S-1 1 d672944ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on April 11, 2014

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Goodman Networks Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

Texas   4812   74-2949460

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

6400 International Parkway, Suite 1000

Plano, Texas 75093

(972) 406-9692

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jimmy D. Hulett, Jr.

General Counsel and Secretary

Goodman Networks Incorporated

6400 International Parkway, Suite 1000

Plano, Texas 75093

(972) 406-9692

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Greg R. Samuel

W. Bruce Newsome

Haynes and Boone, LLP

2323 Victory Avenue, Suite 700

Dallas, Texas 75219

(214) 651-5000

Fax: (214) 200-0577

 

Marc D. Jaffe

Wesley C. Holmes

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200

Fax: (212) 751-4864

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the registration statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)      Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to Be Registered

 

Proposed

Maximum

Aggregate

Offering Price (1)

 

Amount of

Registration Fee (2)

Common Stock, $0.01 par value per share

 

$100,000,000

 

$12,880

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the offering price of the shares of common stock that may be sold if the option to purchase additional shares is exercised in full.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated April 11, 2014

PROSPECTUS

                 Shares

 

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Common Stock

 

 

This is our initial public offering of common stock. We are selling                  shares of our common stock.

We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares of our common stock. We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “GNET”.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 19.

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. In addition, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Risk Factors—Risks Related to Our Common Stock—We are an “emerging growth company” and may elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors” and “Summary—JOBS Act.”

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount (1)

   $           $     

Proceeds, before expenses, to us

   $           $     

Proceeds, before expenses, to the selling stockholders

   $           $     

 

  (1) We refer you to “Underwriting” beginning on page 142 of this prospectus for additional information regarding total underwriting compensation.

The underwriters may also exercise their option to purchase up to an additional                  shares from the selling stockholders identified in this prospectus at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus. We will not receive any proceeds from the sale of shares by the selling stockholders.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock will be made on or about                     , 2014.

 

 

 

BofA Merrill Lynch   Jefferies

 

 

 

FBR   Stifel
BB&T Capital Markets   D.A. Davidson & Co.   PNC Capital Markets LLC

 

 

The date of this prospectus is                     , 2014.


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We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or any free writing prospectus prepared by us or on our behalf or to which we have referred you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information in this document may only be accurate on the date of this document.

TRADEMARKS

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

STATEMENT REGARDING INDUSTRY AND MARKET DATA

Any market or industry data contained in this prospectus is based on a variety of sources, including internal data and estimates, independent industry publications, government publications, reports by market research firms or other published independent sources. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions, and such information has not been verified by any independent sources. Accordingly, investors should not place undue reliance on such data and information.


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PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus and may not contain all of the information that may be important to you. You should carefully read this entire prospectus, including the information set forth under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” before making an investment decision. The terms “we,” “us” and “our” as used in this prospectus refer to Goodman Networks Incorporated and its directly and indirectly owned subsidiaries on a consolidated basis; references to “Goodman Networks” or our “Company” refer solely to Goodman Networks Incorporated; and references to “Multiband” refer to our subsidiary, Multiband Corporation.

Overview

We are a leading national provider of end-to-end network infrastructure and professional services to the wireless telecommunications industry. Our wireless telecommunications services span the full network lifecycle, including the design, engineering, construction, deployment, integration, maintenance and decommissioning of wireless networks. We perform these services across multiple network infrastructures, including traditional cell towers as well as next generation small cell and distributed antenna systems, or DAS. We also serve the satellite television industry by providing onsite installation, upgrading and maintenance of satellite television systems to both the residential and commercial markets. These highly specialized and technical services are critical to the capability of our customers to deliver voice, data and video services to their end users.

We operate from a broad footprint, having provided services during 2013 in all 50 states. As of March 31, 2014, we employed over 4,900 persons, including approximately 2,500 technicians and 530 engineers, and operated 62 regional offices and warehouses. During the year ended December 31, 2013, we completed over 65,000 telecommunications projects and fulfilled over 1.5 million satellite television installation, upgrade or maintenance work orders. We have established strong, long-standing relationships with Tier-1 wireless carriers and original telecommunications equipment manufacturers, or OEMs, including AT&T Mobility, LLC, or AT&T, Alcatel-Lucent USA Inc., or Alcatel-Lucent, and Sprint/United Management Company, or Sprint, as well as DIRECTV. Over the last few years, we have diversified our customer base within the telecommunications industry by leveraging our long-term success and reputation for quality to win new customers such as Nokia Solutions and Networks B.V., or NSN, T-Mobile International AG, or T-Mobile, and Verizon Wireless, or Verizon. We generated nearly all of our revenues over the past several years under master service agreements, or MSAs, that establish a framework, including pricing and other terms, for providing ongoing services. We believe our long-standing relationships with our largest customers, which are governed by MSAs that historically have been renewed or extended, provide us with high visibility to our future revenue. During 2013, we also provided small cell or DAS services to over 100 enterprises including higher education institutions, stadiums for professional and collegiate sports events, hotels and resorts, major retailers, hospitals, corporations and government agencies.

The wireless telecommunications industry is characterized by favorable trends that are driving our growth. This industry is going through an unprecedented and sustained phase of expansion and increased complexity as the number of wireless devices and demand for greater speed and availability of mobile data continues to grow rapidly. Users continue to upgrade to more advanced mobile devices, such as smartphones and tablets, and access more bandwidth-intensive applications. According to Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2013-2018, dated February 5, 2014, or the Cisco VNI Mobile Update, mobile data traffic will increase in North America 660% between 2013 and 2018, or an average of over 50% percent annually. By 2018, North American mobile data traffic will reach approximately 3.0 exabytes per month, and the number of Long Term Evolution, or 4G-LTE, annual connections will grow 2.6 times compared to 2013. These developments are creating significant challenges for wireless carriers to manage increasing network congestion and continually deliver a high quality customer experience. In response, carriers, governments and

 

 

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other enterprises are making significant investments in their wireless infrastructures, such as increasing the 4G-LTE capacity of their wireless networks, as well as integrating small cell technology and DAS (supporting both Wi-Fi and cellular solutions) within wireless networks. To address the challenges presented by expanding increasingly complex network infrastructures, wireless carriers and OEMs have increased their dependency on an outsourcing model in an effort to control costs, deploy capital more efficiently and ensure schedule attainment. We believe our leading reputation and capacity to provide services on a national scale positions us to increase our market share and capitalize on future growth opportunities in the wireless telecommunications industry.

Since our founding in 2000, we have evolved with the needs of the telecommunications industry and transformed our business into an end-to-end wireless infrastructure and professional services provider by adding new service capabilities, addressing new and growing wireless technologies and servicing a broader range of customers. In addition to offering core infrastructure and construction services, we have grown our offerings to include sophisticated network analysis, design, engineering, integration and optimization services. Small cell and DAS technologies have been developed to meet the rapidly growing bandwidth demands in the wireless industry. In keeping with this evolution, we have significantly invested in, and supplemented our small cell and DAS network service capabilities, both through organic growth and acquisitions. In 2013, we acquired Multiband, which provided us with a technician-based workforce that we intend to train to augment and reduce our cost of delivering small cell and DAS services. We have also broadened our capabilities to serve not only wireless carriers, but also OEMs and enterprise and public safety customers.

For the year ended December 31, 2012, we generated revenues of $609.2 million and net loss of $2.5 million. For the year ended December 31, 2013, we generated revenues of $931.7 million and net loss of $43.2 million. Our 18-month estimated backlog as of December 31, 2012 was $1.1 billion, and our 18-month estimated backlog as of December 31, 2013 was $1.9 billion. The 18-month estimated backlog as of December 31, 2013 includes $0.4 billion of estimated backlog from DIRECTV.

Our Businesses

We primarily operate through three business segments, Professional Services, Infrastructure Services and Field Services. Through our Professional Services and Infrastructure Services segments, we help wireless carriers and OEMs design, engineer, construct, deploy, integrate, maintain and decommission critical elements of wireless telecommunications networks. Through our Field Services segment, we install, upgrade and maintain satellite television systems for both residential and commercial customers.

 

 

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The following diagram illustrates our customers’ recurring need for the services we provide in our Professional Services and Infrastructure Services segments:

 

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Professional Services. Our Professional Services segment provides customers with highly technical services primarily related to designing, engineering, integration and performance optimization of transport, or “backhaul,” and core, or “central office,” equipment of enterprise and wireless carrier networks. When a network operator integrates a new element into its live network or performs a network-wide upgrade, a team of in-house engineers from our Professional Services segment can administer the complete network design, equipment compatibility assessments and configuration guidelines, the migration of data traffic onto the new or modified network and the network activation.

In addition, we provide services related to the design, engineering, installation, integration and maintenance of small cell and DAS networks. Our acquisition of the assets of the Custom Solutions Group of Cellular Specialties, Inc., or CSG, in February 2013 was incorporated into our Professional Services segment, which has enhanced our ability to provide end-to-end in-building services from design and engineering to maintenance. Our enterprise small cell and DAS customers often require most or all of the services listed above and may also purchase consulting, post-deployment monitoring, performance optimization and maintenance services.

Infrastructure Services. Our Infrastructure Services segment provides program management services of field projects necessary to deploy, upgrade, maintain or decommission wireless outdoor networks. We support wireless carriers in their implementation of critical technologies such as 4G-LTE, the addition of new macro and small cell sites, increase of capacity at their existing cell sites through additional spectrum allocations, as well as other performance optimization and maintenance activities at cell sites. When a network provider requests our services to build or modify a cell site, our Infrastructure Services segment is able to: (i) handle the required pre-construction leasing, zoning, permitting and entitlement activities for the acquisition of the cell site, (ii) prepare site designs, structural analysis and certified drawings and (iii) manage the construction or modification of the site including tower-top and ground equipment installation. These services are managed by our wireless project

 

 

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and construction managers and are performed by a combination of scoping engineers, real estate specialists, ground crews, line and antenna crews and equipment technicians, either employed by us or retained by us as subcontractors.

Our Infrastructure Services segment also provides fiber and wireless backhaul services to carriers. Our fiber backhaul services, or Fiber to the Cell services, connect existing points in the fiber networks of wireline carriers to thousands of cell sites needing the bandwidth and ethernet capabilities for upgrading capacity. Our microwave backhaul services provide a turnkey solution offering site audit, site acquisition, microwave line of sight surveys, path design, installation, testing and activation services. This fiber and wireless backhaul work often involves planning, route engineering, right-of-way (for fiber work) and permitting, logistics, project management, construction inspection and optical fiber splicing services. Backhaul work is performed to extend an existing optical fiber network owned by a wireline carrier, typically between several hundred yards to a few miles, to the cell site.

Field Services. Our Field Services segment provides installation and maintenance services to DIRECTV, commercial customers and a provider of internet wireless service primarily to rural markets. Our wholly owned subsidiary Multiband, which we acquired in August 2013, fulfilled over 1.5 million satellite television installation, upgrade or maintenance work orders during 2013 for DIRECTV, which represented 27.6% of DIRECTV’s outsourced work orders for residents of single-family homes during 2013. We were the second largest DIRECTV in-home installation provider in the United States for the year ended December 31, 2013.

Our Industries

We participate in the large and growing market for connectivity and essential wireless telecommunications infrastructure services. We also participate in the significant satellite pay television installation and maintenance market for both residential and commercial customers as well as providing satellite access links for an internet service provider. Although we do not anticipate significant growth in the Field Services segment, we do believe our Professional Services and Infrastructure Services segments are poised for substantial growth consistent with the growth in the wireless telecommunications industry generally. We believe the following trends are driving growth in this market:

Increasing Demand for Wireless Services

We are addressing a vast and growing market opportunity resulting from an unprecedented and sustained escalation in both the number of wireless devices and the demand for those mobile devices to deliver and transmit larger quantities of mobile data traffic at ever increasing speeds. Mobile device manufacturers are rapidly introducing advanced mobile devices that have faster processors, increased memory and larger high-resolution screens that are capable of supporting advanced media and require faster data connections for an enhanced experience. According to the Cisco VNI Mobile Update, wireless data growth in North America is forecasted to increase on average 50% annually from 2013 through 2018, as smartphones, tablets, laptops, 3G and 4G-LTE modems and other telecommunications devices are becoming increasingly utilized by consumers. Moreover, a growing number of consumers are using their mobile devices as their primary means to access the internet, according to the Pew Internet & American Life Project’s Cell Internet Use 2013 Report, dated September 16, 2013. This growth in wireless data demand will require service carriers to invest in existing infrastructure and build-out new infrastructure to prevent slow or unavailable data connections that negatively impact the experience of their customers and result in costly churn.

 

 

 

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Spending on U.S. wireless data services has grown at double digit rates since 2005 and is forecasted to increase on average at approximately 18% annually, from $95 billion in 2012 to $184 billion in 2016, according to the 2013 Market Review and Forecast© 2013 by the Telecommunications Industry Association, or the TIA Report. Domestic spending on data rose by 33% in 2012, and through 2016 it is expected to increase by approximately 94%. By 2016, data is expected to comprise more than 72% of total domestic wireless services spending. The following chart illustrates historical and projected growth in the domestic wireless data services market:

U.S. Wireless Data Services Market

 

($ in billions)

 

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Source: Telecommunications Industry Association, citing Consumer Electronics Association and Wilkofsky Gruen Associates, 2013.

Need for Ongoing Capacity Management for 4G-LTE

Over the last few years, AT&T, Sprint, T-Mobile and Verizon have made significant investments to provide 4G-LTE coverage to their customers and have begun initiatives to increase capacity and performance of their existing networks. The capacity of those networks, however, will continue to need to be enhanced to meet the needs of new users of 4G-LTE devices and the growing appetite for data by those users. As wireless carriers rapidly complete their first phase of 4G-LTE deployment to establish their geographic coverage, we believe they will utilize the following methods to continue to increase the capacity of their networks: (i) allocating additional spectrum that is already licensed by the wireless carrier to its 4G-LTE network, (ii) acquiring additional lower band spectrum that could come to auction by the Federal Communications Commission, or the FCC, in 2015, which in turn would require new, wide-band antennas to be deployed at many cell sites, (iii) increasing the density of the macro network layer by lowering the antenna systems on existing sites, which in turn creates a requirement to add additional cell sites, (iv) adding additional sectors by affixing additional antennas and radios to existing cell sites, (v) increasing backhaul capacity, (vi) harvesting older technology at cell sites to provide physical space, power, spectrum and capacity to be allocated to the 4G-LTE infrastructure and (vii) supplementing the macro network with small cell and DAS technology, creating a heterogeneous network.

 

 

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While each of the above methods represents a significant revenue opportunity for companies that provide services to wireless carriers, the addition of cell sites to an existing network alone is a substantial market opportunity. According to the TIA Report, wireless data growth will result in a 16% cumulative increase in the number of new domestic cell sites between 2013 and 2016. Based on our cost estimate of $212,000 per macro cell site, these new cell sites would generate revenue for wireless infrastructure services companies of approximately $10.4 billion.

Given the multiple approaches that carriers are utilizing to address the growing demand placed on their networks, these networks are becoming increasingly complex and require active monitoring and management. As a result, wireless carriers will be required to perform ongoing performance optimization of their networks to ensure competitive service levels to their customers. These needs provide an opportunity for professional service partners of carriers to provide ongoing solutions related to network balancing, performance optimization and capacity alignment.

Increasing Implementation of Small Cell and DAS Technology

Escalating wireless data consumption has caused carriers to begin offloading mobile traffic from macro networks to preserve available spectrum and to increase wireless data capacity through small cell and DAS technology solutions. Small cells are low-powered radio access units that have a relatively short range of approximately 10 to 300 meters as compared to a typical wireless macro cell having a range of 2 to10 kilometers. Compared to the traditional macro cell, small cell technology features a higher quantity of smaller transmitters in a given area. This dispersion of transmitting devices boosts the capacity and the efficiency of wireless networks, resulting in fewer “dead zones” and reduces competition for cellular tower resources. In addition, small cells have the inherent ability to serve multiple technologies including Wi-Fi and wireless carrier standards such as GSM, UMTS, CDMA and 4G-LTE.

Similarly, installing a DAS system in a building allows users to access the wireless network through antennas located inside the building rather than through an outdoor macro cell site, thereby providing the user better indoor wireless coverage and capacity. Offloading these customers from the outdoor network to a DAS benefits the wireless carrier and the user by providing the user with improved wireless coverage and capacity at a lower cost to the wireless carrier. DAS technology is particularly well suited for larger facilities, such as sports stadiums, large office buildings and shopping malls. DAS technology can also consolidate multiple cellular standards, emergency bands and Wi-Fi.

Wireless carriers are in the early stages of implementing indoor and outdoor small cell and DAS technology to extend their service precisely and inexpensively in dense urban areas. According to SNS Research’s Wireless Infrastructure Bible: 2014-2020, industry studies estimate that more than 850,000 small cells, exclusive of self-installed femtocells, will be deployed in North America by the end of 2018. Increased network complexities and capacity needs will require network providers to evolve their networks into a heterogeneous architecture involving a combination of macro cells and small cells. These diversified architectures will require a full array of network services, which we expect will drive increasing reliance on infrastructure service providers. The deployment and performance optimization of small cell and DAS technologies will create a new set of challenges for wireless carriers and their providers of outsourced infrastructure services including complex logistics and differentiated backhaul and site acquisition strategies.

The large volume of deployments and unique technological challenges will drive the need for increased standardization, consistency and efficient processes. We believe that these trends will drive the need for fewer, larger and more financially stable outsourced wireless infrastructure service providers that will be capable of providing a full range of services across a large geographic footprint in a cost effective manner.

 

 

 

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Increasing Trend for Wireless Carriers to Outsource Capital and Operating Expenditures

Wireless carriers are under mounting competitive pressure to deliver a high level of performance and additional next generation services to their customers. As a result, wireless carriers have outsourced many of the services required to design, build and maintain their complex network offerings, which provides them better flexibility, efficiency and lower costs than self-performing these services. According to Wilkofsky Gruen Associates, over two-thirds of this spending on services in support of wireless infrastructure is outsourced. The following chart illustrates such spending on wireless equipment since 2005:

 

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Sources: Blumberg Advisory Group, Telecommunications Industry Association, Wilkofsky Gruen Associates; figures for 2013-2016 are estimates.

We believe wireless carriers are increasing the amount of the capital and operating expenditures that they outsource.

According to the Booz & Co. research report, Second-Generation Telecom Outsourcing Regaining Control and Innovation Power, published July 17, 2013, the top four factors driving outsourcing in telecommunications are: (i) economic efficiency, (ii) capabilities focus, (iii) partnership integration and (iv) technology convergence. According to the Infonetics Research 2013 Report, Service Provider Outsourcing to Vendors, published March 18, 2013, or the Infonetics Report, reduction in operating expenditures, including tasks such as designing, building and maintaining, continues to be the primary driver for carriers outsourcing and is forecasted to grow at an annual rate of 8% through 2016. We believe that U.S. wireless carriers have a limited number of vendors, especially those without any equipment brand bias, that can provide comprehensive services and scale required to manage the size and complexity of their needs.

Growing Demand for Wireless Services in Adjacent Markets

The positive trends in the wireless telecommunications industry are also relevant to numerous other markets, including the public safety and enterprise markets. We believe that there is a large opportunity in the government telecommunications infrastructure market. In February 2012, a federal law was amended that provides for the creation of a nationwide interoperable broadband network for police, firefighters, emergency medical service professionals and other federal, state and local public safety personnel. This legislation established the FirstNet, charged with the deployment and operation of this network, and allocated FirstNet $7 billion in funding towards deployment of this network, as well as $135 million for a new state and local implementation grant program.

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voice, video and data applications. We believe that we are in the beginning of a long-term transition to increase usage of wireless networks within enterprises and that a significant opportunity exists for wireless specialists to serve the increasingly complex requirements of those enterprises.

Stable Industry Dynamics in the Satellite Television Market

The U.S. market for satellite television subscribers is significant. DIRECTV is the largest satellite television provider with 20.2 million subscribers according to public filings. During the year ended December 31, 2013, we performed approximately 27.6% of all of DIRECTV’s outsourced installation, upgrade and maintenance activities. We believe that the demand for our outsourced installation and maintenance services related to the satellite television market will remain steady as leading national providers continue to upgrade technology and add customers by investing in competitive marketing efforts.

