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 March 31, 2004
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
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 ¨ No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Outstanding at March 31, 2004 | ||
| Common Stock, $.001 par value |
12,816,367 |
Explanatory Note
Grande Communications Holdings, Inc. does not have any class of equity securities registered under the Securities Exchange Act of 1934 and files periodic reports with the Securities and Exchange Commission pursuant to contractual obligations with third parties.
Grande Communications Holdings, Inc.
Index
| Page No. | ||||
| Part I. |
Financial Information | 3 | ||
| Item 1. Financial Statements | 3 | |||
| Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 |
3 | |||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
7 | |||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 18 | |||
| Item 4. Controls and Procedures | 18 | |||
| Part II |
Other Information | 19 | ||
| Item 1. Legal Proceedings | 19 | |||
| Item 2. Changes in Securities and Use of Proceeds | 19 | |||
| Item 4. Submission of Matters to a Vote of Security Holders | 19 | |||
| Item 5. Other Information | ||||
| Item 6. Exhibits and Reports on Form 8-K | 19 | |||
| 21 | ||||
2
FINANCIAL INFORMATION
GRANDE COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, 2003 |
March 31, 2004 |
|||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 42,246 | $ | 87,464 | ||||
| Accounts receivable, net |
16,825 | 16,525 | ||||||
| Prepaid expenses and other current assets |
5,967 | 3,797 | ||||||
| Total current assets |
65,038 | 107,786 | ||||||
| Property and equipment, net |
298,197 | 298,063 | ||||||
| Goodwill |
134,983 | 134,954 | ||||||
| Other intangible assets, net |
10,463 | 9,181 | ||||||
| Other assets |
8,010 | 14,611 | ||||||
| Total assets |
$ | 516,691 | $ | 564,595 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 14,947 | $ | 10,823 | ||||
| Accrued expenses |
15,794 | 12,920 | ||||||
| Note payable |
63 | 21 | ||||||
| Deferred revenue |
4,263 | 4,262 | ||||||
| Current portion of capital lease obligations |
429 | 436 | ||||||
| Total current liabilities |
35,496 | 28,462 | ||||||
| Deferred revenue |
4,443 | 4,397 | ||||||
| Capital lease obligations, net of current portion |
12,723 | 12,639 | ||||||
| Long term debt |
61,859 | 127,610 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, issued and outstanding; liquidation preference of $232,618 |
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 |
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 |
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 $149,108 |
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 $19,998 |
8 | 8 | ||||||
| Series F preferred stock, $0.001 par value per share; 12,307,692 shares authorized, 11,758,278 shares issued and outstanding; liquidation preference of $15,286 |
12 | 12 | ||||||
| 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 $135,000 |
35 | 35 | ||||||
| Common stock, $0.001 par value per share; 786,835,883 and 786,835,883 shares authorized, 12,309,087 and 12,816,367 shares issued and outstanding, at December 31, 2003 and March 31, 2004, respectively |
12 | 13 | ||||||
| Additional paid-in capital |
505,497 | 508,243 | ||||||
| Treasury stock, at cost |
(5 | ) | (5 | ) | ||||
| Accumulated deficit |
(103,775 | ) | (117,205 | ) | ||||
| Total stockholders’ equity |
402,170 | 391,487 | ||||||
| Total liabilities and stockholders’ equity |
$ | 516,691 | $ | 564,595 | ||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
GRANDE COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
| For the quarters ended March 31, |
||||||||
| 2003 |
2004 |
|||||||
| Operating revenues |
$ | 43,339 | $ | 41,687 | ||||
| Operating expenses: |
||||||||
| Direct costs |
20,500 | 16,430 | ||||||
| Selling, general and administrative |
18,711 | 22,631 | ||||||
| Depreciation and amortization |
12,096 | 12,715 | ||||||
| Total operating expenses |
51,307 | 51,776 | ||||||
| Operating loss |
(7,968 | ) | (10,089 | ) | ||||
| Other income (expense): |
||||||||
| Interest income |
40 | 65 | ||||||
| Interest expense |
(356 | ) | (1,277 | ) | ||||
| Gain/(loss) on disposal of assets |
(2 | ) | 16 | |||||
| Loss on extinguishment of debt |
— | (2,145 | ) | |||||
| Total other income (expense) |
(318 | ) | (3,341 | ) | ||||
| Net loss attributable to common shareholders |
$ | (8,286 | ) | $ | (13,430 | ) | ||
| Basic and diluted net loss per share attributable to common shareholders |
$ | (0.71 | ) | $ | (1.12 | ) | ||
| Basic and diluted weighted average number of common shares outstanding |
11,677,924 | 11,971,352 | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
4
GRANDE COMMUNICATIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| For the quarters ended March 31 |
||||||||
| 2003 |
2004 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (8,286 | ) | $ | (13,430 | ) | ||
| Adjustment to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation |
11,499 | 11,383 | ||||||
| Amortization of intangible assets |
597 | 1,332 | ||||||
| Amortization of deferred financing costs |
111 | 128 | ||||||
| Provision for bad debts |
664 | 1,074 | ||||||
| Accretion of debt discount |
40 | 37 | ||||||
| Non-qualified option expense |
5 | 6 | ||||||
| Gain on sale of assets |
3 | 16 | ||||||
