIES |
None
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Certain matters that were submitted to a vote of security holders during the first quarter of 2009 were previously disclosed in the credit markets and poor economic conditions could negatively impact our business by squeezing demand for our products and the availabilityPart I, Item 4 “Submission of capital and increasing our costMatters to a Vote of credit.
The current turmoilSecurity Holders” included in the credit markets could limit demand for our products, and affect the overall availability and cost of credit. Our operations are affected by local and national economic conditions, which have recently deteriorated significantly and may remain depressed for the foreseeable future. The consequences of a prolonged recession may include a lower level of economic activity and changes in demand for the services we provide in our markets, which may adversely affect our revenues, liquidity and future growth. Current economic conditions may be exacerbated by insufficient financial sector liquidity leading to potential increased unemployment, which may impact our customers’ ability to pay timely, increase customer bankruptcies, and may lead to increased bad debt. It is expected that commercial and wholesale customers will be impacted first with residential customers following, if such circumstances occur. Customer collections are our primary source of cash. While we believe we have a diversified customer base and no concentration of credit risk with any single customer, if the current market conditions continue to deteriorate we may experience increased churn in our customer base, which could also have a material adverse effect on our liquidity.
Instability in the financial markets, as a result of recession or otherwise, also may affect the cost of capital and our ability to raise capital, which are discussed in greater detail in the Risks Relating to Our Business risk section in ourGrande’s Annual Report on Form 10-K for the year ended December 31, 2007. At this time, it is unclear whether and to what extent the actions taken by the U.S. government, including, without limitation, the passage of the Emergency Economic Stabilization Act of 2008 and other measures currently being implemented or contemplated, will mitigate the effects of the crisis. While we have no immediate need to access the credit markets, the impact of the current crisis on our ability to obtain financing in the future, and the cost and terms of same, is unclear. No assurances can be given that the effects of the current crisis will not have a material adverse effect on our business, financial condition and results of operations.2008.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the three months ended September 30, 2008, we issued 12,000 shares of common stock in connection with the exercise of options with a weighted average exercise price of $0.05 per share and awarded options to purchase 249,000 shares of common stock with an exercise price of $0.05 per share. We relied on the exemption set forth in Section 4(2) of the Securities Act of 1933 in issuing these securities.None
| DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters submitted to a vote of security holders of Grande during the three months ended September 30, 2008.
None
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). |
ExhibitNo. | | Description |
| | | |
| 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). |
| | | |
| | SeparationAmendment No. 2 to Purchase and License Agreement by and Full and Final Release of Claims between Grande Communications Networks, Inc. and Jeffrey A. BrennanNortel Networks, Inc., dated August 15, 2008.as of April 3, 2009. |
| | | |
| | Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) promulgated under the Securities Exchange Act of 1934, as amended.Act. |
| | | |
| | Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) promulgated under the Securities Exchange Act of 1934, as amended.Act. |
| | | |
| | Certification pursuant to Rule 13a – 14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350. |
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: November 10, 2008 | May 14, 2009 | By: | /s/ MICHAELMICHAEL L. WILFLEY WILFLEY |
| | | Michael L. Wilfley |
| | | | Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |
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