Business Strengths

We believe the following business strengths position us to capitalize on the anticipated growth in demand for our services:

End-to-end Service Offering Providing Compelling Value Proposition

As the telecommunications sector continues to evolve and become more complex due to increasing demand for wireless data, wireless carriers and OEMs will continue a long-term trend of increasingly seeking outsourced providers that can service the full wireless network lifecycle on a national level. We believe our end-to-end service offering provides a compelling and differentiated value proposition to the marketplace. Many infrastructure service providers do not offer the professional network services of business consulting, design, integration and performance optimization. As a result, telecommunication companies typically need to hire professional services companies to provide complementary and higher-end services, creating incremental project coordination costs and financial risks. Our ability to seamlessly provide these solutions to our customers reduces the risks and limits inefficiencies caused by using multiple vendors. We believe this single vendor approach improves overall quality, schedule attainment and reduces costs for wireless carriers and OEMs.

Reputation for Consistent, High Customer Satisfaction and Technical Expertise

We maintain an exemplary track record with our customers and regularly outperform customer satisfaction and on-time delivery targets. In 2013, we performed critical wireless work in 9 of 31 distinct AT&T markets, or Turf Markets, faster than all other Turf Market vendors. In 2013, our safety rating (reported incidents) assigned by the Occupational Safety and Health Administration, or OSHA, for work provided to the telecommunications industry was less than half of the composite rating for our industry. Also, in 2013, Multiband had customer satisfaction ratings, as measured by a third party, of over 95% when fulfilling DIRECTV work orders. We believe our reputation for technical expertise, reliable service and high customer satisfaction provides us with an advantage when competing for new contracts and maintaining and expanding our current customer relationships.

Long-term Relationships with Key Customers

We have long-standing relationships with three of the largest national telecommunication companies, AT&T Inc., Alcatel-Lucent and Sprint. We believe we serve as a strategic partner to our customers, having, for example, assisted AT&T with the deployment of 4G-LTE network services in the first five cities in which AT&T launched 4G-LTE service. Substantially all of our revenue is derived from work performed under multi-year MSAs with these customers. AT&T assigns work to us under our MSA on a market-by-market basis as the sole, primary or secondary vendor in 9 of AT&T’s 31 Turf Markets. Our reputation and experience enhance the

 

 

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loyalty of our customers and position us to become an increasingly important service provider in the outsourced wireless telecommunications industry, and our visibility into future revenues provided by these long-term relationships assists us in profitably managing our business. These executive-level long-term relationships with our customers have provided us with valuable insight into their medium and long-term direction, allowing us to make the right strategic investments in our business. We are seeking to develop similar long-term relationships with T-Mobile and Verizon built upon the rapidly expanding scope of work performed for these customers.

We have maintained a long-term strategic relationship with DIRECTV for over 17 years. We are one of three in-home installation and maintenance service providers that DIRECTV utilizes in the United States, and during the year ended December 31, 2013, we performed approximately 27.6% of all of DIRECTV’s outsourced installation, upgrade and maintenance activities.

National Footprint with Scalability of Operations

We have developed a nationwide platform for the provision of our services with 62 regional offices and warehouses in 23 states across the United States as of March 31, 2014. We employed over 4,900 people, including over 650 employees in our Professional Services segment, over 1,000 employees in our Infrastructure Services segment and over 2,900 employees in our Field Services segment, as of March 31, 2014. We also have the proven ability to increase our operations to meet the needs of our customers. The technician-based workforce that we acquired in the Multiband transaction is not only available to meet the needs of our Field Service segment, but is also being cross-trained to deploy and maintain small cell and DAS services in support of our Professional Services segment. We also utilize an extensive network of subcontractors, which combined with our existing employee workforce enables us to execute large, complex and multi-location telecommunications projects across the United States by allocating personnel and resources quickly and efficiently, thereby maximizing efficiency. Through our MSA with AT&T, our largest customer, we serviced 5 of the 10 most populous cities in the United States as of March 31, 2014. The Turf Markets that AT&T has assigned to us as of March 31, 2014 cover an estimated 26.7% of the total U.S. population based upon 2010 census data.

Experienced Management Team with Exceptional Track Record

Our proven and experienced management team has an exceptional track record and plays a significant role in establishing and maintaining long-term relationships with our customers, supporting the growth of our business and managing the financial aspects of our operations. Under their leadership, we have grown substantially to become one of the largest providers of wireless infrastructure and professional services in the United States as well as a leader in the satellite television installation market. Our management team possesses significant industry experience and has a deep understanding of our customers and their performance requirements. Under their leadership our revenue has increased to $931.7 million for the year ended December 31, 2013. Over the four years ended December 31, 2013, we have experienced a compounded annual revenue growth rate of 30.6%, which includes revenue growth both organically and through acquisitions. Many of our new business relationships have been developed from our long-standing relationships within the industry. As evidenced by the 2013 acquisitions of Multiband, CSG and Design Build Technologies, LLC, or DBT, in August 2013, our management team has demonstrated a strong ability to grow the business through strategic acquisitions in an effort to better position the Company to be able to compete for new business opportunities in the future. As of December 31, 2013, we had materially completed the integration of CSG and DBT and completed integration planning for the merger with Multiband.

 

 

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Our Growth Strategies

We intend to leverage our market leading capabilities to take advantage of a number of favorable long-term industry trends by utilizing the following strategies:

Capitalize on Rapid Growth in the Wireless Carrier Sector and Continue to Grow Our Core Business

Rapidly increasing data usage on wireless networks is driving wireless carriers to increase capacity and upgrade cell sites nationwide while at the same time working to improve wireless quality, reliability and performance. The wireless industry will have completed much of its first phase of 4G-LTE coverage buildout by the end of 2014. In order to continue to meet the projected demand for wireless data, carriers will need to add additional capacity to these 4G-LTE sites on an on-going basis, which will be heavily dependent on wireless carriers allocating capital expenditures to services that optimize and add capacity to those sites. In addition, we anticipate that significant capacity enhancements will be realized via small cell site proliferation and DAS deployments. We expect to benefit from these developments in both the near- and long-term.

We have had over a decade of experience in successfully working with Tier-1 wireless carriers and OEMs as they designed, built, upgraded, optimized, maintained and decommissioned their networks. We believe that our focus on the wireless telecommunications market, end-to-end service capabilities, national scale, reputation for quality and ability to acquire and integrate new and strategic businesses positions us well to capitalize on these opportunities and trends in the wireless sector and to continue to grow our business.

Continue to Expand Our Market Leading Services Capabilities

We believe our comprehensive range of network services and reputation for outstanding performance differentiates us in the marketplace. We plan to continue to develop our end-to-end service portfolio and technical capabilities to ensure we remain highly valued by our customers.

Throughout our history, we have added services capabilities to meet our customers’ changing needs. Our acquisition of CSG in 2013 expanded our professional services capabilities to offer in-building wireless network design. This offering has already been leveraged to help expand our relationship with existing customers, such as AT&T. Additionally, in response to broad market trends, we are focused on building competencies and driving opportunities in the small cell and DAS markets with new and existing customers. We believe the addition of Multiband’s technician-based workforce will allow us to better serve our customers, increase our ability to take on larger scale small cell and DAS deployments and provide local onsite maintenance services post initial deployments. As of March 31, 2014, Multiband employed 2,576 technicians and selected technicians are being cross-trained to provide advanced wireless installation and maintenance solutions for our customers.

As the enterprise small cell and DAS markets continue to grow, we believe that there is a tremendous opportunity to provide managed services to these customers. We believe that as venue owners increasingly choose to own the networks in their buildings they will need to rely on a provider with extensive wireless telecommunications experience to help them install, integrate and manage those networks. We are experienced in providing venue owners with network monitoring, network performance optimization, preventative maintenance and field technician repair and replacement services. Furthermore, as network technologies continue to evolve and become more complex, we are focused on continuing to supplement our high value-added services capabilities that help our enterprise customers maintain, upgrade and manage those networks. In addition, our strategy to enhance our managed services capability with incremental network services, including cloud and network virtualization, content delivery and network performance optimization, can drive additional business and enhance margins.

 

 

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Continue to Grow our Small Cell and DAS Business

We anticipate the demand for small cell and DAS technologies will continue to increase as a result of need for wireless carriers to reduce stress on existing macro cell networks, expand network coverage and add capacity to their networks. Additionally, these technologies are a logical solution to serve an increasing number of enterprises that desire to expand and own their local wireless networks. For many enterprises, small cell and DAS are effective solutions to increase data throughput in their networks. DAS technology is particularly well suited for larger facilities, such as sports stadiums, large office buildings and shopping malls.

Our acquisitions of CSG and Multiband provide us a powerful combination of design, technician workforce and dispatch, scheduling and maintenance capabilities to be leveraged for small cell and DAS services. We believe our service offerings addressing these technologies distinguish us in the marketplace. We are currently a small cell strategic deployment development partner for AT&T, an exclusive partner for enterprise femtocell for Sprint and one of two partners selected for a strategic small cell trial for Verizon. We have also signed an MSA to support future small cell deployments for T-Mobile.

Selectively Pursue New Profitable Long-Term Relationships

We have developed strong relationships with our three largest customers, AT&T Inc., DIRECTV and Alcatel-Lucent. We intend to pursue similar long-term relationships with new customers. Our ability to secure these contractual relationships is demonstrated through the recent establishment of relationships with CenturyLink, NSN, Sprint, T-Mobile, Verizon and Windstream Supply, LLC, or Windstream. Historically, we have often declined opportunities for short-term service projects in order to focus on long-term opportunities that generate more predictable revenue without sacrificing acceptable profit margins. We believe that there are significant opportunities to continue expanding our scope of work with our new and legacy customers.

Extend Capabilities to Adjacent Wireless Markets Including Enterprise and Government Networks

We plan to apply the wireless expertise we have developed serving wireless carriers and OEMs to further expand into the enterprise and public safety markets. According to a February 2014 ABI Research In-Building Wireless Market Data research report, the North American market for in-building wireless deployment revenue is estimated at $2.7 billion for 2014 and is expected to grow to $4.3 billion for 2019, representing a compound annual growth rate of 9.5%. As cloud-based services continue to penetrate the enterprise IT market and enterprise employees increase the use of mobile devices to conduct business critical activities, enterprises are requiring enhanced speed and coverage from their wireless networks. For many enterprises, small cell and DAS are effective solutions to increase data throughput in their networks. We believe we are well positioned to be a market leader in this field as significant overlap exists among the services we provide to network carriers and those needed by enterprise networks. Our February 2013 acquisition of CSG provides us a significant entry into the enterprise market including higher education institutions, stadiums for professional and collegiate events, hotels and resorts, major retailers, hospitals and government agencies. In 2013, we provided services to over 100 enterprise customers for whom we deployed small cell or DAS infrastructure.

We also believe there is a considerable opportunity to address the public safety market. Our initial entry would focus on providing services to federal and state agencies. The initial $7 billion allocated by FirstNet to deploy a nationwide interoperable broadband network for public safety officials over the next several years represents a medium-to-long term opportunity for growth in the public safety sector. Government officials have already performed a significant amount of planning and preparation for this project, and we offer the capabilities, scale, reputation and knowledge to provide substantial support in the design, deployment and maintenance of the network. Our leadership team, as well as our government relationships team, is focused on leveraging existing relationships to help ensure participation in this initiative, including relationships developed through our implementation of the new public safety systems at the new World Trade Center.

 

 

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Continue to Improve our Operational Efficiencies and Expand our Margins

We are planning to implement and continue several initiatives that we believe will create operational efficiencies in our business. Key initiatives include continuing our 2013 plan of increasing our self-perform capabilities in an effort to decrease our dependence upon subcontractor-performed services in our Infrastructure Services segment, either organically or through targeted acquisitions, such as DBT, and utilizing technology to gather real-time business intelligence to provide faster visibility on operational and financial performance and improving scoping accuracy. In addition, our strategy to enhance our managed services capability with incremental network services, including cloud and network virtualization, content delivery and network performance optimization, can drive additional business and enhance margins.

Pursue Complementary Strategic Acquisitions

We plan to selectively pursue strategic acquisitions in the wireless industry that will enhance our service offerings, diversify our business and enable margin expansion. One area of interest would be the potential acquisition of subcontractors that perform tower services. The market for tower service companies is highly fragmented, and a number of high quality subcontractors exist that could provide us better control of these resources and improve our margins. Other strategic acquisitions may provide us with the opportunity to build market share and provide geographic density in a cost-effective and efficient manner.

JOBS Act

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2019. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

 

 

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We have elected to take advantage of certain of the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

Company Information

We were founded in 2000 as Goodman Networks Incorporated, a Texas corporation and we plan to reincorporate in Delaware prior to or upon the closing of this offering. We maintain our principal executive offices at 6400 International Parkway, Suite 1000, Plano, Texas 75093. Our telephone number is (972) 406-9692, and our website address is www.goodmannetworks.com. The references to our website in this prospectus are inactive textual references only. The information on our website is neither incorporated by reference into this prospectus nor intended to be used in connection with this offering.

 

 

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THE OFFERING

The following summary of the offering contains basic information about the offering and the common stock and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the common stock, please refer to the section of this prospectus entitled “Description of Capital Stock.”

 

Common stock offered by Goodman Networks Incorporated

                shares

 

Option to purchase additional shares from the selling stockholders

                shares (if the underwriters exercise their option to purchase additional shares in full)

 

Total common stock offered

                shares (                 shares if the underwriters exercise their option to purchase additional shares in full)

 

Common stock to be outstanding after this offering `

                shares (                shares if the underwriters exercise their option to purchase additional shares in full)

 

Use of proceeds

We estimate that we will receive net proceeds of approximately $         million from the sale of the common stock offered by us, based upon the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and estimated offering expenses (or approximately $         million if the underwriters’ option to purchase additional shares is exercised in full).

 

  We will use approximately $         million of the net proceeds from this offering to exercise our right under the “optional redemption” provision in the indenture, or the Indenture, governing our 12.125% Senior Secured Notes due 2018, or the notes, and redeem up to $         million in aggregate principal amount of the notes.

 

The remaining net proceeds of approximately $         million (or approximately $         million if the underwriters’ option to purchase additional shares is exercised in full) will be used for general corporate purposes.

 

  We will not receive any proceeds from the sale of shares by the selling stockholders.

 

Dividend policy

We do not anticipate paying any cash dividends on our common stock. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends. See “Dividend Policy” on page 46.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 20 and the other information

 

 

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included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed NASDAQ symbol

We will apply to list our common stock on the NASDAQ Global Market under the symbol “GNET.”

Except as otherwise indicated, all share information in this prospectus is based on                  shares of our common stock outstanding as of December 31, 2013, and excludes:

 

                     shares of common stock issuable pursuant to the exercise of options outstanding under the Goodman Networks, Incorporated 2008 Long-Term Incentive Plan, or the 2008 Plan, at a weighted average exercise price of $                 per share;

 

                     shares of common stock issuable pursuant to the exercise of options outstanding under the Goodman Networks, Incorporated 2000 Equity Incentive Plan, or the 2000 Plan, which expired in 2010, at a weighted average exercise price of $                 per share;

 

                     shares of common stock reserved and available for future grant or issuance under the 2008 Plan, which shares will cease to become available for future issuance upon the completion of this offering;

 

                    shares of common stock to be available for future issuance under the Goodman Networks Incorporated 2014 Long-Term Incentive Plan, or the 2014 Plan, will be available for grant upon the completion of this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan;

 

                    shares issuable upon the conversion or exercise of awards to be granted to directors, members of management and other employees upon consummation of this offering; and

 

    43,358 shares issued upon the exercise of a warrant on April 9, 2014.

Unless otherwise stated or the context requires otherwise, information in this prospectus (except for the historical financial statements) gives effect to a                 -for-                 forward stock split of the outstanding shares of our common stock and assumes:

 

    an initial offering price of $         per share (which is the midpoint of the range on the cover page of this prospectus);

 

    our reincorporation in Delaware immediately prior to or upon the completion of this offering;

 

    that our certificate of incorporation, which we will file in connection with the completion of this offering, is in effect; and

 

    that the underwriters do not exercise their option to purchase up to                 additional shares of common stock from us.

We intend to effectuate a                 -for-                 forward stock split of our outstanding common stock immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. As of the date of this prospectus, we have not yet effectuated this forward stock split.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following tables set forth certain summary historical consolidated financial and operating data for our business as of and for the years ended December 31, 2011, 2012 and 2013 which has been derived from and should be read together with, our audited historical consolidated financial statements and related notes included elsewhere in this prospectus.

On February 28, 2013, we completed the CSG acquisition. Accordingly, the operations and assets acquired in the CSG acquisition are included in our historical results of operations beginning March 1, 2013 and reflected in our historical balance sheet beginning as of June 30, 2013. We completed the merger with Multiband on August 30, 2013. The operations and assets of Multiband are included in our historical results of operations beginning August 31, 2013 and reflected in our historical balance sheet beginning as of September 30, 2013.

The following table also sets forth the summary pro forma combined statement of operations presenting the pro forma combined results of operations of Goodman Networks and Multiband for the year ended December 31, 2013, assuming the merger with Multiband occurred on January 1, 2013.

You should read the following summary historical financial and operating data and pro forma combined financial data in conjunction with the information under “Unaudited Pro Forma Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and other financial information included elsewhere in this prospectus. Our historical results included below and elsewhere in this prospectus are not necessarily indicative of our future performance.

 

     Goodman Networks
Year Ended December 31,
    Pro Forma
    Combined    

Year Ended
December 31,
 
     2011     2012     2013     2013  
     (Dollars in thousands, except per share data)  

Statement of Operations Data:

        

Revenues

   $ 729,002      $ 609,227      $ 931,745      $ 1,135,276   

Cost of revenues

     610,784        499,288        806,109        963,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     118,218        109,939        125,636        171,373   

Selling, general and administrative expenses

     67,450        87,216        121,106        161,505   

Other operating expense

     (4,000     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,768        22,723        4,530        9,868   

Interest expense

     20,548        31,998        40,287        46,626   

Other income

     —          —          (25     (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     26,220        (9,275     (35,732     (36,683
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

     10,309        (4,176     7,506        8,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

   $ 15,911      $ (5,099   $ (43,238   $ (45,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations per share attributable to common stock

        

Basic

   $        $        $       

Diluted

   $        $        $       

Pro forma earnings (loss) from continuing operations per share attributable to common stock (1)

        

Basic

       $       

Diluted

       $       

Other Financial Data:

        

EBITDA from continuing operations (2)

   $ 51,287      $ 26,344      $ 14,313      $ 24,131   

Adjusted EBITDA from continuing operations (2)

     53,494        42,431        25,758        38,834   

Capital expenditures (3)

     3,227        3,470        4,964        6,207   

 

 

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Pro Forma as
Adjusted

December 31,

2013 (4)

 
     December 31,
2013
   
     (Unaudited)  
     (Dollars in thousands)  

Balance Sheet Data (at period end):

    

Cash and cash equivalents

   $ 59,439      $               

Total assets

     508,390     

Long-term debt (net of current portion)

     330,346     

Total stockholders’ deficit

     (135,324  

 

(1) Pro forma amounts reflect the following, as if each occurred on January 1, 2013: (a) our sale of shares of common stock in this offering, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (b) the decreased interest expense we would have incurred had the net proceeds from this offering been used to redeem a portion of the notes as described under “Use of Proceeds,” (c) the     % prepayment premium in an aggregate amount of $         million in connection with the redemption of $         million of the notes and (d) the write off of approximately $         million of unamortized deferred financing costs associated with the redemption of $         million of the notes, in each case with a portion of the net proceeds of this offering.

 

(2) EBITDA from continuing operations represents net income from continuing operations before income tax expense, interest, depreciation and amortization. We present EBITDA from continuing operations because we consider it to be an important supplemental measure of our operating performance and we believe that such information will be used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA from continuing operations when reporting their results. We consider EBITDA from continuing operations to be an operating performance measure, and not a liquidity measure, that provides a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies.

We present Adjusted EBITDA from continuing operations, which adjusts EBITDA from continuing operations for items that management does not consider to be reflective of Goodman Networks’ core operating performance, because it may be used by certain investors as a measure of operating performance. Management considers core operating performance to be that which can be affected by managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Adjusted EBITDA from continuing operations adjusts EBITDA from continuing operations to eliminate the impact of certain items, including: (i) share-based compensation (non-cash portion); (ii) certain professional and consultant fees identified in the Indenture; (iii) severance expense (paid to certain senior level employees); (iv) amortization of debt issuance costs; (v) restatement fees and expenses; (vi) a tax gross-up payment made to the Company’s Chief Executive Officer to cover his tax obligation for an award of common stock and (vii) transaction fees and expenses related to acquisitions.