| Extinguishment of debt |
— | 2,145 | ||||||
| Changes in operating assets and liabilities, net of business acquisitions: |
||||||||
| Accounts receivable |
(1,321 | ) | (775 | ) | ||||
| Prepaid expenses and other current assets |
(284 | ) | (928 | ) | ||||
| Accounts payable |
(911 | ) | (4,125 | ) | ||||
| Accrued expenses |
(1,983 | ) | (2,873 | ) | ||||
| Deferred revenue |
(514 | ) | (62 | ) | ||||
| Net cash used in operating activities |
(380 | ) | (6,072 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of property, plant and equipment |
(10,434 | ) | (11,248 | ) | ||||
| Purchase of C3, net of cash acquired |
(7,271 | ) | — | |||||
| Purchase of TXU |
(950 | ) | — | |||||
| Purchase price adjustments |
258 | 38 | ||||||
| Proceeds on sale of fixed assets |
16 | — | ||||||
| Purchase of franchise rights and other |
(301 | ) | (50 | ) | ||||
| Net cash used in investing activities |
(18,682 | ) | (11,260 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from borrowings and promissory notes |
16,500 | 132,502 | ||||||
| Payments of long-term debt |
(4 | ) | (64,960 | ) | ||||
| Deferred financing costs |
(368 | ) | (5,140 | ) | ||||
| Proceeds from issuance of common stock |
3 | 137 | ||||||
| Proceeds from issuance of preferred stock, net of related offering expenses |
— | 11 | ||||||
| Net cash provided by financing activities |
16,131 | 62,550 | ||||||
| Net change in cash and cash equivalents |
(2,931 | ) | 45,218 | |||||
| Cash and cash equivalents, beginning of period |
19,658 | 42,246 | ||||||
| Cash and cash equivalents, end of period |
$ | 16,727 | $ | 87,464 | ||||
The accompanying notes are an integral part of these condensed consolidated statements.
5
GRANDE COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization & Nature of the Business
Grande Communications Holdings, Inc. and Subsidiaries (“the Company”) provides communications services to residential and commercial customers in various areas of Texas and portions of the United States. The Company delivers products such as cable television, local and long-distance telephone, high-speed data, broadband transport services, and other telephony network services.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s financial statements in Form S-4 for the year ended December 31, 2003.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2004, or any other interim period.
3. Long Term Debt
On March 23, 2004, the Company completed a private placement offering for 136,000 units each consisting of (1) $1,000 of 14% Senior Secured Notes due 2011 and (2) a warrant to purchase 100.336 shares of common stock. The units were issued with a discount to the face value of $5.8 million and the warrants were assigned a value of $2.6 million. Concurrent with the closing, we paid $64.8 million to extinguish the 2001 Credit Facility. In conjunction with this repayment, we recognized a $2.1 million loss on debt extinguishment. Concurrent with the extinguishment of the 2001 Credit Facility, we reclassified $3.2 million of cash to other long term assets as collateral for our existing letters of credit.
4. Stock-Based Compensation
During 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which defines fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value method, as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as clarified by Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation.
Entities electing to remain with the accounting methodology required by APB 25 must make pro forma disclosures of net income and, if presented, earnings per share as if the fair value based method of accounting defined in SFAS 123 had been applied.
The Company has elected to account for its employee stock-based compensation plans using the intrinsic value method under APB No. 25. The Company has computed, for pro forma disclosure purposes, the value of all options for shares of the Company’s common stock granted to employees of the Company using the Minimum Value pricing method and the following weighted-average assumptions:
| 2003 |
2004 |
|||||
| Risk-free interest rate |
3.0 | % | 3.0 | % | ||
| Expected dividend yield |
0 | % | 0 | % | ||
| Expected lives |
5 years | 5 years | ||||
| Volatility (Minimum Value Method) |
0 | % | 0 | % |
If the Company had accounted for these plans in accordance with SFAS 123, the Company’s net loss for the three months ended March 31, 2003 and 2004, would have increased as follows:
| Three months ended March 31, |
||||||||
| 2003 |
2004 |
|||||||
| Net loss, as reported |
$ | (8,286 | ) | $ | (13,430 | ) | ||
| Total stock-based employee compensation expense determined under fair value based method for all awards |
(199 | ) | (227 | ) | ||||
| Pro forma net loss |
$ | (8,485 | ) | $ | (13,657 | ) | ||
| Basic and diluted net loss per share, as reported |
$ | (0.71 | ) | $ | (1.12 | ) | ||
| Basic and diluted net loss per share, pro forma |
$ | (0.73 | ) | $ | (1.14 | ) | ||
| Basic and diluted weighted average number of common shares outstanding |
11,677,924 | 11,971,352 | ||||||
5. Contingencies
Both the FCC and the Department of Justice are conducting investigations understood to involve billing practices by MCI and related issues involving companies that terminated or otherwise may have handled traffic on behalf of MCI, including those companies participating in MCI’s Least Cost Routing Program. We bel