Because EBITDA from continuing operations and Adjusted EBITDA from continuing operations are not recognized measurements under generally accepted accounting principles, or GAAP, both have limitations as analytical tools. Because of these limitations, when analyzing our operating performance, investors should use EBITDA from continuing operations and Adjusted EBITDA from continuing operations in addition to, and not as an alternative for, net income, operating income or any other performance measure presented in accordance with GAAP. Similarly, investors should not use EBITDA from continuing operations and Adjusted EBITDA from continuing operations as an alternative to cash flow from operating activities or as a measure of our liquidity.

 

 

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The following table reconciles net income to EBITDA from continuing operations and EBITDA from continuing operations to Adjusted EBITDA from continuing operations.

 

     Goodman Networks
Year Ended December 31,
     Pro Forma
    Combined    

Year Ended
December 31,
 
     2011      2012      2013      2013  
     (Dollars in thousands)  

EBITDA from continuing operations and Adjusted EBITDA from continuing operations:

           

Net income (loss) from continuing operations

   $ 15,911       $ (5,099    $ (43,238    $ (45,395

Income tax expense (benefit)

     10,309         (4,176      7,506         8,712   

Interest expense

     20,548         31,998         40,287         46,626   

Depreciation and amortization

     4,519         3,621         9,758         14,188   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA from continuing operations

     51,287         26,344         14,313         24,131   

Share-based compensation (a)

     1,023         5,629         4,507         5,276   

Specified professional fees (b)

     651         —           —           —     

Severance expense (c)

     1,228         —           —           —     

Amortization of debt issuance costs (d)

     (695      (1,195      (1,990      (1,990

Restatement fees and expenses (e)

     —           8,075         3,382         3,382   

Tax gross up on CEO stock grant (f)

     —           3,226         —           —     

Acquisition related transaction expenses (g)

     —           352         5,546         8,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA from continuing operations

   $ 53,494       $ 42,431       $ 25,758       $ 38,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) Represents non-cash expense related to equity-based compensation.
  (b) Includes: (i) third-party consultant fees for a review of various business process and cost improvement initiatives; (ii) third-party consultant fees as a result of an investment in our company by affiliates of The Stephens Group, LLC; (iii) fees paid to an executive recruiting firm and (iv) operations review expenses.
  (c) Represents severance costs paid to certain senior level employees upon termination of their employment with us.
  (d) Amortization of debt issuance costs is included in interest expense but excluded in the calculation of Consolidated EBITDA per the Indenture governing the notes.
  (e) Represents accounting advisory and audit fees incurred in connection with completing the restatement of the Company’s financial statements for the years ended December 31, 2009, 2010 and 2011, and preparing the Company’s financial statements for the year ended December 31, 2012, on the completed contract method and modifying the Company’s business processes to account for construction projects under the completed contract method going forward.
  (f) Represents a tax gross-up payment made to cover the tax obligation for share grant made to the Company’s Chief Executive Officer in connection with his transition into that role.
  (g) Represents fees and expenses incurred relating to our recent acquisitions.

 

(3) Includes purchase of property and equipment financed through capital leases and other financing arrangements.

 

(4) Presented on a pro forma as adjusted basis to give effect to the following, as if each occurred on December 31, 2013: (i) our sale of             shares of common stock in this offering, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of the estimated net proceeds to be received to redeem $         million in aggregate principal amount of the notes as described in “Use of Proceeds” and to fund the payment of premium and accrued and unpaid interest thereon.

 

 

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RISK FACTORS

Risks Related to Our Business

We derive substantially all of our revenues from subsidiaries of AT&T Inc., DIRECTV and Alcatel-Lucent. The loss of any of these customers or a reduction in their demand for our services would impair our business, financial condition and results of operations.

We derive substantially all of our revenues from subsidiaries of AT&T Inc., DIRECTV and Alcatel-Lucent. We derived our revenue from the following sources over the past three fiscal years:

 

    Years Ended December 31,  
                                        2012, on a pro
forma basis for the
merger with
Multiband (1)
    2013, on a pro
forma basis for the
merger with
Multiband (1)
 
    2011     2012     2013      
    Revenue     Percent
of

Total
    Revenue     Percent
of
Total
    Revenue     Percent
of
Total
    Revenue     Percent
of
Total
    Revenue     Percent
of

Total
 

Revenue From:

                   

Subsidiaries of AT&T Inc.

  $ 650,372        89.2   $ 532,082        87.3   $ 662,758        71.1   $ 532,082        58.9   $ 662,758        58.4

DIRECTV

    —          —          —          —          92,425        9.9     263,754        29.2     270,329        23.8

Alcatel-Lucent

    72,332        9.9     55,022        9.0     57,940        6.2     55,022        6.1     57,940        5.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 722,704        99.1   $ 587,104        96.3   $ 813,123        87.3   $ 850,858        94.2   $ 991,027        87.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Giving effect to the merger with Multiband as if it occurred on January 1, 2012.

Because we derive substantially all of our revenues from these customers, and certain of our services for AT&T are provided on a territory basis, with no required commitment for AT&T to spend a specified amount in such territory with us, we could experience a material adverse effect to our business, financial condition or results of operations if the amount of business we obtain from these customers is reduced. In addition, to the extent that our performance does not meet customer expectations, or our reputation or relationships with our key customers are impaired, we may lose future business with such customers, which would materially adversely affect our ability to generate revenue. Any of these factors could negatively impact our business, financial condition or results of operations.

Amounts included in our estimated backlog may not result in actual revenue or translate into profits, and our estimated backlog is subject to cancellation and unexpected adjustments and therefore is an uncertain indicator of future operating results.

As of December 31, 2013, our estimated backlog through June 30, 2015 was primarily comprised of services anticipated to be performed under MSAs, pursuant to which our customers often have little or no obligation to undertake any work with us and that are cancellable on limited notice. These estimated backlog amounts are based on our estimates and therefore may not result in actual recognition of revenue in the originally anticipated period, or at all. In addition, certain contracts included in our estimated backlog may not be profitable. We may experience variances in the realization of our estimated backlog because of project delays or cancellations resulting from weather conditions, other project deferrals or delays, scope adjustments, external market factors and economic factors beyond our control. If our estimated backlog fails to materialize as anticipated, our business, financial condition or results of operations would be materially and adversely affected. Accordingly, our estimated backlog as of any particular date is an uncertain indicator of future revenue or earnings.

Our results of operations have been variable, which makes it difficult to evaluate our business and to forecast future results.

Our results of operations have been variable, which makes it difficult to evaluate our business and to forecast our future results based upon our historical data. For the years ended December 31, 2011, 2012 and

 

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2013, we had net income (loss) of $19.3 million, $(2.5) million and $(43.2) million, respectively. As evidenced by these financial results, we may be unable to maintain profitability on a consistent basis. Because of the uncertainties related to our operations, we may be hindered in our ability to adapt to increases or decreases in sales, revenues or expenses. If we make poor operational decisions in implementing our business plan, we may not generate revenues or may incur losses, which may materially adversely affect our business, financial condition or results of operations.

Most of our contracts do not obligate our customers to undertake a significant amount, if any, of infrastructure projects or other work with us and may be cancelled on limited notice, so our revenue is not guaranteed.

Substantially all of our revenue is derived from multi-year MSAs. Under our multi-year MSAs, we contract to provide customers with individual project services through work orders within defined geographic areas or scopes of work on a fixed fee. Under these agreements, our customers often have little or no obligation to undertake any infrastructure projects or other work with us. In addition, most of our contracts are cancellable on limited notice, even if we are not in default under the contract. We may hire employees permanently to meet anticipated demand for the anticipated projects that may be delayed or cancelled. Further, our contract with Alcatel-Lucent contains a cross-default provision pursuant to which a default under one of our credit facilities would also constitute a default under our MSA with Alcatel-Lucent, or the Alcatel-Lucent Contract. In addition, many of our contracts, including our service agreements, are periodically open to public bid. We may not be the successful bidder on our existing contracts that are re-bid. We could face a drop in revenues and our business, financial condition or results of operations could be materially adversely affected if:

 

    we see a significant decline in the projects customers assign to us under our service agreements;

 

    our customers cancel or defer a significant number of projects;

 

    we fail to win our existing contracts upon re-bid; or

 

    we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects.

Our revenues could be negatively affected by reduced support from DIRECTV.

DIRECTV conducts promotional and marketing activities on national, regional and local levels. Due to the Field Services segment’s substantial dependence on DIRECTV, the Field Services segment’s revenues depend, in significant part, on: (i) the overall reputation and success of DIRECTV; (ii) the incentive and discount programs provided by DIRECTV and its promotional and marketing efforts for its products and services; (iii) the goodwill associated with DIRECTV trademarks; (iv) the introduction of new and innovative products by DIRECTV; (v) the manufacture and delivery of competitively-priced, high quality equipment and parts by DIRECTV in quantities sufficient to meet customers’ requirements on a timely basis; (vi) the quality, consistency and management of the overall DIRECTV system; and (vii) the ability of DIRECTV to manage its risks and costs. If DIRECTV does not provide, maintain or improve any of the foregoing, if DIRECTV changes the terms of its incentive and discount programs, or if DIRECTV were sold or reduced or ceased operations, there could be a material adverse effect on our financial condition and results of operations.

If we do not obtain additional capital to fund our operations and obligations, our growth may be limited.

We may require additional capital to fund our operations and obligations. Our business is working capital intensive. As our business has grown, we have managed periods of tight liquidity by accessing capital

 

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from our stockholders and their affiliates, some of whom are no longer affiliated with us. Our capital requirements will depend on several factors, including:

 

    our ability to enter into new agreements with customers or to extend the terms of our existing agreements with customers, and the terms of such agreements;

 

    the success rate of our sales efforts;

 

    costs of recruiting and retaining qualified personnel;

 

    expenditures and investments to implement our business strategy; and

 

    the identification and successful completion of acquisitions.

We may seek additional funds through equity or debt offerings and/or borrowings under lines of credit or other sources, including a possible increase in the borrowing base in the the Company’s amended and restated senior secured revolving credit facility, or the Credit Facility. If we cannot raise additional capital, we may have to implement one or more of the following remedies:

 

    curtail internal growth initiatives; and

 

    forgo the pursuit of acquisitions.

We do not know whether additional financing will be available on commercially acceptable terms, if at all, when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial condition or results of operations.

Our substantial level of indebtedness could adversely affect our cash flow, our business, financial condition or results of operations and our ability to remain in compliance with financial covenants and fulfill our debt obligations.

We have a significant amount of indebtedness. As of December 31, 2013, we had approximately $327.1 million of indebtedness outstanding (including unamortized discounted premium thereon). After giving effect to this offering, and the application of the net proceeds from this offering as of December 31, 2013, we would have had approximately $                     million of indebtedness outstanding (including unamortized discounted premium thereon).

Our substantial indebtedness could have important consequences. For example, it could:

 

    make it more difficult for us to satisfy our payment obligations;

 

    increase our vulnerability to general adverse economic and industry conditions;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

    limit our flexibility in planning for, or reacting to, changes in our business and changes in the industries we serve and in which we operate;

 

    place us at a competitive disadvantage compared to our competitors that have less debt;

 

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    limit our ability to borrow additional funds for working capital, capital expenditures and other general corporate purposes; and

 

    limit our ability to refinance our indebtedness, including the notes.

The Credit Facility and the Indenture impose significant operating and financial restrictions on us that may prevent us from engaging in transactions that might benefit us, including responding to changing business and economic conditions or securing additional financing, if needed.

The terms of the Credit Facility and the Indenture governing the notes contain customary events of default and covenants that prohibit us and our subsidiaries from taking certain actions without satisfying certain conditions, financial tests (including a minimum fixed charge coverage ratio) or obtaining the consent of the lenders. These restrictions, among other things, limit our ability to:

 

    divest our assets;

 

    incur additional indebtedness;

 

    create liens against our assets;

 

    enter into certain mergers, joint ventures, and consolidations or transfer all or substantially all of our assets;

 

    make certain investments and acquisitions;

 

    prepay indebtedness;

 

    make certain payments and distributions;

 

    pay dividends;

 

    engage in certain transactions with affiliates; and

 

    act outside the ordinary course of business.

In particular, our Credit Facility permits us to borrow up to $50.0 million, subject to borrowing base determinations and certain other restrictions. The Credit Facility contains financial covenants that require that we not permit our annual capital expenditures to exceed $20.0 million (plus any permitted carry over). We are also required to comply with additional financial covenants upon the occurrence of a Triggering Event, as defined in the Credit Facility. A Triggering Event is deemed to have occurred when our undrawn availability under the Credit Facility fails to equal at least $10.0 million measured as of the last day of each month for two consecutive month-ends. A Triggering Event will cease to be continuing when our undrawn availability for three consecutive months equals at least $20.0 million measured as of the last day of each such month. Upon the occurrence and during the continuance of a Triggering Event, beginning with the fiscal quarter ending March 31, 2014, we are required to meet the following financial covenants:

 

    maintain, as of the end of each fiscal quarter, for the trailing four quarters then ended, a ratio of EBITDA (as defined in the Credit Facility) less non-financed capital expenditures (but only to the extent made after the occurrence of a Triggering Event) to Fixed Charges (as defined in the Credit Facility) of at least 1.25 to 1.00; and

 

    not permit our ratio of total indebtedness to trailing twelve month EBITDA, as of the last day of a fiscal quarter, to exceed 6.00 to 1.00 from January 1, 2014 through June 30, 2014, 5.50 to 1.00 from July 1, 2014 through December 31, 2014, or 5.00 to 1.00 beginning January 1, 2015.

 

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Should we be unable to comply with the terms and covenants of the Credit Facility, we would be required to obtain further modifications of the Credit Facility or secure another source of financing to continue to operate our business. A default could also result in the acceleration of our obligations under the Credit Facility. If that should occur, we may be unable to repay all of our obligations under the Credit Facility, which could force us to sell significant assets or allow our assets to be foreclosed upon. In addition, these covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions or securing additional financing, if needed. Our business is capital intensive and, to the extent we need additional financing, we may not be able to obtain such financing at all or on favorable terms, which may adversely affect our business, financial condition or results of operations. Had we been required to meet these ratio tests as of December 31, 2013, we would have met the Fixed Charge Coverage Ratio and would not have met the Leverage Ratio (each as defined in the Indenture and in each case with respect to the ratio required for the fiscal quarter ending March 31, 2014).

Further, the terms of the Indenture governing the notes require us to meet certain ratio tests, on a pro forma basis giving effect to such transactions, before engaging in certain transactions, including incurring additional debt outside of the Credit Facility and making restricted payments, subject, in each case, to certain exceptions. We must meet a Fixed Charge Coverage Ratio of at least 2.00 to 1.00 in order to make restricted payments or incur additional debt, and we must meet a Total Leverage Ratio test of not greater than 2.50 to 1.00 in order to secure any additional debt (each defined in the Indenture). Excluding the merger with Multiband, with respect to which holders of the notes waived compliance with both ratios pursuant to the Consent Letter, we have not entered into any transaction that requires us to meet these tests as of December 31, 2013. Had we been required to meet these ratio tests as of December 31, 2013, we would not have met either the Fixed Charge Coverage Ratio or the Total Leverage Ratio. We do not anticipate that we will meet the Fixed Charge Coverage Ratio unless our EBITDA is increased and our fixed charges associated with the debt to be retired with the proceeds of this offering is no longer included in the trailing twelve months’ Fixed Charge Coverage Ratio calculation. As a result, we would not be able to make certain restricted payments or incur indebtedness unless (i) we obtain an amendment or waiver to the Indenture and related documents in order to make such restricted payment or incur such indebtedness or (ii) such additional indebtedness or restricted payment were specifically permitted by the Indenture, such as borrowings under the Credit Facility.

As a result of these covenants and restrictions, we are limited in how we conduct our business and we may be unable to raise additional debt financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to obtain or maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lender and/or amend these covenants.

Failure to manage our planned growth could place a significant strain on our resources.

Our ability to successfully implement our business plan requires an effective plan for managing our future growth. We plan to increase the scope of our operations. Current and future expansion efforts will be expensive and may significantly strain our managerial and other resources and ability to manage working capital. We cannot be certain that our infrastructure will be adequate to support our operations as they expand. To manage future growth effectively, we must manage expanded operations, integrate new personnel and maintain and enhance our financial and accounting systems and controls. If we do not manage growth properly, it could harm our business, financial condition or results of operations and make it difficult for us to satisfy our obligations under the notes.

We may be unsuccessful in achieving our organic growth strategies, which could limit our revenue growth. Our ability to generate organic growth will be affected by, among other factors, our ability to:

 

    expand the range of services we offer to customers to address their evolving network needs;

 

    attract new customers;

 

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    increase the number of projects performed for existing customers;

 

    achieve the estimated revenue we announced from new customer contracts;

 

    hire and retain qualified employees;

 

    expand geographically, including internationally; and

 

    address the challenges presented by difficult economic or market conditions that may affect us or our customers.

Many of the factors affecting our ability to generate organic growth may be beyond our control, and we cannot be certain that our strategies for achieving internal growth will occur or be successful.

Our business strategy includes the entrance into several markets in which we have little or no experience, which may not be successful and could be costly.

As part of our growth strategy, in addition to our entrance into the satellite television and broadband installation markets in connection with the acquisition of Multiband, we have entered into other markets, including the enterprise and government telecommunications infrastructure markets. We have little or no experience in these markets. As we enter new markets, we will face new technological and operational risks and challenges with which we are unfamiliar and may incur significant costs. Entering new markets requires substantial management efforts and skills to mitigate these risks and challenges. Our lack of experience with certain of these new markets may result in unsuccessful new market entries. If we do not manage our entry into new markets properly, these costs and risks could harm our business, financial condition or results of operations.

If we are unable to integrate the operations of Multiband, or any future acquisitions successfully, our operating results and prospects could be harmed.

We may not be able to successfully integrate the operations of Multiband and if we complete other acquisitions in the future, such acquired companies with our other operations without substantial costs, delays or other operational or financial problems. Integrating acquired companies involves a number of special risks that could materially and adversely affect our business, financial condition, results of operations and prospects, including:

 

    failure of acquired companies to achieve the results we expect;

 

    diversion of management’s attention from operational matters;

 

    difficulties integrating the operations and personnel of acquired companies;

 

    uncertainty of entry into markets in which we have limited or no experience and in which competitors have stronger market positions;

 

    inability to retain key personnel of acquired companies;

 

    risks associated with unanticipated events or liabilities;

 

    the potential disruption of our business; and

 

    the difficulty of maintaining uniform standards, controls, procedures and policies, including an effective system of internal control over financial reporting.

 

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If one of our acquired companies suffers customer dissatisfaction or performance problems, the reputation of that or our entire company could be materially and adversely affected. In addition, future acquisitions could result in issuances of equity securities that would reduce the ownership interest of our stockholders, the incurrence of debt, contingent liabilities, deferred stock-based compensation or expenses related to the valuation of goodwill or other intangible assets and the incurrence of large, immediate write-offs.

Our failure to continue to be certified as a minority business enterprise could reduce some of the opportunities available to us, which could reduce our revenue growth.

We are currently certified as a minority business enterprise by the National Minority Supplier Development Council. A substantial majority of our common stock is beneficially owned and controlled by persons deemed to be minorities. Certain of our current and potential customers consider the percentage of minority ownership and control of a company when awarding new business. Upon the consummation of this offering, we will cease to qualify as a minority business enterprise. However, we are seeking an exception to the qualification requirements from the National Minority Supplier Development Council. If for any reason we cease to be certified as a minority business enterprise by the National Minority Supplier Development Council or similar organization, then we may lose an advantage and not be selected for future business from current or potential customers who may benefit from purchasing our services as a result of our status as a certified minority business enterprise. The failure to obtain a potential project or customer as a result of our not being a minority business enterprise in the future may have a material adverse effect on our business, financial condition or results of operations.

Our business is seasonal and is affected by the capital planning and spending patterns of our customers, and we have adopted the completed contract method of accounting for construction and installation contracts, all of which expose us to variable quarterly results.

Our results of operations experience significant fluctuations because we have adopted the completed contract method of accounting for revenues and expenses from our construction and installation contracts. Substantially all of our revenues are generated from construction and installation contracts. Because of the nature of our business, the vast majority of contracts are completed during the fourth quarter of each year. Under the completed contract method, we do not recognize revenue or expenses on contracts until we have substantially completed the contract. Accordingly, the vast majority of our revenues and costs are recognized during the fourth quarter of each year. For example, our fourth quarter revenues represented 38.5% of our total revenues for the year ended December 31, 2013. The recognition of revenue and expenses on contracts that span quarters may also cause our reported results of operations to experience significant fluctuations.

Additionally, we have historically experienced seasonal variations in our business, primarily due to the capital planning cycles of certain of our customers. Generally, AT&T’s annual capital plans are not finalized to the project level until sometime during the first three months of the year, resulting in reduced capital spending in the first quarter relative to the rest of the year. As a result, we have historically experienced, and may continue to experience, significant differences in operations results from quarter to quarter.

Our Field Services segment’s results of operations may also fluctuate significantly from quarter to quarter. Variations in our Field Services segment’s revenues and operating results occur quarterly as a result of a number of factors, including the number of customer engagements, employee utilization rates, the size and scope of assignments and general economic conditions. Because a significant portion of our Field Service segment’s expenses are relatively fixed, a variation in the number of customer engagements or the timing of the initiation or completion of those engagements can cause significant fluctuations in operating results from quarter to quarter.

As a result of these seasonal variations and our methodology for the recognition of revenue and expenses on projects, comparisons of operating measures between quarters may not be as meaningful as comparisons between longer reporting periods.

 

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We may not accurately estimate the costs associated with our services provided under fixed price contracts, which could impair our business, financial condition or results of operations.

Substantially all of our revenues are derived from MSAs that are fixed-unit price contracts. Under these contracts, we set the price of our services on a per unit or aggregate basis and assume the risk that the costs associated with our performance may be greater than we anticipated. In addition to MSAs, we enter into contracts that require installation or construction of specified units within an infrastructure system. Under those agreements, we have also contractually agreed to a price per unit. If the actual costs to complete each unit exceed original estimates, our profitability will be adversely affected. These contracts also contain “most favored nation” clauses, which provide that if we perform services similar to those performed under these contracts to another customer on more favorable terms, then we must offer those same terms to our current customers and we might be required to reimburse our customers for amounts they have paid in the past. Future contracts might also contain similar “most favored nation” clauses. We are also required to immediately recognize the full amount of any expected losses on these projects if estimated costs to complete the remaining units for the projects exceed the revenue to be earned on such units. Our profitability is therefore dependent upon our ability to accurately estimate the costs associated with our services. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid on the contract and higher costs of materials and labor resulting from inflation and other factors. These variations, along with other risks inherent in performing fixed-unit price contracts, may cause actual revenues and gross profits for a project to differ from those originally estimated, and as a result, certain agreements or projects could have lower margins than anticipated, or losses if actual costs for our contracts exceed our estimates, which could materially adversely affect our business, financial condition or results of operations.

Project performance issues, including those caused by third parties, or certain contractual obligations may result in additional costs to us, reductions in revenues or the payment of liquidated damages.

Many projects involve challenging engineering, procurement, construction or installation phases that may occur over extended time periods, sometimes over several years. We may encounter difficulties as a result of delays in designs, engineering information or materials provided by the customer or a third party, delays or difficulties in equipment and material delivery, schedule changes, delays from our customer’s failure to timely obtain permits or rights-of-way or meet other regulatory requirements, weather-related delays and other factors, some of which are beyond our control, that impact our ability to complete the project in accordance with the original delivery schedule. In addition, we contract with third-party subcontractors to assist us with the completion of contracts. Any delay or failure by suppliers or by subcontractors in the completion of their portion of the project may result in delays in the overall progress of the project or may cause us to incur additional costs, or both. Delays and additional costs may be substantial and, in some cases, we may be required to compensate the customer for such delays. Delays may also disrupt the final completion of our contracts as well as the corresponding recognition of revenues and expenses therefrom. In certain circumstances, we guarantee project completion by a scheduled acceptance date or achievement of certain acceptance and performance testing levels. Failure to meet any of our schedules or performance requirements could also result in additional costs or penalties, including liquidated damages, and such amounts could exceed expected project profit. In extreme cases, the above-mentioned factors could cause project cancellations, and we may be unable to replace such projects with similar projects or at all. Such delays or cancellations may impact our reputation or relationships with customers, adversely affecting our ability to secure new contracts.

Our subcontractors may fail to satisfy their obligations to us or other parties, or we may be unable to maintain these relationships, either of which may have a material adverse effect on our business, financial condition and results of operations.

We depend on subcontractors to complete work on certain of our projects. There is a risk that we may have disputes with subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor or our failure to extend existing task orders or

 

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issue new task orders under a subcontract. In addition, if any of our subcontractors fail to deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services, then our ability to fulfill our obligations as a prime contractor may be jeopardized. In addition, the absence of qualified subcontractors with whom we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts. Any of these factors may have a material adverse effect on our business, financial condition or results of operations.

If the high demand for the limited supply of subcontractors in our industry persists or grows it may lead to higher subcontracting fees and the increased use of prepayment arrangements, which may harm our cash flow and profitability.

The current increase in the demand for deploying, upgrading and maintaining wireless networks and the limited supply of skilled subcontractors has made the competition to recruit qualified subcontractors intense and has led to higher fees for subcontracting services. Beginning in the first quarter of 2013, the increased demand for subcontractors also led to a change in the payment arrangements with certain of our subcontractors, which effectively resulted in an acceleration of our payment terms with these subcontractors. If the high demand for subcontractors persists, our subcontracting fees may continue to grow at a rate faster than we can offset with increased prices for our services, which may harm our profitability. Additionally, more subcontractors may begin requiring us to prepay for services or increase the fees they charge us for services, which could harm our financial condition and results of operations.

Material delays or defaults in customer payments could leave us unable to cover expenditures related to such customer’s projects, including the payment of our subcontractors.

Because of the nature of most of our contracts, we commit resources to projects prior to receiving payments from our customers in amounts sufficient to cover expenditures as they are incurred. In certain cases, these expenditures include paying our subcontractors who perform significant portions of our services. Delays in customer payments may require us to make a working capital investment or obtain advances from our Credit Facility. If a customer defaults in making its payments on a project or projects to which we have devoted significant resources, it could have a material adverse effect on our business, financial condition or results of operations and negatively impact the financial covenants with our lenders.

Certain of our employees and subcontractors work on projects that are inherently dangerous, and a failure to maintain a safe worksite could result in significant losses.

Certain of our project sites can place our employees and others in difficult or dangerous environments, including difficult and hard to reach terrain or locations high above the ground or near large or complex equipment, moving vehicles, high voltage or dangerous processes. Safety is a primary focus of our business and is critical to our reputation. Many of our clients require that we meet certain safety criteria to be eligible to bid on contracts. We maintain programs with the primary purpose of implementing effective health, safety and environmental procedures throughout our company. If we fail to implement appropriate safety procedures or if our procedures fail, our employees, subcontractors and others may suffer injuries. The failure to comply with such procedures, client contracts or applicable regulations could subject us to losses and liability and adversely impact our ability to obtain projects in the future.

Our failure to comply with the regulations of OSHA and other state and local agencies that oversee transportation and safety compliance could materially adversely affect our business, financial condition or results of operations.

OSHA establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by OSHA and various recordkeeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards and safety in excavation and demolition work may apply to our operations. We have incurred,

 

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and will continue to incur, capital and operating expenditures and other costs in the ordinary course of business in complying with OSHA and other state and local laws and regulations, and could incur penalties and fines in the future, including in extreme cases, criminal sanctions.

While we have invested, and will continue to invest, substantial resources in occupational health and safety programs, our industry involves a high degree of operational risk and is subject to significant liability exposure. We have suffered employee injuries in the past and may suffer additional injuries in the future. Serious accidents of this nature may subject us to substantial penalties, civil litigation or criminal prosecution, and Multiband, which we recently acquired, has an OSHA incident rating higher than industry average. Personal injury claims for damages, including for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our business, financial condition or results of operations. In addition, if our safety record were to substantially deteriorate, or if we suffered substantial penalties or criminal prosecution for violation of health and safety regulations, customers could cancel existing contracts and not award future business to us, which could materially adversely affect our business, financial condition or results of operations.

We are self-insured against many potential liabilities.

Although we maintain insurance policies with respect to automobile liability, general liability, workers’ compensation and employee group health claims, those policies are subject to high deductibles, and we are self-insured up to the amount of the deductible. Because most claims against us do not exceed the deductibles under our insurance policies, we are effectively self-insured for substantially all claims. In addition, we are self-insured on our medical coverage up to a specified annual maximum of costs. If our insurance claims increase or if costs exceed our estimates of insurance liabilities, we could experience a decline in profitability and liquidity, which would materially adversely affect our business, financial condition or results of operations.

Warranty claims resulting from our services could have a material adverse effect on our business, financial condition or results of operations.

We generally warrant the work we perform within our Professional Services and Infrastructure Services segments for one- to two-year periods following substantial completion of a project, subject to further extensions of the warranty period following repairs or replacements. While costs that we have incurred historically under our warranty obligations have not been material, the costs associated with such warranties, including any warranty related legal proceedings, could have a material adverse effect on our business, financial condition or results of operations.

Our operations may impact the environment or cause exposure to hazardous substances, our properties may have environmental contamination, and our failure to comply with environmental laws, each of which could result in material liabilities.

Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products. Certain of our current and historical construction operations have used hazardous materials and, to the extent that such materials are not properly stored, contained or recycled, they could become hazardous waste. A portion of the work we perform is also in underground environments. If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil containing pollutants and result in a rupture and discharge of pollutants and other damages. In such cases, we could be liable for fines or damages. Additionally, some of our contracts require that we assume the environmental risk of site conditions and require that we indemnify our customers for any damages, including environmental damages incurred in connection with our projects.

We may also be subject to claims under various environmental laws and regulations, federal and state statutes and/or common law doctrines for toxic torts and other damage caused by us, as well as for natural resource damages and the investigation and clean up of soil, surface water, groundwater and other media under

 

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laws such as the Comprehensive Environmental Response, Compensation, and Liability Act. Such claims may arise, for example, out of current or former conditions at project sites, current or former properties owned or leased by us, and contaminated sites that have always been owned or operated by third parties. Liability may be imposed without regard to fault and may be strict, joint and several, such that we may be held responsible for more than our share of any contamination or other damages, or even for the entire share, and may be unable to obtain reimbursement from the parties causing the contamination.

New environmental laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could also require us to incur significant costs or become the basis for new or increased liabilities that could have a material negative impact on our business, financial condition or results of operations.

Increases in the costs of fuel could reduce our operating margins.

The price of fuel needed to run our vehicles and equipment is unpredictable and fluctuates based on events outside of our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries and other oil and gas producers, war and unrest in oil producing countries, regional production patterns and environmental concerns. Most of our contracts do not allow us to adjust our pricing. Any increase in fuel costs could have a material adverse effect our business, financial position or results of operations. Accordingly, any increase in fuel costs could materially adversely affect our business, financial condition or results of operations.

If we are unable to implement and maintain effective internal control over financial reporting in the future, our ability to produce accurate financial statements could be impaired, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, as a voluntary filer, beginning with our 2014 annual report on Form 10-K to be filed in 2015, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

In connection with the audit of our financial statements for the year ended December 31, 2011 both we and our auditors identified accounting errors and internal control deficiencies that collectively called into question our ability to properly apply the percentage of completion method of accounting to our long-term construction contracts, which is the method that we had historically applied to recognize revenue on our long-term construction contracts. After consultations with KPMG LLP and with the SEC Staff, we concluded that the completed contract method of accounting would be a more appropriate and reliable method under which to recognize revenue from our construction contracts. Accordingly, we restated our financial statements for each of the three years ended December 31, 2011 so that our revenues from construction contracts were recognized using the completed contract method, which we have also applied in the preparation of our financial statements for the

 

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years ended December 31, 2012 and 2013. We incurred costs of approximately $8.1 million and $3.4 million for the years ended December 31, 2012 and 2013, respectively, to restate our financial statements and implement processes and procedures to capture results on the completed contract method of accounting.

We evaluated deficiencies identified in connection with the preparation and audit of our consolidated financial statements for the fiscal year ended December 31, 2013 in accordance with the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. The following control deficiency represents a material weakness in our internal control over financial reporting as of December 31, 2013:

 

    Purchasing and Inventory Management: We did not maintain sufficient controls over our purchasing and inventory management process. Specifically (a) the controls surrounding the tracking of inventory movements between warehouses and job sites was not sufficient to ensure that inventory was appropriately recorded and that inventory not used at job sites was returned to warehouses on a timely basis; and (b) controls and processes to properly match returned inventory to the appropriate project to ensure accurate project costs and profitability either were not present or did not operate effectively.

During the quarter ended June 30, 2013, we also identified a control deficiency that represented a material weakness in our internal control over financial reporting as of March 31, 2013 related to controls surrounding the Company’s adoption of processes used to capture results based upon the completed contract method of accounting.

Our actions to improve internal financial accounting controls may not be sufficient to mitigate these material weaknesses. There may be additional material weaknesses in our control environment now or in the future, requiring corrective action to improve our financial and accounting controls. In addition, implementing any appropriate changes to our internal controls may entail substantial costs in order to modify our existing accounting and information technology systems, may take a significant period of time to complete and may distract our officers, directors and employees from the operation of our business. Any failure to maintain adequate internal control over financial reporting, or consequent inability to produce accurate financial statements, could increase our operating costs and could materially impair our ability to operate our business.

The requirements of being a public company may strain our resources and divert management’s attention.

We only recently began reporting with the SEC. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of NASDAQ and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced

 

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coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

The need to establish and maintain the corporate infrastructure demanded of a public reporting company may divert management’s attention from implementing our business and growth strategies, which could prevent us from improving our business, results of operations and financial condition. Based on management’s estimates, we anticipate that we will incur approximately $2.5 million per year of cost as a result of being a public reporting company, including legal, audit, printing and other costs, although unforeseen circumstances could increase actual costs. These costs are not fully reflected in our audited financial statements.

We depend on a limited number of key personnel who would be difficult to replace.

We depend, in part, on the performance of John Goodman, our Executive Chairman, Ron Hill, our Chief Executive Officer and President, Randal Dumas, our Chief Financial Officer, Cari Shyiak, our Chief Operating Officer, Scott Pickett, our Chief Marketing Officer and Executive Vice President of Strategic Planning and Mergers and Acquisitions, and James L. Mandel, Multiband’s Chief Executive Officer, to operate and grow our business. The loss of any of Messrs. Goodman, Hill, Dumas, Shyiak, Pickett or Mandel could negatively impact our ability to execute our business strategies. Although we have entered into employment agreements with Messrs. Goodman, Hill, Dumas, Shyiak, Pickett and Mandel, we may be unable to retain them or replace any of them if we lose their services for any reason.

If we are unable to attract and retain qualified and skilled employees, we may be unable to operate efficiently, which could materially adversely affect our business, financial condition or results of operations.

Our business is labor intensive, and some of our operations experience a high rate of employee turnover. Given the nature of the highly specialized work we perform, many of our employees are trained in and possess specialized technical skills. At times of low unemployment rates of skilled laborers in the areas we serve, it can be difficult for us to find qualified and affordable personnel. We may be unable to hire and retain a sufficient skilled labor force necessary to support our operating requirements and growth strategy. Our labor expenses may increase as a result of a shortage in the supply of skilled personnel. We may also be forced to incur significant training expenses if we are unable to hire employees with the requisite skills. Labor shortages or increased labor or training costs could materially adversely affect our business, financial condition or results of operations.

In the ordinary course of business, we extend unsecured credit to our customers for purchases of our services or may provide other financing or investment arrangements, which subjects us to potential credit or investment risk that could, if realized, adversely affect our business, financial condition or results of operations.

In the ordinary course of business, we extend unsecured credit to our customers. As of December 31, 2013, this credit amounted to $109.5 million. We may also agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. In addition, we may provide other forms of financing in the future to our customers or make investments in our customers’ projects, typically in situations where we also provide services in connection with the projects. Our payment arrangements with our customers subject us to potential credit risk related to changes in business and economic factors affecting our customers, including material changes in our customers’ revenues or cash flows. These changes may also reduce the value of any financing or equity investment arrangements we have with our customers. If we are unable to collect amounts owed to us, our cash flows would be reduced and we could experience losses if the uncollectible amounts exceeded current allowances. We would also recognize losses with respect to any investments that are impaired as a result of our customers’ financial difficulties. Losses experienced could materially and adversely affect our business, financial condition or results of operations. The risks of collectability and impairment losses may increase for projects where we provide services as well as make a financing or equity investment.

 

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We may be unable to obtain sufficient bonding capacity to support certain service offerings, and the need for performance and surety bonds may reduce our availability under the Credit Facility.

Certain of our contracts require performance and payment bonds. If our business continues to grow, our bonding requirements may increase under these and other contracts we obtain. If we are unable to renew or obtain a sufficient level of bonding capacity in the future, we may be precluded from being able to bid for certain contracts or successfully contract with certain customers. In addition, even if we are able to successfully renew or obtain performance or payment bonds, we may be required to post letters of credit in connection with the bonds, which would reduce availability under the Credit Facility.

Our inability to adequately protect the confidential aspects of our technology and the products and services we sell could materially weaken our operations.

We rely on a combination of trade secret, copyright and trademark laws, license agreements, and contractual arrangements with certain key employees to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. The legal protections afforded to us or the steps that we take may be inadequate to prevent misappropriation of our intellectual property. If it was determined that we have infringed or are infringing on the intellectual property rights of others, we could be required to pay substantial damages or stop selling products and services that contain the infringing intellectual property, which could have a material adverse effect on our business, financial condition and results of operations. In such a case, we may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all. Our success depends in part on our ability to protect the proprietary and confidential aspects of our technology and the products and services that we sell or utilize.

Claims, lawsuits and proceedings and contract disputes, including those related to our construction business, could materially adversely affect our business, financial condition or results of operations.

We are subject to various claims, lawsuits and proceedings and contract disputes that arise in the ordinary course of business. In particular, our construction activities expose us to increased risk because design, construction or systems failures can result in substantial bodily injury or damage to third parties. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage, punitive damages, civil penalties or other losses, consequential damages, or injunctive or declaratory relief. In addition, pursuant to our service agreements, we generally indemnify our customers for claims related to the services we provide. Claimants may seek large damage awards and defending claims can involve significant costs. When appropriate, we establish reserves against these items that we believe to be adequate in light of current information, legal advice and professional indemnity insurance coverage, and we adjust such reserves from time to time according to case developments. If our reserves are inadequate, or if in the future our insurance coverage proves to be inadequate or unavailable, or if there is an increase in liabilities for which we self-insure, we could experience a reduction in our profitability and liquidity. Furthermore, if there is a customer dispute regarding performance of project services, the customer may decide to delay or withhold payment to us. An adverse determination on any such liability claim, lawsuit or proceeding, or delayed or withheld payments from customers in contract disputes, could have a material adverse effect on our business, financial condition or results of operations. In addition, liability claims, lawsuits and proceedings or contract disputes may harm our reputation or divert management resources away from operating our business.

If we are unable to manage our growth profitably, our business, financial results and cash flow could suffer.

Our future financial results will depend in part on our ability to profitably manage our growth on a combined basis with Multiband. Management will need to maintain existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems. If integration-related expenses and capital expenditure requirements are greater than anticipated, or if we are unable to manage our growth profitably, our financial results and our cash flow may decline.

 

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The historical and unaudited pro forma financial information included elsewhere in this prospectus may not be representative of our actual results as a combined company, and accordingly, you have limited financial information on which to evaluate the combined company and your investment decision.

We, CSG and Multiband have limited prior history as a combined entity and our operations have not previously been managed on a combined basis. As a result, the pro forma financial information, which was prepared in accordance with Article 11 of Regulation S-X, is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have actually occurred had the merger with Multiband been completed at or as of the dates indicated, nor is it indicative of the future operating results or financial position of the combined company. The pro forma financial information does not reflect future nonrecurring charges resulting from the merger with Multiband or future events that may occur, including restructuring activities or other costs related to the integration of Multiband, and does not consider potential impacts of current market conditions on revenues, expense efficiencies or asset dispositions. The pro forma financial information presented in this prospectus is based in part on certain assumptions regarding the merger with Multiband that we believe are reasonable under the circumstances. However our assumptions may not prove to be accurate over time. Investors should not place any undue reliance on the pro forma financial information.

The Field Services segment is highly dependent on our strategic alliance with DIRECTV and a major alteration or termination of that alliance could adversely affect our business.

The Field Services segment is highly dependent on our relationship with DIRECTV. Our current MSA with DIRECTV was extended in December 2013 and expires December 31, 2017. The term of this agreement automatically renews for additional one-year periods unless either DIRECTV or we give written notice of termination at least 90 days in advance of expiration of the then current term.

The MSA can be terminated on 180 days’ notice by either party. DIRECTV may also change the terms of this agreement with us, and has done so to Multiband in the past, to terms that are more favorable to DIRECTV. Any adverse alteration or termination of our agreement with DIRECTV would have a material adverse effect on our business. In addition, a significant decrease in the number of jobs we complete for DIRECTV could have a material adverse effect on our business, financial condition and results of operations.

Multiband may have liabilities that are not known, probable or estimable at this time.

As a result of the merger with Multiband, Multiband became our subsidiary and we effectively assumed all of its liabilities, whether or not asserted. There could be unasserted claims or assessments that we failed or were unable to discover or identify in the course of performing due diligence investigations of Multiband. In addition, there may be liabilities that are neither probable nor estimable at this time that may become probable and estimable in the future. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business. We may learn additional information about Multiband that adversely affects us, such as unknown, unasserted or contingent liabilities and issues relating to compliance with applicable laws.

The merger with Multiband and our recent acquisition of CSG makes evaluating our operating results difficult given the significance of these transactions, and the historical and unaudited pro forma financial information may not give you an accurate indication of how we will perform in the future.

The merger with Multiband and the acquisition of CSG may make it more difficult for us to evaluate and predict our future operating performance. Neither our historical results of operations, nor the separate pre-acquisition financial information of Multiband, fully reflect the acquisitions of CSG and Multiband; accordingly, such historical financial information does not necessarily reflect what our financial position, operating results and cash flows will be in the future on a consolidated basis following the acquisitions of CSG and Multiband. While we have included in this prospectus unaudited pro forma financial information giving effect to the merger with Multiband and the offering of the common stock and the use of proceeds thereof, such pro forma information

 

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does not purport to represent, and should not be relied upon as reflecting, what our financial position, results of operations or cash flows actually would have been if the transactions referred to therein had been consummated on the dates or for the periods indicated, or what such results will be for any future date or any future period.

Our future results of operations could be adversely affected if the goodwill recorded in connection with the merger with Multiband or any recent acquisitions subsequently requires impairment.

Upon completing the merger with Multiband, we recorded an asset called “goodwill” equal to the excess amount we paid for Multiband over the fair values of the assets and liabilities acquired and identified intangible assets to be allocated to Multiband. We also recorded goodwill in connection with the acquisitions of CSG and DBT. The amount of goodwill on our consolidated balance sheet increased substantially as a result of the merger with Multiband. Accounting Standards Codification Topic 350 from the Financial Accounting Standards Board provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. The testing of goodwill and other intangible assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the definition of a business segment in which we operate; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or changes in actual performance compared with estimates of our future performance, could affect the fair value of goodwill or other intangible assets, which may result in an impairment charge. We cannot accurately predict the amount or timing of any impairment of assets. Should the value of our goodwill or other intangible assets become impaired, it could have a material adverse effect on our consolidated results of operations and could result in our incurring net losses in future periods.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be significantly limited.

As of December 31, 2013, we had federal net operating loss carryforwards, or NOLs, of $76.8 million and state NOLs of $155.9 million. If not used, the federal NOLs will begin to expire in 2027 and the state NOLs will begin to expire in 2014. In addition, as of December 31, 2013, Multiband had generated NOLs of approximately $23.9 million to reduce future federal taxable income and $45.7 million to reduce future state taxable income. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” generally occurs if there is a cumulative change in our ownership by 5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We have performed a Section 382 study under the Code and determined that Multiband has had a total of five ownership changes since 1999. As a result of these ownership changes, Multiband’s ability to utilize its NOLs is limited. Federal NOLs are limited to a total of $23.9 million, consisting of annual amounts of $1.1 million in 2014 and for each of the years thereafter. State NOLs are limited to a total of approximately $44.1 million.

As of December 31, 2013, we did not meet the requirements in accordance with GAAP to support that it is more likely than not that some portion or all of the deferred tax assets will be realized; therefore, a valuation allowance of $17.6 million was recorded as of December 31, 2013. The valuation allowance recorded against these NOLs does not limit or preclude us from fully utilizing these NOLs should we generate taxable income in future periods.

 

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Risks Related to Our and Our Customers’ Industries

We are vulnerable to economic downturns and the cyclical nature of the telecommunications industry and particularly the wireless telecommunications industry, which could reduce capital expenditures by our customers and result in a decrease in demand for our services.

The demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the U.S. economy. In addition, because a substantial portion of our revenue is derived from customers within the telecommunications industry, we are vulnerable to the cyclical nature of the telecommunications industry and the capital expenditures of these customers. The wireless telecommunications market, in which many of our existing and potential customers compete, is particularly cyclical in nature and vulnerable to downturns in the overall telecommunications industry. During an economic downturn, our customers may not have the ability or desire to continue to fund capital expenditures for infrastructure, may determine to outsource less work or may have difficulty in obtaining financing. Any of these factors could result in the delay, reduction or cancellation of projects, which could result in decreased demand for our services and could materially adversely affect our business, financial condition or results of operations.

Our profitability and liquidity could decline if our customers reduce spending, are unable to pay for our services or fail to implement new technology.

Stagnant or declining economic conditions have adversely impacted the demand for our services and resulted in the delay, reduction or cancellation of projects and may continue to adversely affect us in the future. In addition, a reduction in cash flows or the lack of availability of debt or equity financing for our customers may result in a reduction in our customers’ spending for our services and may also impact the ability of our customers to pay amounts owed to us. Network services providers, including certain of our customers, may not continue to upgrade their wireless networks as technology advances or maintain and expand their network capacities and coverage. The occurrence of any of these events could have a material adverse effect on our business, financial condition or results of operations and our ability to grow.

Our industries are highly competitive, which may reduce our market share and harm our business, financial condition or results of operations.

Our industries are highly fragmented, and we compete with other companies in most of the markets in which we operate, ranging from small independent firms servicing local markets to larger firms servicing regional and national markets. There are relatively few barriers to entry into certain of the markets in which we operate, and, as a result, any organization that has adequate financial resources and access to technical expertise and skilled personnel may become one of our competitors.

Most of our customers’ work is awarded through a bid process. Consequently, price is often a significant factor in determining which service provider is selected, especially on smaller, less complex projects. Smaller competitors are sometimes able to win bids for these projects based on price alone due to their lower costs and financial return requirements. If we are unsuccessful in bidding on these projects, or if our ability to win such projects requires that we accept lesser margins, our business, financial condition or results of operations could be materially and adversely affected.

We also face competition from existing or prospective customers that employ in-house personnel to perform some of the same types of services we provide. For example, OEMs are increasingly bundling their equipment and software with ongoing services to provide complete managed services to their service provider customers. Our success depends upon the continued trend by our customers to outsource their network design, construction and project management needs. If this trend does not continue or is reversed and communication service providers and network equipment vendors elect to perform more of these tasks themselves, our business, financial condition or results of operations may be adversely affected due to the decline in the demand for our services.

 

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Our business growth depends in part upon demand for wireless data services on wireless networks and related infrastructure build outs and demand for broadband and expanded satellite television services and the overall appeal of DIRECTV’s products and services.

We expect that an important component of our revenue growth will be sales to telecommunications service providers as they build out their network infrastructure and accommodate increased demand for wireless data services. The demand for wireless data services may decrease or may grow more slowly than expected. Any such decrease in the demand or slowing rate of growth could have a material adverse effect on our business. In addition, if the evolution to next generation technology, including small cell and DAS, does not materialize for any reason, such as lack of cost-effectiveness, then this may have an adverse impact on our business growth and revenues. Delays in the introduction of new wireless networks, the failure of these services to gain widespread acceptance or the ineffective marketing of these services may reduce the demand for our services, which could have a material adverse effect on our business, financial condition or results of operations.

We also anticipate that future revenue in the Field Services business will be dependent upon public acceptance of broadband and expanded satellite television services and the overall appeal of DIRECTV’s products and services to consumers. Acceptance of these services is partially dependent on the infrastructure of the internet and satellite television, which is beyond our control. In addition, newer technologies, such as video-on-demand and delivery of programming content over the internet, are being developed, which could have a material adverse effect on our competitiveness in the marketplace if it is unable to adopt or deploy such technologies. A decline in the popularity of existing products and services or the failure of new products and services to achieve and sustain market acceptance could result in reduced overall revenues, which could have a material adverse effect on our business, financial condition and results of operations. Consumer preferences with respect to entertainment are continuously changing, are difficult to predict and can vary over time. DIRECTV’s current products and services may not continue to be popular for any significant period of time, and any new products and services may not achieve commercial acceptance. Changes in consumer preferences may reduce the demand for our services, which could have a material adverse effect on our business, financial condition or results of operations.

Our customers are highly regulated, and the addition of new laws or regulations or changes to existing laws, regulations or technology may adversely impact demand for our services and the profitability of those services.

We derive, and anticipate that we will continue to derive, the vast majority of our revenue from customers in the telecommunications and subscription television industries. Our telecommunications and subscription television customers are subject to legislation enacted by Congress, and regulated by various federal, state and local agencies, including the FCC, and state public utility commissions, and are subject to rapid changes in governmental regulation and technology. These bodies might modify or interpret the application of their laws or regulations in a manner that is different than the way such regulations are currently applied or interpreted and may impose additional laws or regulations. If existing, modified or new laws or regulations have an adverse effect on our customers and adversely impact the profitability of the services they provide, demand for our services may be reduced. Changes in technology may also reduce the demand for the services we provide. The research and development of new and innovative technologically advanced products, including upgrades to current products and new generations of technologies, is a complex and uncertain process requiring high levels of innovation and investment, as well as accurate anticipation of technology and market trends. Our failure to rapidly adopt and master new technologies as they are developed in our industries could have a material adverse effect on our business, financial condition or results of operations.

Mergers, consolidations or other strategic transactions in the wireless communications industry could weaken our competitive position, reduce the number of our customers and adversely affect our business.

The wireless communications industry may continue to experience consolidation and an increased formation of alliances among carriers and between carriers and other entities. Should one of our customers or a competitor, merge, consolidate, partner or enter into a strategic alliance with another carrier, OEM or competitor,

 

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this could have a material adverse impact on our business. Such a merger, consolidation, partnership or alliance may cause us to lose a wireless carrier or OEM customer or require us to reduce prices as a result of enhanced customer leverage or changes in the competitive landscape, which would have a negative effect on our business, revenues and profitability. We may not be able to expand our base of customers to offset revenue declines if we lose a material customer. These events could reduce our revenue and adversely affect our operating results.

Risks Related to Our Common Stock

The market price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price, if at all.

The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. We cannot assure you that the initial public offering price of our common stock, or the market price following this offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to this offering. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    actual or anticipated fluctuations in our revenues and results of operations;

 

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

    increase or loss of customers;

 

    fluctuations in product sales mix;

 

    changes in our pricing strategy or those of our competitors;

 

    developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies;

 

    lawsuits threatened or filed against us;

 

    actual or anticipated changes in our growth rate relative to those of our competitors;

 

    announcements of technological innovations or new services offered by us or our competitors;

 

    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

    additions or departures of key personnel;

 

    actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or investor expectations;

 

    fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

    additional shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable “lock-up” periods end;

 

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    price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

    other events or factors, including those resulting from war or incidents of terrorism, or responses to these events; and

 

    general economic and market conditions.

Furthermore, in the past several years the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could adversely affect our business, results of operations and financial condition.

Future sales of our common stock in the public market could cause the price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market after our initial public offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. After this offering, we will have outstanding                  shares of common stock, based on the number of shares of our common stock outstanding as of March 31, 2014. This number includes                  shares that we and the selling stockholders are selling in this offering, and assumes no additional exercise of outstanding options.

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. The remaining                  shares of our common stock outstanding after this offering, based on shares outstanding as of March 31, 2014, will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.

Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies LLC may permit our executive officers, our directors and the selling stockholders to sell shares prior to the expiration of the restrictive provisions contained in the “lock-up” agreements with the underwriters. In addition, we may, with the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies LLC, permit our employees and current stockholders who are subject to market standoff agreements or arrangements with us and who are not subject to a lock-up agreement with the underwriters to sell shares prior to the expiration of the restrictive provisions contained in those market standoff agreements or arrangements.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. Although we expect to apply to list our common stock on NASDAQ, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

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We have broad discretion in the use of a portion of the net proceeds from our initial public offering and may not use them effectively.

After exercising our right under the “optional redemption” provision in the Indenture governing the notes, we intend to use the remaining net proceeds to us from this offering primarily for general corporate purposes, including working capital and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. However, we will have broad discretion over the uses of the net proceeds, including for any of the purposes described in “Use of Proceeds,” and we may spend or invest them in ways that our stockholders disagree or that could adversely affect our business, results of operations and financial condition.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of our stock to some investors.

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. In addition, our Credit Facility contains restrictions on our ability to pay dividends.

Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a change of control of our company and, therefore, may depress the trading price of our stock.

Immediately prior to or upon the closing of this offering, we plan to reincorporate in Delaware. Our certificate of incorporation and bylaws contain, or will contain upon completion of this offering, certain provisions that may discourage, delay or prevent a change of control of our Company that our stockholders may consider favorable. These provisions:

 

    authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

    provide for a classified board, dividing our board of directors into three classes of directors, with one class elected each year for a three-year term;

 

    provide that stockholders may only remove directors for cause;

 

    prohibit stockholder action by written consent;

 

    provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

    prohibit our stockholders from calling a special meeting of stockholders; and

 

    establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

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Provisions of Delaware law may also discourage, delay or prevent us from engaging in any of a broad range of business combinations, which may cause the market price of our common stock to decline. Under Section 203 of the Delaware General Corporation Law, a stockholder who beneficially owns more than 15% of our voting stock, or an “interested stockholder,” cannot acquire our company for a period of three years following the date on which the stockholder becomes an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors before this person became an interested stockholder or approval of the holders of at least two-thirds of our outstanding voting shares not beneficially owned by the interested stockholder. See “Description of Capital Stock–Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws—Delaware Anti-Takeover Statute.”

Our certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $         per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share as of December 31, 2013, after giving effect to the issuance of shares of our common stock in this offering. See “Dilution” on page 46. Furthermore, investors purchasing shares of our common stock in this offering will only own approximately     % of our outstanding shares of common stock (and have     % of the voting power of the outstanding shares of our common stock), after the offering even though their aggregate investment will represent     % of the total consideration received by us in connection with all initial sales of shares of our capital stock outstanding as of December 31, 2013, after giving effect to the issuance of shares of our common stock in this offering and shares of our common stock to be sold by certain selling stockholders.

We are an “emerging growth company” and may elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public reporting companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports. We could be an emerging growth company up until the December 31st following the fifth anniversary after our first equity

 

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offering, although circumstances could cause us to lose that status earlier if our annual revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in any three-year period or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30th, in which case we would no longer be an emerging growth company as of the following December 31st. We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this prospectus are not statements of historical fact and are forward-looking statements. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We have based these forward-looking statements on our current assumptions, expectations and projections about future events.

Forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from those anticipated in such statements. Most of these factors are outside our control and difficult to predict. Factors that may cause such differences include, but are not limited to:

 

    our reliance on three customers for substantially all of our revenues;

 

    our reliance on contracts that do not obligate our customers to undertake work with us and that are cancellable on limited notice;

 

    our ability to refinance existing indebtedness;

 

    our ability to raise additional capital to fund our operations and meet our obligations;

 

    our ability to translate amounts included in our estimated backlog into revenue or profits;

 

    our ability to maintain our certification as a minority business enterprise;

 

    our reliance on subcontractors to perform portions of our services;

 

    our ability to maintain proper and effective internal controls;

 

    our reliance on a limited number of key personnel who would be difficult to replace;

 

    our ability to effectively integrate acquisitions;

 

    potential credit risk arising from unsecured credit extended to our customers;

 

    economic downturns and the cyclical nature of the telecommunications and subscription television service industries;

 

    competition in the telecommunications and subscription television service industries;

 

    rapid regulatory and technological changes in the telecommunications industry; and

 

    our substantial level of indebtedness and our ability to generate sufficient cash to service our indebtedness.

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this prospectus except to the extent required by applicable securities laws.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $         million from the sale of the common stock offered by us, based upon the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

We will use approximately $         million of the net proceeds from this offering to exercise our right under the “optional redemption” provision in the Indenture governing the notes and redeem up to $         million in aggregate principal amount of the notes at 112.125%, plus accrued and unpaid interest to the date of redemption.

The remaining net proceeds of approximately $         million will be used for general corporate purposes.

In August 2013, upon completion of the merger with Multiband, we issued $100 million aggregate principal amount of notes in exchange for an equal aggregate principal amount of notes issued by our wholly owned subsidiary, GNET Escrow Corp. GNET Escrow Corp. offered the notes in June 2013 to fund the merger with Multiband. The notes issued in exchange for the indebtedness of GNET Escrow Corp. will mature on July 1, 2018. The interest rate for all indebtedness to be retired is 12.125%.

We will not receive any proceeds from the sale of shares by the selling stockholders.

 

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DIVIDEND POLICY

We have not paid any dividends on our common stock during the two years ended December 31, 2013. We do not intend to pay any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital, acquisitions and for other general corporate purposes, including to service our debt and to fund the operation of our business. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and condition, legal requirements and other factors our board of directors deems relevant. The Indenture governing the notes and our Credit Facility also impose restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization at December 31, 2013 on:

 

    an actual basis; and

 

    on an as adjusted basis to give effect to: (i) our sale of shares                 of common stock in this offering, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of the estimated net proceeds to be received to redeem $         million in aggregate principal amount of the notes as described in “Use of Proceeds” and to fund the payment of premium and accrued and unpaid interest thereon.

This table should be read in conjunction with “Use of Proceeds,” “Selected Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

   

As of December 31, 2013

 
   

Actual

   

As Adjusted (1)

 
(in thousands except for shares and par value per share)            

Cash and cash equivalents

  $ 59,439      $                
 

 

 

   

 

 

 

Total debt

   

Credit Facility

  $ —        $     

12.125% Senior Secured Notes due 2018

    327,146     
 

 

 

   

 

 

 

Total debt

    327,146     
 

 

 

   

 

 

 

Total stockholders’ equity (deficit)

   

Preferred stock, $0.01 par value: 3,000,000 shares authorized, issued and outstanding, actual, pro forma and pro forma as adjusted

    —       

Common stock, $0.01 par value: 10,000,000 shares authorized, 985,714 shares issued and 869,396 outstanding, actual;             shares authorized,             shares issued and             outstanding, as adjusted

    10     

Additional paid-in capital

    13,314     

Treasury stock

    (11,756  

Accumulated deficit

    (136,892  
 

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (135,324       (2) 
 

 

 

   

 

 

 

Total capitalization

  $ 191,822      $   (2) 
 

 

 

   

 

 

 

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) cash and cash equivalents, and additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(2) As adjusted total stockholders’ equity (deficit) and as adjusted total capitalization give effect to (a) the     % prepayment premium in an aggregate amount of $         million in connection with the redemption of $         million of the notes and (b) the write-off of approximately $         million of unamortized deferred financing costs associated with the redemption of $         million of the notes, in each case with a portion of the net proceeds of this offering.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. The historical net tangible book value of our common stock as of December 31, 2013 was $(233.6) million, or $             per share. Historical net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock.

After giving effect to the receipt of the net proceeds from our sale of                 shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution of $         per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

      $     

Pro forma net tangible book value per share as of December 31, 2013

   $                       

Increase per share attributable to investors in this offering

     
  

 

 

    

Pro forma net tangible book value per share, as adjusted to give effect to this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $     
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $         per share and the dilution to new investors by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $         per share and the dilution to new investors by $         per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $         per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $         per share of common stock.

 

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The table below summarizes as of December 31, 2013, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses.

 

          

Total Consideration

   

Average Price Per
Share

 
  

Shares Purchased

   

Amount

(in thousands)

    

 

   
     Number    Percent        Percent    

Existing stockholders

            $               $     

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100.0        100.0  
  

 

  

 

 

   

 

 

    

 

 

   

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to                 shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to                 shares, or     % of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters’ over-allotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to                 shares, or     % of the total number of shares of our common stock outstanding after this offering.

To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2000 Plan and 2008 Plan as of December 31, 2013 were exercised, then our existing stockholders, including the holders of these options, would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the completion of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $         million, or     %, the total consideration paid by our new investors would be $         million, or     %, the average price per share paid by our existing stockholders would be $         and the average price per share paid by our new investors would be $            .

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

The following unaudited pro forma combined statement of operations is based on the historical financial statements of Goodman Networks and Multiband, combined and adjusted to give effect to the merger with Multiband, or the Merger. A pro forma balance sheet has not been included as the Merger with Multiband closed on August 30, 2013 and is fully reflected in our consolidated balance sheet as of December 31, 2013.

The unaudited pro forma combined statement of operations for the fiscal year ended December 31, 2013 assumes that the Merger took place on January 1, 2013. Goodman Networks’ audited consolidated statement of operations for the fiscal year ended December 31, 2013 has been combined with Multiband’s unaudited consolidated statement of operations for the period from January 1, 2013 to August 30, 2013, the closing date of the Merger. Multiband’s results of operations for the period from August 31, 2013 to December 31, 2013 are included in our consolidated statement of operations for the year ended December 31, 2013.

The historical consolidated financial information has been adjusted in the unaudited pro forma combined statement of operations to give effect to pro forma events that are (1) directly attributable to the Merger, (2) factually supportable, and (3) expected to have a continuing impact on the combined results. The unaudited pro forma combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma combined statement of operations. In addition, the unaudited pro forma combined financial information was based on, and should be read in conjunction with, the following historical consolidated financial statements and accompanying notes of Goodman Networks and Multiband for the applicable periods, which are included elsewhere in this prospectus:

 

    Separate historical financial statements of Goodman Networks for the year ended December 31, 2013 and the related notes;

 

    Separate historical financial statements of Multiband as of and for the six months ended June 30, 2013 and the related notes (the latest interim period that preceded the Merger).

The unaudited pro forma combined financial information is presented for informational purposes only. The unaudited pro forma information is not necessarily indicative of what the combined results of operations actually would have been had the Merger been completed as of the date indicated. In addition, the unaudited pro forma combined financial information does not purport to project the combined financial position or operating results for any future period. The unaudited pro forma combined statement of operations does not include the realization of potential cost savings from operating efficiencies or restructuring costs which may result from the Merger.

The unaudited pro forma combined financial information has been prepared using the acquisition method of accounting for business combinations under accounting principles generally accepted in the United States, or GAAP. Goodman Networks is the acquirer for accounting purposes.

Goodman Networks has not had sufficient time to completely evaluate the identifiable assets and liabilities of Multiband. Accordingly, the pro forma adjustments, including the allocations of the purchase price, are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial information. Differences between these preliminary estimates and the final acquisition accounting could be material.

 

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GOODMAN NETWORKS INCORPORATED

Unaudited Pro Forma Combined Statement of Operations

For The Year Ended December 31, 2013

(Dollars in thousands)

 

    Goodman
Networks Incorporated,
as reported
    Multiband
Corporation (1)
    Pro Forma
Adjustments
        Combined  

Revenues

  $ 931,745      $ 203,531      $ —          $ 1,135,276   
         

Cost of revenues

    806,109        148,638        9,156      A     963,903   
 

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

    125,636        54,893        (9,156       171,373   

Selling, general and administrative
expenses (2)

    121,106        49,201        (8,802   A,B
    161,505   
 

 

 

   

 

 

   

 

 

     

 

 

 

Operating income

    4,530        5,692        (354       9,868   

Other expense

            —     

Interest expense

    40,287        1,761        4,578      C     46,626   

Interest income

    —          (11     —            (11

Write-off of deferred financing costs

    —          2,342        (2,342   D     —     

Other income

    (25     (39     —            (64
 

 

 

   

 

 

   

 

 

     

 

 

 

Income (loss) before income taxes

    (35,732     1,639        (2,590       (36,683

Income tax expense (benefit)

    7,506        2,112        (906   E     8,712   
 

 

 

   

 

 

   

 

 

     

 

 

 

Net loss from continuing operations

  $ (43,238   $ (473   $ (1,684     $ (45,395
 

 

 

   

 

 

   

 

 

     

 

 

 

 

(1) Reflects the results of operations for Multiband Corporation for the period from January 1, 2013 to August 30, 2013, the closing date of the Merger.
(2) Includes depreciation and amortization expenses.

 

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1. Description of Transaction

On May 21, 2013, Goodman Networks, MergerSub, and Multiband entered into a definitive agreement for Multiband to merge with and into MergerSub, with Multiband surviving the Merger (the “Merger”). On August 30, 2013, Multiband became a wholly owned subsidiary of Goodman Networks. As part of the Merger, Goodman Networks acquired the outstanding shares of Multiband common stock at $3.25 per share in cash and repaid Multiband’s indebtedness of $22.6 million, which was the amount outstanding under Multiband’s credit agreement that Goodman Networks agreed to repay pursuant to the merger agreement with Multiband.

To fund the Merger, Goodman Networks offered $100 million aggregate principal amount of its Stage I Notes 12.125% Senior Secured Notes due 2018 (“Stage I Notes”) with a premium of $5 million. Substantially concurrently with the consummation of the Merger, Goodman Networks redeemed all of the Stage I Notes by issuing in exchange for the Stage I Notes its 12.125% Senior Secured Notes due 2018 (the “Stage II Notes” and together with the Stage I Notes, the “Notes”) equal to the aggregate principal amount of the Stage I Notes (the “Stage II Notes Exchange Redemption”). The Stage II Notes so issued constituted an additional issuance of Goodman Networks’ 12.125% Senior Secured Notes due 2018 (the “Existing Notes” and, together with the Stage II Notes, the “Goodman Notes”) pursuant to that certain indenture, dated as of June 23, 2011, as supplemented and amended (the “Existing Goodman Networks Indenture”) between Goodman Networks and Wells Fargo Bank, National Association, as trustee, under which Goodman Networks previously issued $225.0 million in aggregate principal amount of Existing Notes. Following the closing of the Merger, Multiband and its subsidiaries became restricted subsidiaries and guarantors under the Existing Goodman Networks Indenture and the Credit Facility.

2. Basis of Presentation

The unaudited pro forma combined financial information is based on the historical financial statements of Goodman Networks and Multiband and prepared and presented pursuant to the regulations of the Securities and Exchange Commission regarding pro forma financial information. The pro forma adjustments include the application of the acquisition method under Accounting Standards Codification (ASC) Topic 805, Business Combinations with respect to the Merger.

ASC Topic 805 requires, among other things, that identifiable assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date, which was August 30, 2013, the closing date of the Merger. Accordingly, the pro forma adjustments reflected in the accompanying combined pro forma financial statements may be materially different from the actual acquisition accounting adjustments required as of the acquisition date.

Under ASC Topic 820, Fair Value Measurements and Disclosures, “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be unrelated buyers and sellers in the principal or the most advantageous market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

There were no transactions between Goodman Networks and Multiband during the periods presented in the unaudited pro forma combined financial statements that would need to be eliminated.

 

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3. Accounting Policies

Upon completion of the Merger, Goodman Networks performed a detailed review of Multiband’s accounting policies. As a result of that review, Goodman Networks identified a difference between the accounting policies of the two companies related to the income statement classification of certain workers compensation, health benefit and other expenses. These expenses have been reclassified from selling, general and administrative expenses to cost of revenues in the accompanying unaudited pro forma combined statement of operations. This adjustment has been identified as adjustment (A) in the accompanying unaudited pro forma combined statement of operations and in the notes below. Goodman Networks is not aware of any additional accounting policy differences that would have a material impact on the combined financial statements and the unaudited pro forma combined statement of operations.

4. Adjustments to Unaudited Pro Forma Combined Financial Statements

 

(A) Reflects the reclassification of certain workers compensation and health benefit expenses from selling, general and administrative expenses to cost of revenues to conform Multiband’s accounting policy for these expenses to the accounting policy adopted by Goodman Networks.

 

(B) Reflects the following adjustment to depreciation and amortization (in thousands):

 

     Year Ended
December 31,
2013
 

Elimination of amortization and impairment of Multiband’s intangible assets

   $ (2,491

Amortization of intangible assets acquired in connection with the Merger

     2,845   
  

 

 

 
   $ 354   

 

(C) Reflects the following adjustments to interest expense (in thousands):

 

     Year Ended
December 31,
2013
 

Amortization of premium and issuance costs of debt issued with the Merger

   $ 600   

Elimination of amortization of Multiband’s historical debt discount and issuance costs

     (945

Estimated interest expense from debt issued in connection with the Merger (See below)

     6,063   

Elimination of Multiband’s interest expense from debt retired in connection with the Merger

     (1,140
  

 

 

 
   $ 4,578   
  

 

 

 

 

(D) Reflects the elimination of the write-off of Multiband’s deferred financing costs related to debt repaid in connection with the Merger during the period from January 1, 2013 to August 30, 2013.

 

(E) Reflects the income tax effects of pro forma adjustments based on Goodman Networks’ statutory rate of 35%.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth certain selected historical consolidated financial and operating data for our business as of and for the years ended December 31, 2011, 2012 and 2013, which has been derived from and should be read together with, our audited historical consolidated financial statements and related notes included elsewhere in this prospectus, and as of and for the year ended December 31, 2010, which has been derived from and should be read together with, our audited historical consolidated financial statements not included in this prospectus.

On February 28, 2013, we completed the CSG acquisition. Accordingly, the operations and assets acquired in the CSG acquisition are included in our historical results of operations beginning March 1, 2013 and reflected in our historical balance sheet as of June 30, 2013. We completed the merger with Multiband on August 30, 2013. The operations and assets of Multiband are therefore included in our historical results of operations beginning August 31, 2013 and reflected in our historical balance sheet as of September 30, 2013.

You should read the following selected historical financial and operating data in conjunction with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and other financial information included elsewhere in this prospectus. Our historical results included below and elsewhere in this prospectus are not necessarily indicative of our future performance.

 

   

Year Ended December 31,

 
    2010     2011     2012     2013  
    (Dollars in thousands, except per share data)  

Statement of Operations Data (1):

       

Revenues

  $ 320,388      $ 729,002      $ 609,227      $ 931,745   

Cost of revenues

    279,767        610,784        499,288        806,109   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    40,621        118,218        109,939        125,636   

Selling, general and administrative expenses

    53,656        67,450        87,216        121,106   

Other operating income (expense)

    749        (4,000     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (12,286     46,768        22,723        4,530   

Interest expense

    5,718        20,548        31,998        40,287   

Other income

    —          —          —          (25
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

    (18,004     26,220        (9,275     (35,732

Income tax expense (benefit)

    (6,897     10,309        (4,176     7,506   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    (11,107     15,911        (5,099     (43,238

Income (loss) from discontinued operations

    (256     3,407        2,568        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (11,363   $ 19,318      $ (2,531   $ (43,238
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to common stock

       

Basic

       

Diluted

       

Balance Sheet Data (at period end):

       

Cash and cash equivalents

        $ 59,439   

Total assets

          508,390   

Long-term debt (net of current portion)

          330,346   

Total stockholders’ deficit

          (135,324

 

(1) During the three months ended March 31, 2013, transitional services ceased on an expired contract with AT&T in the Pacific Northwest region. Accordingly, the results of operations for the Pacific Northwest region are presented as discontinued operations for all periods presented.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results may differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.” See “Cautionary Statement Regarding Forward-Looking Statements.”

Overview

We are a leading national provider of end-to-end network infrastructure and professional services to the wireless telecommunications industry. Our wireless telecommunications services span the full network lifecycle, including the design, engineering, construction, deployment, integration, maintenance and decommissioning of wireless networks. We perform these services across multiple network infrastructures, including traditional cell towers as well as next generation small cell and distributed antenna systems, or DAS. We also serve the satellite television industry by providing onsite installation, upgrading and maintenance of satellite television systems to both the residential and commercial markets customers. These highly specialized and technical services are critical to the capability of our customers to deliver voice, data and video services to their end users.

We operate from a broad footprint, having provided services during 2013 in all 50 states. As of March 31, 2014, we employed over 4,900 persons, including approximately 2,500 technicians and 530 engineers, and operated 62 regional offices and warehouses. During the year ended December 31, 2013, we completed over 65,000 telecommunications projects and fulfilled over 1.5 million satellite television installation, upgrade or maintenance work orders. We have established strong, long-standing relationships with Tier-1 wireless carriers and original telecommunications equipment manufacturers, or OEMs, including AT&T Mobility, LLC, or AT&T, Alcatel-Lucent USA Inc., or Alcatel-Lucent, Sprint/United Management Company, or Sprint as well as DIRECTV. Over the last few years, we have diversified our customer base within the telecommunications industry by leveraging our long-term success and reputation for quality to win new customers such as Nokia Solutions and Networks B.V., or NSN, T-Mobile International AG, or T-Mobile, and Verizon. We generated nearly all of our revenues over the past several years under master service agreements, or MSAs, that establish a framework, including pricing and other terms, for providing ongoing services. We believe our long-standing relationships with our largest customers, which are governed by MSAs that historically have been renewed or extended, provide us with high visibility to our future revenue. During 2013, we also provided small cell or DAS services to over 100 enterprises including higher education institutions, stadiums for professional and collegiate sports events, hotels and resorts, major retailers, hospitals and government agencies.

Significant Transactions

Merger with Multiband Corporation

On August 30, 2013, we completed a merger with Multiband Corporation, or Multiband, pursuant to which Multiband became a wholly owned subsidiary of Goodman Networks. The aggregate purchase price, excluding merger-related fees and expenses, was approximately $101.1 million. Upon the closing of the merger, Multiband and its subsidiaries became restricted subsidiaries and guarantors under the indenture, or the Indenture, governing the Company’s 12.125% senior secured notes due 2018, or the notes, and the Company’s amended and restated senior secured revolving credit facility, or the Credit Facility. To fund the merger with Multiband, the Company, through its wholly owned subsidiary, sold an additional $100 million of senior secured

 

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notes due 2018, or the tack-on notes, under terms substantially identical to those of the $225 million in aggregate principal amount of notes issued in June 2011, or the original notes. The Company paid the remainder of the merger consideration from cash on hand.

Disposition of the MDU Assets

On December 31, 2013, the Company sold certain assets to DIRECTV MDU, LLC, or DIRECTV MDU, and DIRECTV MDU assumed certain liabilities of the Company, related to the division of the Company’s business involved with the ownership and operation of subscription based video, high-speed internet and voice services and related call center functions to multiple dwelling unit customers, lodging and institution customers and commercial establishments, or, such assets, collectively, the MDU Assets. The operations of the MDU Assets were previously reported in the Company’s “Other Services” segment. In consideration for the MDU Assets, DIRECTV MDU paid the Company $12.5 million and additional non-cash consideration including an extension of the existing Multiband/DIRECTV HSP Agreement, resulting in a four-year remaining term ending on December 31, 2017, as well as the assumption of certain liabilities.

Acquisition of Design Build Technologies

On August 8, 2013, we acquired the assets of Design Build Technologies, LLC, or DBT, one of our former subcontractors in the southeast region of the United States, for $1.3 million in cash together with earn-out payments of up to an aggregate of $0.9 million over a period of 18 months. We received certain assets, tower crews, and non-compete agreements from the owner of DBT, who became an employee of our Company upon the close of the transaction.

Acquisition of the Custom Solutions Group of Cellular Specialties, Inc.

On February 28, 2013, we completed the acquisition of the Custom Solutions Group of Cellular Specialties, Inc., or CSG, which provides indoor and outdoor wireless distributed antenna system, or DAS, and carrier Wi-Fi solutions, services, consultations and maintenance. The purchase price consisted of $18.0 million in cash, earn-out payments of up to an aggregate of $17.0 million through December 31, 2015 and the assumption of certain liabilities related to the acquired business. We believe the acquisition will help better serve our customers’ evolving needs by addressing the increasingly used small cell and DAS offload solutions.

Operating Segments

Prior to the merger with Multiband, we operated our business in two segments: Professional Services and Infrastructure Services.

Professional Services. Our Professional Services segment provides customers with highly technical services primarily related to designing, engineering, integration and performance optimization of transport, or “backhaul,” and core, or “central office,” equipment of enterprise and wireless carrier networks. When a network operator integrates a new element into its live network or performs a network-wide upgrade, a team of in-house engineers from our Professional Services segment can administer the complete network design, equipment compatibility assessments and configuration guidelines, the migration of data traffic onto the new or modified network and the network activation.

In addition, we provide services related to the design, engineering, installation, integration and maintenance of small cell and DAS networks. Our acquisition of CSG was incorporated into our Professional Services segment, which has enhanced our ability to provide end-to-end in-building services from design and engineering to maintenance. Our enterprise small cell and DAS customers often require most or all of the services listed above and may also purchase consulting, post-deployment monitoring, performance optimization and maintenance services.

 

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Infrastructure Services. Our Infrastructure Services segment provides program management services of field projects necessary to deploy, upgrade, maintain or decommission wireless outdoor networks. We support wireless carriers in their implementation of critical technologies such as long-term evolution, or 4G-LTE, the addition of new macro and small cell sites, increase of capacity at their existing cell sites through additional spectrum allocations, as well as other optimization and maintenance activities at cell sites. When a network provider requests our services to build or modify a cell site, our Infrastructure Services segment is able to: (i) handle the required pre-construction leasing, zoning, permitting and entitlement activities for the acquisition of the cell site, (ii) prepare site designs, structural analysis and certified drawings and (iii) manage the construction or modification of the site including tower-top and ground equipment installation. These services are managed by our wireless project and construction managers and are performed by a combination of scoping engineers, real estate specialists, ground crews, line and antenna crews and equipment technicians, either employed by us or retained by us as subcontractors.

Our Infrastructure Services segment also provides fiber and wireless backhaul services to carriers. Our fiber backhaul services, or Fiber to the Cell services, connect existing points in the fiber networks of wireline carriers to thousands of cell sites needing the bandwidth and ethernet capabilities for upgrading capacity. Our microwave backhaul services provide a turnkey solution offering site audit, site acquisition, microwave line of sight surveys, path design, installation, testing and activation services. This fiber and wireless backhaul work often involves planning, route engineering, right-of-way (for fiber work) and permitting, logistics, project management, construction inspection and optical fiber splicing services. Backhaul work is performed to extend an existing optical fiber network owned by a wireline carrier, typically between several hundred yards to a few miles, to the cell site.

We expect continued growth in the Infrastructure Services segment, but we expect the rate of growth to moderate in 2014.

We began operating the following additional segments in connection with the closing of the merger with Multiband:

Field Services. Our Field Services segment provides installation and maintenance services to DIRECTV, commercial customers and a provider of internet wireless service primarily to rural markets. Our wholly owned subsidiary Multiband, which we acquired in August 2013, fulfilled over 1.5 million satellite television installation, upgrade or maintenance work orders during 2013 for DIRECTV, which represented 27.6% of DIRECTV’s outsourced work orders for residents of single-family homes during 2013. We were the second largest DIRECTV in-home installation provider in the United States for the year ended December 31, 2013.

Other Services. The Other Services segment includes our Engineering, Energy & Construction, or EE&C, line of business and, until we disposed of the MDU Assets to DIRECTV MDU on December 31, 2013, included the Multi-Dwelling Unit, or MDU, line of business. See “Significant Transactions—Disposition of the MDU Assets” above for a description of the disposition of certain assets related to the MDU services.

Engineering, Energy & Construction Services. Our EE&C services include the provision of engineering and construction services for the wired and wireless telecommunications industry, including public safety networks, renewable energy services including wind and solar applications and other design and construction services which are usually done on a project basis.

Multi-Dwelling Unit Services. Our MDU services included the provision of voice, data and video services to residents of MDU facilities as an owner/operator of the rights under the related subscription agreements with those residents. From 2004 until 2013, Multiband operated under a Master System Operator agreement for DIRECTV, through which DIRECTV offered satellite television services to residents of MDUs. On December 31, 2013 we sold the MDU Assets, from which we provided the MDU services, to an affiliate of

 

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DIRECTV for $12.5 million and the assumption of certain liabilities. We continue to perform certain other MDU services for DIRECTV through our Field Services segment.

We intend to integrate the EE&C line of business with our Infrastructure Services and Professional Services segments, and we expect that we will no longer have an Other Services segment beginning in 2014.

Customers

For the year ended December 31, 2013, we provided services to customers across 47 states. Following our acquisition of Multiband, we began providing services to DIRECTV. The vast majority of our revenues were related to our MSAs with a subsidiary of AT&T Inc. and Alcatel-Lucent. For the years ended December 31, 2011, 2012 and 2013, subsidiaries of AT&T Inc., Alcatel-Lucent and DIRECTV combined to provide 99.1%, 96.3% and 87.3% of our revenues, respectively.

AT&T

We provide site acquisition, construction, technology upgrades, Fiber to the Cell and maintenance services for AT&T Mobility, LLC, or AT&T, at cell sites in 9 of 31 distinct AT&T markets, or Turf Markets, as the sole, primary or secondary vendor, pursuant to a multi-year MSA that we entered into with AT&T and have amended and replaced from time to time. We refer to our MSAs with AT&T related to its turf program collectively as the “Mobility Turf Contract.” We have generated an aggregate of approximately $2.4 billion of revenue from subsidiaries of AT&T Inc. collectively for the period from January 1, 2009 through December 31, 2013.

Our Mobility Turf Contract provides for a term expiring on November 30, 2015, and AT&T has the option to renew the contract on a yearly basis thereafter. In connection therewith, AT&T reassigned certain of its Turf Markets, including the assignment to us of two additional Turf Markets, Missouri/Kansas and San Diego, and the assignment of the Pacific Northwest region, which was previously assigned to us, to another company effective December 31, 2011. Although our contract for the Pacific Northwest region expired on December 31, 2011, we continued to provide transitional services to AT&T in the Pacific Northwest region throughout 2012, and thereby concluded that we did not meet the criteria to report the results of operations from the Pacific Northwest as discontinued operations as a result of significant continuing cash flows as of December 31, 2012. During the three months ended March 31, 2013, the transitional services ceased, and accordingly, we have presented the results of operations for the Pacific Northwest region as discontinued operations for all periods presented. The results of operations of the Pacific Northwest now reported as a discontinued operation were previously included within our Infrastructure Services segment.

We provide other services to AT&T in addition to those provided under the Mobility Turf Contract. Those services include the deployment of indoor small cell systems, DAS systems and microwave transmission facilities and central office services. We recently entered into a DAS Installation Services Agreement and Subordinate Material and Services Agreement with a subsidiary of AT&T Inc. to provide these services. We continually seek to expand our service offerings to AT&T.

DIRECTV

With the acquisition of Multiband, DIRECTV became our second largest customer. The relationship between Multiband and DIRECTV has lasted for over 17 years and is essential to the success of our Field Services segment’s operations. We are one of three in-home installation providers that DIRECTV utilizes in the United States, and during the year ended December 31, 2013, Multiband performed 27.6% of all DIRECTV’s outsourced installation, upgrade and maintenance activities. Our contract with DIRECTV has a term expiring on December 31, 2017, and contains an automatic one-year renewal. Until December 31, 2013, we also provided customer support and billing services to certain of DIRECTV’s customers through our Other Services segment pursuant to a separate arrangement.

 

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Alcatel-Lucent

In November 2009, we entered into a five-year MSA with Alcatel-Lucent, or the Alcatel-Lucent Contract. Pursuant to the Alcatel-Lucent Contract, 461 of Alcatel-Lucent’s domestic engineering and integration specialists became employees of Goodman Networks. The Alcatel-Lucent Contract grants us the right to perform, subject to certain conditions, certain deployment engineering, integration engineering and radio frequency engineering services for Alcatel-Lucent in the United States. The outsourcing agreement expires on December 31, 2014, and renews on an annual basis thereafter for up to two additional one-year terms unless notice of non-renewal is first provided by either party. Under the terms of the Alcatel-Lucent Contract, Alcatel-Lucent is required to purchase a minimum level of services from us, which amount corresponds to the number of employees we are required to commit to Alcatel-Lucent’s projects under the Alcatel-Lucent Contract, and is subject to decline at a predetermined rate that accelerates in the event of attrition of certain of our employees that were formerly employed by Alcatel-Lucent. Although these contractual minimum levels of work decline over time, the amount of work we have performed for Alcatel-Lucent has consistently exceeded these contractual minimum levels.

During 2014, we anticipate that our revenues under the Alcatel-Lucent Contract will continue to decrease compared to the amount that we have historically realized thereunder, correlative with the decline in contractual minimum levels of services described above. In addition, Alcatel-Lucent may elect not to renew the Alcatel-Lucent Contract, which may cause Alcatel-Lucent to ramp down the services that we currently provide to it prior to the December 31, 2014 expiration date. We are currently in negotiations with Alcatel-Lucent to secure additional work; however, if we are unable to come to terms with Alcatel-Lucent regarding such additional work and Alcatel-Lucent decides not to extend the term of the Alcatel-Lucent Contract beyond the expiration date, Alcatel-Lucent may no longer remain a material customer.

Sprint

In May 2012 we entered into an MSA with Sprint to provide decommissioning services for Sprint’s iDEN (push-to-talk) network. We are removing equipment from Sprint’s network that is no longer in use and restoring sites to their original condition. We recognized $11.9 million and $34.0 million of revenue during the years ended December 31, 2012 and 2013, respectively, related to the services we provide for Sprint.

Enterprise Customers

We provide services to enterprise customers through our Professional Services segment. These service offerings consist of the design, installation and maintenance of DAS systems to customers such as Fortune 500 companies, hotels, hospitals, college campuses, airports and sports stadiums.

Key Components of Operating Results

The following is a discussion of key line items included in our financial statements for the periods presented below under the heading “Results of Operations.” We utilize revenues, gross profit, net income and earnings before interest, income taxes, depreciation and amortization, or EBITDA, as significant performance indicators.

Estimated Backlog

We refer to the amount of revenue we expect to recognize over the next 18 months from future work on uncompleted contracts, including MSAs and work we expect to be assigned to us under MSAs, and based on historical levels of work under such MSAs and new contractual agreements on which work has not begun, as our “estimated backlog.” We determine the amount of estimated backlog for work under MSAs based on historical trends, anticipated seasonal impacts and estimates of customer demand based upon communications with our customers. Our 18-month estimated backlog as of December 31, 2012 was $1.1 billion, and our 18-month estimated backlog as of December 31, 2013 was $1.9 billion, including $0.4 billion of estimated backlog from DIRECTV as of December 31, 2013. We expect to recognize approximately $1.1 billion of our estimated backlog as of

 

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December 31, 2013 in the next twelve months. The vast majority of estimated backlog as of December 31, 2013 has originated from multi-year customer relationships, primarily with AT&T, DIRECTV and Alcatel-Lucent.

Because we use the completed contract method of accounting for revenues and expenses from our long-term construction contracts, our estimated backlog includes revenue related to projects that we have begun but not completed performance. Therefore, our estimated backlog contains amounts related to work that we have already performed but not completed.

While our estimated backlog includes amounts under MSA and other service agreements, our customers are generally not contractually committed to purchase a minimum amount of services under these agreements, most of which can be cancelled on short or no advance notice. Therefore, our estimates concerning customers’ requirements may not be accurate. The timing of revenues for construction and installation projects included in our estimated backlog can be subject to change as a result of customer delays, regulatory requirements and other project related factors that may delay completion. Changes in timing could cause estimated revenues to be realized in periods later than originally expected or unrealized. Consequently, our estimated backlog as of any date is not a reliable indicator of our future revenues and earnings. See “Risk Factors—Risks Related to Our Business—Amounts included in our estimated backlog may not result in actual revenue or translate into profits, and our estimated backlog is subject to cancellation and unexpected adjustments and therefore is an uncertain indicator of future operating results.”

Revenues

Our revenues are generated primarily from projects performed under MSAs including the design, engineering, construction, deployment, integration, maintenance, and decommissioning of wireless networks. Our MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks as well as various other terms depending on the nature of the services provided, and typically provide for termination upon short or no advance notice.

Our revenues fluctuate as a result of the timing of the completion of our projects and changes in the capital expenditure and maintenance budgets of our customers, which may be affected by overall economic conditions, consumer demands on telecommunications and satellite television providers, the introduction of new technologies, the physical maintenance needs of our customers’ infrastructure and the actions of the government, including the Federal Communications Commission and state agencies. A significant portion of our revenues and costs in our Infrastructure Services segment are recognized during the fourth quarter of each year as we complete the most contracts in that segment during such time. See “—Seasonality,” herein.

Our Professional Services segment revenues are derived from wireless and wireline services through engineers who specialize in network architecture, transformation, reliability and performance. Until our acquisition of CSG in February 2013, the vast majority of our revenues for the Professional Services segment were attributable to work performed pursuant to the Alcatel-Lucent Contract. The acquisition of the assets of CSG expanded our revenues from enterprise, small cell and DAS customers.

Our Infrastructure Services segment revenues are derived from project management, site acquisition, architecture and engineering, construction management, equipment installation and drive-testing verification services. The vast majority of the revenues we earn in our Infrastructure Services segment are from subsidiaries of AT&T Inc. and are primarily comprised of work performed under the Mobility Turf Contract. Substantially all of our revenues are earned under fixed-unit price contracts. We have historically had success in certain circumstances seeking price adjustments from its customers to avoid losses on projects undertaken pursuant to these contracts.

Our Field Services segment revenues are derived from the installation and service of DIRECTV video programming systems for residents of single family homes through work order fulfillment under a contract with DIRECTV.

 

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The following table presents our gross deferred revenue and deferred cost balances as of December 31, 2012 and 2013, which have been presented net on a project basis in the accompanying financial statements (in thousands):

 

    

December 31,
2012

   

December 31,
2013

 

Deferred revenue (gross)

   $ (237,380   $ (197,854

Deferred cost (gross)

     222,608        251,421   
  

 

 

   

 

 

 

Net deferred cost / (deferred revenue)

   $ (14,772   $ 53,567   
  

 

 

   

 

 

 

Costs in excess of billings on uncompleted projects

   $ 33,487      $ 100,258   

Billings in excess of costs on uncompleted projects

     (48,259     (46,691
  

 

 

   

 

 

 

Net deferred cost / (deferred revenue)

   $ (14,772   $ 53,567   
  

 

 

   

 

 

 

Cost of Revenues

Our costs of revenues include the costs of providing services or completing the projects under our MSAs, including operations payroll and benefits, subcontractor costs, equipment rental, fuel, materials not provided by our customers and insurance. Profitability will be reduced or eliminated if actual costs to complete a project exceed original estimates on fixed-unit price projects under our MSAs. Estimated losses on projects under our MSAs are recognized immediately when estimated costs to complete a project exceed the expected revenue to be received for a project.

For our Professional Services segment, cost of revenues consists primarily of salaries and benefits paid to our employees. In addition to salaried employees, we hire a relatively small amount of temporary subcontractors to perform work within our Professional Services segment. An additional small percentage of cost of revenues includes materials and supplies.

For our Infrastructure Services segment, cost of revenues consists primarily of operating expenses such as salaries and related headcount expenses, subcontractor expenses and cost of materials used in the projects. The majority of these costs have historically consisted of payments made to subcontractors hired to perform work for us, typically on a fixed-unit price basis tied to completion of the given project. During periods of increased demand, subcontractors may charge more for their services. In addition, we typically bill our customers for raw materials used in the performance of services plus a certain percentage of our costs. Additional costs to us that are not included in this billing primarily include storage and shipping of materials.

For our Field Services segment, cost of revenues consists primarily of salaries for technicians, fleet expenses, the cost of installation materials used in the field projects and subcontractor expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of salaries and related headcount expenses, sales commissions and bonuses, professional fees, travel, facilities, communication expenses, depreciation and amortization and other corporate overhead. Corporate overhead costs include costs associated with corporate staff, corporate management, human resources, information technology, finance and other corporate support services.

 

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Our selling, general and administrative expenses are not allocated to a reporting segment. We expect our selling, general and administrative expenses to increase as a result of additional expenses associated with being a public company, including increased personnel costs, legal costs, accounting costs, board compensation expense, investor relations costs, director and officer insurance premiums, share-based compensation and costs associated with our compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and other applicable regulations of the Securities and Exchange Commission, or the SEC. As of December 31, 2013, we had approximately $8.0 million of unrecognized compensation costs related to non-vested stock options, which we were recognizing over a remaining weighted average vesting period of 1.1 years. The vesting of these awards will accelerate, and we will recognize any remaining unrecognized compensation costs on these awards, upon completion of this offering.

 

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Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The following table sets forth information concerning our operating results by segment for the years ended December 31, 2012 and 2013 (in thousands):

 

    

Year Ended December 31,

             
    

2012

   

2013

             
     Amount     Percentage
of Total
Revenue
    Amount     Percentage
of Total
Revenue
    Change
($)
    Change
(%)
 

Revenues:

            

Professional Services

   $ 79,140        13.0   $ 111,468        12.0   $ 32,328        40.8

Infrastructure Services

     530,087        87.0     715,518        76.8     185,431        35.0

Field Services

     —          —          88,240        9.5     88,240        n/a   

Other Services

     —          —          16,519        1.8     16,519        n/a   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     609,227        100.0     931,745        100.0     322,518        52.9

Cost of revenues:

            

Professional Services

     65,200        10.7     91,597        9.8     26,397        40.5

Infrastructure Services

     434,088        71.3     622,438        66.8     188,350        43.4

Field Services

     —          —          77,899        8.4     77,899        n/a   

Other Services

     —          —          14,175        1.5     14,175        n/a   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     499,288        82.0     806,109        86.5     306,821        61.5

Gross profit:

            

Professional Services

     13,940          19,871          5,931        42.5

Infrastructure Services

     95,999          93,080          (2,919     (3.0 )% 

Field Services

     —            10,341          10,341        n/a   

Other Services

     —            2,344          2,344        n/a   
  

 

 

     

 

 

     

 

 

   

 

 

 

Total gross profit

     109,939          125,636          15,697        14.3

Gross margin as percent of segment revenues:

            

Professional Services

     17.6       17.8      

Infrastructure Services

     18.1       13.0      

Field Services

     —            11.7      

Other Services

     —            14.2      
  

 

 

     

 

 

       

Total gross margin

     18.0       13.5      

Selling, general and administrative expenses

     87,216        14.3     121,106        13.0     33,890        38.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     22,723        3.7     4,530        0.5     (18,193     (80.1 )% 

Other (income) loss

     —          —          (25     (0.0 )%      (25     n/a   

Interest expense

     31,998        5.3     40,287        4.3     8,289        25.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes from continuing operations

     (9,275     (1.5 )%      (35,732     (3.8 )%      (26,457     (285.3 )% 

Income tax expense (benefit)

     (4,176     (0.7 )%      7,506        0.8     11,682        (279.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (5,099     (0.8 )%      (43,238     (4.6 )%      (38,139     (748.0 )% 

Discontinued operations, net of income taxes

     2,568        0.4     —          —          (2,568     (100.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,531     (0.4 )%    $ (43,238     (4.6 )%    $ (40,707     (1608.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

We recognized total revenues of $931.7 million for the year ended December 31, 2013, compared to $609.2 million for the year ended December 31, 2012, representing an increase of $322.5 million, or 52.9%. Our

 

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aggregate revenue from subsidiaries of AT&T Inc., a majority of which was earned through our Infrastructure Services segment, was $662.8 million for the year ended December 31, 2013, compared to $532.1 million in the same period of 2012. In addition to the inclusion of revenue of $43.3 million generated by the operation of the assets acquired in the acquisition of CSG and revenue of $104.8 million generated by Multiband, which were not included in our results for the year ended December 31, 2012, a significant amount of our revenue increase was due to increased volume of services provided to subsidiaries of AT&T Inc. for projects that were completed during the period.

Revenues for the Professional Services segment increased $32.3 million, or 40.8%, to $111.5 million in the year ended December 31, 2013 from $79.1 million in the same period of 2012. The acquisition of CSG contributed revenues of $43.3 million during the year ended December 31, 2013, which are included in our Professional Services segment. Excluding the CSG revenues, which were not included in our results for the year ended December 31, 2012, our Professional Services revenues declined $10.9 million, or 13.8%. This decrease was primarily due to decreased volume of services provided to Alcatel-Lucent that are included within our Professional Services segment. Our aggregate revenue from Alcatel-Lucent for the year ended December 31, 2013 was $57.9 million compared to $55.0 million in the same period of 2012. We expect our aggregate revenues from the Alcatel-Lucent Contract to decline in future periods.

Revenues for the Infrastructure Services segment increased by $185.4 million, or 35.0%, to $715.5 million for the year ended December 31, 2013 from $530.1 million in the same period of 2012. The increase was primarily due to an increase in the scope and volume of services provided to AT&T under the Mobility Turf Contract for projects that completed during the period.

The Field Services segment did not exist prior to the merger with Multiband. The Field Services segment contributed revenues of $88.2 million for the four months ended December 31, 2013.

Cost of Revenues

Our cost of revenues for the year ended December 31, 2013, of $806.1 million increased $306.8 million, or 61.4%, as compared to $499.3 million for the year ended December 31, 2012, and occurred during a period when revenues increased 52.9% from the comparative period. Cost of revenues represented 82.0% and 86.5% of total revenues for the years ended December 31, 2012 and 2013, respectively.

Cost of revenues for the Professional Services segment increased $26.4 million to $91.6 million for the year ended December 31, 2013 from $65.2 million for the same period of 2012. The operation of the assets acquired in the acquisition of CSG contributed cost of revenues of $33.0 million during the year ended December 31, 2013, which are included in our Professional Services segment. Excluding CSG cost of revenues, which were not included in our results for the year ended December 31, 2012, our Professional Services cost of revenues declined $6.6 million, or 10.1%. This decrease was primarily related to a reduction of project workload under the Alcatel-Lucent Contract. Cost of revenues for the Professional Services segment increased 40.5% due to revenue mix changes, schedule changes from Alcatel-Lucent and also the operational integration costs of CSG. During this period, revenues for the Professional Services segment also increased by 40.8% from the comparative period.

Cost of revenues for the Infrastructure Services segment increased $188.4 million to $622.4 million for the year ended December 31, 2013 from $434.1 million for the same period of 2012. While the majority of the increase was related to the increase in the volume of work we completed in our Infrastructure Services segment, we incurred approximately $27 million in costs (3.8% of segment revenue) due to the following items that were not volume related: (i) tower crew shortages in all markets requiring significant cost increases to attract and maintain the necessary crew capacity (which included implementing exclusivity arrangements and incentives with key tower crew vendors); (ii) schedule accelerations and recoveries due to such crew shortages as well as weather related impact in the fourth quarter; (iii) integration and ramp up expenses for our internal self-perform capability, including for crews acquired in our DBT acquisition; and (iv) quality issues that we corrected in a few of our markets in 2013.

 

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We have incurred additional costs related to these items for projects that are still in progress and have yet to be recognized on our income statement. We are working aggressively to mitigate the impact of these items through leadership changes and additions we have made in our Infrastructure Services segment, increased self-perform capabilities and proactive management of our leading tower crew vendors. We expect that these costs will cause continued pressure on our gross margins into 2014.

The Field Services segment did not exist prior to the merger with Multiband. The Field Services segment incurred cost of revenues of $77.9 million for the four months ended December 31, 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2013 were $121.1 million as compared to $87.2 million for the same period of 2012, representing an overall increase of $33.9 million, or 38.9%. The increase during the period is attributable to (i) an increase of $8.5 million in employee related costs due to increased headcount of 108 employees (excluding Multiband employees) at December 31, 2013 as compared to December 31, 2012, (ii) $1.8 million of search fees and our transition services agreement with CSG, (iii) an increase of $3.8 million in professional fees related to merger and acquisition advisory fees, (iv) $5.2 million due to amortization expense related to intangible assets acquired in the CSG and Multiband acquisitions, (v) $1.4 million related to the acceleration of restricted stock and employee stock options held by Multiband employees at the date of the merger with Multiband and (vii) $10.3 million of other selling, general and administrative charges related to Multiband that were not included in our results prior to the merger with Multiband. Pursuant to the Indenture Amendments (as defined below), the merger and acquisition advisory fees of $4.2 million and amortization of intangible assets acquired from CSG and Multiband of $5.2 million and the equity acceleration charges of $1.4 million related to the merger with Multiband will be excluded from our calculation of Consolidated EBITDA per the Indenture.

Interest Expense

Interest expense for the years ended December 31, 2012 and 2013, was $32.0 million and $40.3 million, respectively. This increase is due to a $0.9 million increase in penalty interest associated with delays in registering the exchange offer for the original notes and increased interest incurred as a result of the issuance of the tack-on notes on June 13, 2013 of $6.7 million. We expect our interest expense to increase in future periods as a result of the tack-on notes added in June 2013.

Income Tax Expense

As a result of the loss before taxes and a valuation allowance recorded against our deferred tax assets, we recorded income tax expense of $7.5 million for the year ended December 31, 2013, compared to a benefit of $4.2 million for the same period of 2012. Our effective income tax rate was 45.0% and (21.0)% for the years ended December 31, 2012 and 2013, respectively. The reduction in the effective tax rate is due to the valuation allowance of $17.6 million, $2.4 million of acquisition costs related to the acquisition of Multiband which are not deductible for tax purposes, and the write-off of approximately $1.9 million of the income tax receivable that existed at December 31, 2012.

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

The following table sets forth information concerning our operating results by segment for the years ended December 31, 2011 and 2012 (in thousands):

 

    

Year Ended December 31,

             
    

2011

   

2012

             
     Amount     Percentage
of Total
Revenue
    Amount     Percentage
of Total
Revenue
    Change ($)     Change (%)  

Revenues:

            

Professional Services

   $ 91,650       12.6 %   $ 79,140       13.0 %   $ (12,510 )     (13.6 )%

Infrastructure Services

     637,352       87.4 %     530,087       87.0     (107,265 )     (16.8 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     729,002       100.0 %     609,227       100.0 %     (119,775 )     (16.4 )%

Cost of revenues:

            

Professional Services

     78,369       10.8 %     65,200       10.7 %     (13,169 )     (16.8 )%

Infrastructure Services

     532,415       73.0 %     434,088       71.3 %     (98,327 )     (18.5 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     610,784       83.8 %     499,288       82.0 %     (111,496     (18.3 )%

Gross profit:

            

Professional Services

     13,281         13,940         659       5.0 %

Infrastructure Services

     104,937         95,999         (8,938 )     (8.5 )%
  

 

 

     

 

 

     

 

 

   

 

 

 

Total gross profit

     118,218         109,939         (8,279 )     (7.0 )%

Gross margin as a percent of segment revenue:

            

Professional Services

     14.5 %       17.6 %      

Infrastructure Services

     16.5 %       18.1 %      
  

 

 

     

 

 

       

Total gross margin

     16.2 %       18.0 %      

Selling, general and administrative expenses

     67,450       9.3 %     87,216       14.3 %     19,766        29.3 %

Other operating income (loss)

     (4,000 )     (0.5 )%     —         —          4,000       n/a  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     46,768       6.4 %     22,723       3.7 %     (24,045     (51.4 )%

Interest expense

     20,548        2.8 %     31,998        5.3 %     11,450       55.7 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     26,220        3.6 %     (9,275     (1.5 )%     (35,495     (135.4 )%

Income tax expense (benefit)

     10,309        1.4 %     (4,176     (0.7 )%     (14,485     (140.5 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations before income taxes

     15,911        2.2     (5,099     (0.8 )%      (21,010     (132.1 )% 

Discontinued operations, net of income taxes

     3,407        (0.5 )%      2,568        0.4     (839     (24.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 19,318       2.6 %   $ (2,531     (0.4 )%   $ (21,849     (113.1 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

We recognized total revenues of $729.0 million for the year ended December 31, 2011, compared to $609.2 million for the year ended December 31, 2012, representing a decrease of $119.8 million, or 16.4%, almost all of which occurred in our Infrastructure Services segment. A significant amount of our revenue decline was attributed to a decrease in the volume of services performed under the Mobility Turf Contract.

 

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Revenues for the Professional Services segment decreased $12.5 million, or 13.6%, from $91.7 million in 2011 to $79.1 million in the year ended December 31, 2012. This decrease was primarily due to decreased Volume of services provided to Alcatel-Lucent. Our aggregate revenue from Alcatel-Lucent for the year ended December 31, 2011 was $72.3 million compared to $55.0 million for the year ended December 31, 2012. We expect our aggregate revenues from the Alcatel-Lucent Contract to continue to decline in future periods, correlative with the decline in contractual minimum levels of services described above.

Revenues for the Infrastructure Services segment decreased by $107.3 million, or 16.8%, from $637.4 million in 2011 to $530.1 million for the year ended December 31, 2012. The decrease was primarily due to a decrease in the scope and volume of services provided to AT&T under the Mobility Turf Contract. We experienced a temporary decrease in revenues from AT&T following AT&T Inc.’s announcement in December 2011 of the termination of its agreement to acquire T-Mobile. Our aggregate revenue from subsidiaries of AT&T Inc., a majority of which was earned through our Infrastructure Services segment was $650.4 million in 2011 compared to $532.1 million in 2012.

Cost of Revenues

Our cost of revenues decreased $111.5 million, or 18.3%, from $610.8 million for the year ended December 31, 2011 to $499.3 million for the year ended December 31, 2012, and occurred during a period when revenues decreased 16.4% from the comparative period. Cost of revenues represented 83.8% and 82.0% of total revenues for the year ended December 31, 2011 and 2012, respectively. Margin expansion in 2012 was the result of greater scale and leverage of our overhead costs as well as more efficient management of direct construction costs.

Cost of revenues for the Professional Services segment decreased $13.2 million from $78.4 million in 2011 to $65.2 million for the year ended December 31, 2012. The majority of this decrease was related to lower staffing required to meet a decreased Alcatel-Lucent project workload. Cost of revenues for the Professional Services segment decreased 16.8% during a period when revenues for the segment decreased by 13.6% from the comparative period.

Cost of revenues for the Infrastructure Services segment decreased $98.3 million from $532.4 million in 2011 to $434.1 million for the year ended December 31, 2012. The majority of this decrease resulted from a reduction in the variable costs associated with supporting the decreased volume and scope of services performed under the Mobility Turf Contract. This decrease in costs of revenues of 18.5% occurred during a period when the segment’s revenues decreased by 16.8% as compared to the year ended December 31, 2011. Improvements during the period resulted from operational improvements made in the segment and through the realization of economies of scale, which allowed us to more efficiently utilize our operating assets and human resources. Due to shortages of qualified tower crews currently being experienced by the wireless industry resulting from increased demand for services such as those we provide, we may incur additional cost to hire additional tower crew personnel or pay additional incentives to subcontracted tower crews to meet expected demand.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2011, were $67.5 million as compared to $87.2 million for the year ended December 31, 2012, representing an overall increase of $19.8 million, or 29.3%. The increase was primarily related to an increase in compensation and related expenses of $11.3 million and an increase in professional fees of $6.7 million related to the restatement of our historical financial statements.

Other Operating Loss

Other operating loss for the year ended December 31, 2011, was $4.0 million as compared to $0.0 for the year ended December 31, 2012. The $4.0 million loss incurred in 2011 is related to our outstanding guarantee of a related party’s line of credit, of which we determined as of December 31, 2011, we would likely be required to perform for the full exposure.

 

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Interest Expense

Interest expense for the years ended December 31, 2011 and 2012, was $20.5 million and $32.0 million, respectively. This increase is due to interest associated with the original notes that were issued on June 23, 2011 and a loss of $1.3 million on the June 2011 extinguishment of our subordinated debt. We expect our interest expense to decrease in future periods as a result of the penalty interest ceasing to accrue after we complete the exchange offer for the original notes.

Income Tax Expense (Benefit)

Income tax expense decreased $14.5 million to a $4.2 million income tax benefit for the year ended December 31, 2012 from a $10.3 million income tax expense for the year ended December 31, 2011. The effective tax rate was 45.0% and 39.3% for the years ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012, our effective tax rate differs from the statutory federal rate of 35.0% primarily due to net state and local taxes and non-deductible expenses. These adjustments relative to $9.3 million loss before income tax expense result in the effective tax rate of 45.0%. For the year ended December 31, 2011, our effective tax rate differs from the statutory federal rate of 35.0% due to net state and local taxes and non-deductible expenses.

Liquidity and Capital Resources

Historically, our primary resources of liquidity have been borrowings under credit facilities and the proceeds of bond offerings. In 2011, we completed a $225 million private offering of the original notes. We used the proceeds of this debt offering to pay the balances remaining on notes payable to stockholders, to purchase a portion of our outstanding warrants and common stock, including all outstanding Series C Redeemable Preferred Stock, and to pay off our prior credit facility. In 2013, to fund the merger with Multiband, we issued $100 million aggregate principal amount of the tack-on notes, and collectively with the original notes, the notes, in exchange for an equal aggregate principal amount of notes issued by our wholly owned subsidiary, GNET Escrow Corp.

Our primary sources of liquidity are currently cash flows from continuing operations, funds available under our Credit Facility with PNC Bank, National Association, or PNC Bank, and our cash balances. We had $121.0 million and $59.4 million of cash on hand at December 31, 2012 and 2013, respectively. We had $45.5 million of borrowing capacity available under our Credit Facility as of December 31, 2012 and 2013.

We anticipate that our future primary liquidity needs will be for working capital, capital expenditures, debt service and any strategic acquisitions or investments that we make. We evaluate opportunities for strategic acquisitions and investments from time to time that may require cash and may consider opportunities to either repurchase outstanding debt or repurchase outstanding shares of our common stock in the future. We may also fund strategic acquisitions or investments with the proceeds from equity or debt issuances. In addition, during 2013 we spent approximately $1.1 million in contributions to charitable and religious organizations. We intend to make similar contributions in the future as we believe such contributions reflect our core values. We believe that, based on our cash balance, the availability we expect under the Credit Facility and our expected cash flow from operations, we will be able to meet all of our financial obligations for the next twelve months.

Should we be unable to comply with the terms and conditions of the Credit Facility, we would be required to obtain modifications to the Credit Facility or another source of financing to continue to operate as we anticipate, and we may not be able to obtain any such modifications or find another source of financing on acceptable terms or at all.

 

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Working Capital

We bill our Professional Services customers for a portion of our services in advance, and the remainder as the work is performed in accordance with the billing milestones contained in the contract. Revenues from the Professional Services segment are recognized on a completed performance method for our non-construction activities and on the completed contract method of accounting for construction projects. Our Infrastructure Services revenues are primarily from fixed-unit price projects and are recognized under the completed contract method of accounting, and we bill for our services as we complete certain billing milestones contained in the contract. Our collection terms are generally one percent if paid in twenty days, net forty-five days for AT&T and net sixty days for Alcatel-Lucent. Our Mobility Turf Contract allows AT&T to retain 10% of the amount due, on a per site basis, until the job is completed. For certain customers, including AT&T, we maintain inventory to meet the requirements for materials under the contracts. Occasionally, certain customers pay us in advance for a portion of the materials we purchase for their projects, or allow us to pre-bill them for materials purchases up to specified amounts. Our agreements with material providers usually allow us to pay them within 45 days of delivery. Our agreements with subcontractors usually have terms of 60 days. As of December 31, 2013, we had $(13.1) million in working capital, defined as current assets (excluding cash) less current liabilities, as compared to $25.9 million in working capital at December 31, 2012.

The following table presents selected cash flow data for the years ended December 31, 2011, 2012 and 2013 (in thousands):

 

    

Year Ended December 31,

 
     2011     2012     2013  

Net cash provided by (used in) operating activities

   $ 41,828      $ 24,226      $ (32,628

Net cash used in investing activities

     (2,015     (3,075     (111,965

Net cash provided by (used in) financing activities

     60,824        (797     83,041   

Operating Activities

Cash flow provided by or used in operations is primarily influenced by demand for our services, operating income and the type of services we provide, but can also be influenced by working capital needs such as the timing of customer billing, collection of receivables and the settlement of payables and other obligations. Working capital needs historically have been higher from April through October due to the seasonality of our business. Conversely, a portion of working capital assets has historically been converted to cash in the first and fourth quarters.

Net cash used in operating activities increased by $56.8 million to $32.6 million for the year ended December 31, 2013, as compared to the same period in 2012. This change is primarily related to changes to payment arrangements with certain of our subcontractors, which effectively resulted in an acceleration of our payment terms with these subcontractors. Also contributing to the increase was an increase of $2.4 million in interest paid during the year ended December 31, 2013 as compared to the same period in 2012, primarily related to the issuance of the tack-on notes.

Net cash provided by operating activities decreased by $17.6 million from $41.8 million for the year ended December 31, 2011, to $24.2 million for the year ended December 31, 2012, primarily due to the impact of a full year of interest expense on the original notes in 2012.

Investing Activities

Net cash used in investing activities increased by $108.9 million to $112.0 million for the year ended December 31, 2013 as compared to the same period in 2012, primarily related to our acquisitions of Multiband and CSG, partially offset by our sale of the MDU Assets.

 

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Net cash used in investing activities increased by $1.1 million from $2.0 million for the year ended December 31, 2011 as compared to $3.1 million for the year ended December 31, 2012, primarily from a reduction in capital expenditures during 2012.

Financing Activities

Net cash provided by financing activities increased by $83.8 million to $83.0 million for the year ended December 31, 2013 as compared to 2012. The change was driven primarily by the issuance of the tack-on notes in connection with the merger with Multiband.

Net cash provided by financing activities decreased by $61.6 million from $60.8 million for the year ended December 31, 2011 as compared with net cash used in financing activities of $0.8 million for the year ended December 31, 2012. The change was driven primarily by net proceeds from the notes offering that closed on June 23, 2011 as well as share repurchases and stock option settlements that we made in 2011 which did not recur in 2012.

Credit Facility

In June 2011, we entered into the Credit Facility, which provides for a five-year revolving facility that is secured by (i) a first lien on our accounts receivable, inventory, related contracts and other rights and other assets related to the foregoing and proceeds thereof and (ii) a second lien on 100% of the capital stock of all of our existing and future material U.S. subsidiaries and non-voting stock of our future material non-U.S. subsidiaries and 66% of the capital stock of all our future material non-U.S. subsidiaries. The Credit Facility has a maturity date of June 2016, and a maximum available borrowing capacity of $50.0 million subject to borrowing base determinations (that take into account, among other things, eligible receivables, eligible unbilled receivables and eligible inventory) and certain other restrictions. Amounts due under the Credit Facility may be repaid and reborrowed prior to the maturity date.

At our election, borrowings under the Credit Facility bear interest at variable rates based on (i) the base rate of PNC Bank plus a margin of between 1.50% and 2.00% (depending on certain financial thresholds) or (ii) London Interbank Offered Rate, or LIBOR, plus a margin of between 2.50% and 3.00% (depending on certain financial thresholds). The Credit Facility also provides for an unused facility fee of 0.375%.

The Credit Facility contains financial covenants that require that we not permit our annual capital expenditures to exceed $20.0 million (plus any permitted carry over). We are also required to comply with additional financial covenants upon the occurrence of a Triggering Event, as defined in the Credit Facility.

Additionally, the Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to divest our assets; incur additional indebtedness; create liens against our assets; enter into certain mergers, joint ventures, and consolidations or transfer all or substantially all of our assets; make certain investments and acquisitions; prepay certain indebtedness; make certain restricted payments; pay dividends; engage in transactions with affiliates; create subsidiaries; amend our constituent documents and material agreements in a manner that materially adversely affects the interests of the lenders; and change our business.

The Credit Facility also contains customary events of default, including, without limitation: nonpayment of principal, interest, fees, and other amounts; material inaccuracy of a representation or warranty when made or deemed made; violations of covenants; judgments and cross-default to indebtedness in excess of specified amounts; bankruptcy or insolvency events; certain U.S. Employee Retirement Income Security Act of 1974, as amended, or ERISA, events; failure to continue to be certified as a minority business enterprise; termination of, or the occurrence of a material default under, material contracts; occurrence of a material adverse effect; and change of control.

 

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As of December 31, 2013, we had no outstanding borrowings on the Credit Facility and had a $50.0 million maximum borrowing base, of which $45.5 million was available, net of $4.5 million of outstanding letters of credit. During the year ended December 31, 2011, we issued a $4.0 million letter of credit as a credit enhancement for a new letter of intent. Such letter of credit was issued in connection with a guarantee of indebtedness of a related party for proposed transaction and was originally due to expire in July 2012, then subsequently amended to expire in July 2013. Prior to the expiration, the letter of credit was amended to extend the guarantee of the related party’s line of credit until July 2014. This guarantee liability for the full amount of $4.0 million remains in accrued liabilities as of December 31, 2012.

12.125% Senior Notes due 2018

On June 23, 2011, we issued $225.0 million of the notes with a discount of $3.9 million. The notes carry a stated interest rate of 12.125%, with an effective rate of 12.50%. Interest is payable semi-annually each January 1 and July 1, beginning on January 1, 2012. The notes are secured by: (i) a first-priority lien on substantially all of our existing and future domestic plant, property, assets and equipment including tangible and intangible assets, other than the assets that secure the Credit Facility on a first-priority basis, (ii) a first-priority lien on 100% of the capital stock of our future material U.S. subsidiaries and non-voting stock of our future material non-U.S. subsidiaries and 66% of all voting stock of our future material non-U.S. subsidiaries and (iii) a second-priority lien on our accounts receivable, unbilled revenue on completed contracts and inventory that secure the Credit Facility on a first-priority basis, subject, in each case, to certain exceptions and permitted liens.

The notes are general senior secured obligations, are guaranteed by our existing and future wholly owned material domestic subsidiaries, rank pari passu in right of payment with all of our existing and future indebtedness that is not subordinated, are senior in right of payment to any of our existing and future subordinated indebtedness, are structurally subordinated to any existing and future indebtedness and other liabilities of our non-guarantor subsidiaries, and are effectively junior to all obligations under the Credit Facility to the extent of the value of the collateral securing the Credit Facility on a first priority basis.

Prior to July 1, 2014, we may redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 112.125% of the principal amount of the notes redeemed, plus accrued and unpaid interest and any additional interest, with the net cash proceeds of certain equity offerings. Prior to July 1, 2015, we may redeem some or all of the notes at a “make-whole” premium plus accrued and unpaid interest. On or after July 1, 2015, we may redeem some or all of the notes at a premium that will decrease over time plus accrued and unpaid interest.

If we undergo a change of control, as defined in the Indenture, we will be required to make an offer to each holder of the notes to repurchase all or a portion of its Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional interest penalty, if any, to the date of repurchase.

If we sell certain assets or experience certain casualty events and do not use the net proceeds as required, we will be required to use such net proceeds to repurchase the notes at 100% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

We entered into a registration rights agreement with the initial purchasers of the original notes. Under the terms thereof, we agreed to file an initial registration statement with the SEC by March 19, 2012, to become effective not later than June 17, 2012, providing for registration of “exchange notes” with terms substantially identical to the original notes. The terms of the agreement provided for additional interest obligations for a late filing interest penalty, or “additional interest,” of 0.25% per annum of the principal amount of the Notes, which increased by an additional 0.25% per annum at the beginning of each subsequent 90-day period with a maximum interest penalty of 1.0% per annum, for each day we were delinquent in filing an initial registration statement with the SEC.

 

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We were unable to file an initial registration statement with the SEC by March 19, 2012 and incurred an additional interest obligation for a late filing interest penalty of 0.25% per annum of the principal amount of the original notes through June 17, 2012 and 0.50% for the subsequent 90-day period. We were unable to cause the initial registration statement to be declared effective by June 17, 2012 and an additional interest obligation was incurred at 0.25% per annum of the principal amount of the original notes for each subsequent 90-day period. The maximum additional interest rate on the notes may not exceed 1.00% per annum at any one time in aggregate. We incurred $1.3 million and $2.2 million of penalty interest for the years ended December 31, 2012 and 2013, respectively. All additional interest on the original notes ceased to accrue on December 23, 2013, when the registration statement for the exchange of the original notes was declared effective and we launched the exchange offer.

On April 30, 2013, we submitted to Depository Trust Company a Consent Letter dated April 30, 2013, or the Consent Letter, in order to solicit consents from the holders of the original notes to (i) raise approximately $100 million of additional indebtedness, secured on a parity lien basis with the original notes, which were to fund the purchase price of the merger with Multiband, notwithstanding the requirement set forth in the Indenture that we meet certain Fixed Charge Coverage Ratio and Total Leverage Ratio tests, (ii) adjust the definition of “Consolidated EBITDA” under the Indenture to permit certain add-backs that are unrelated to our business operations and (iii) reduce the Fixed Charge Coverage Ratio that we are required to meet to consummate certain transactions from a ratio of 2.5 to 1.0 to a ratio of 2.0 to 1.0, or collectively the Indenture Amendments. On May 6, 2013, in accordance with the terms of the Indenture, we received consent from holders of a majority in aggregate principal amount of the then tack-on notes with respect to the Indenture Amendments. Promptly thereafter, we executed and delivered the First Supplemental Indenture and the First Amendment to Intercreditor Agreement, which became operative upon our payment of the consent fee of $5.1 million, pursuant to the Consent Letter, in connection with the merger with Multiband.

On May 30, 2013, Goodman Networks and GNET Escrow Corp., a wholly owned subsidiary of Goodman Networks, or the Stage I Issuer, entered into a purchase agreement with Jefferies LLC, in connection with the offering of $100.0 million aggregate principal amount of the Stage I Issuer’s 12.125% Senior Secured Notes due 2018, or the Stage I Notes. The Stage I Notes were offered at 105% of their principal amount for an effective interest rate of 10.81%. The estimated gross proceeds of approximately $105.0 million, which includes an approximate $5.0 million of issuance premium, were used, together with cash contributions from Goodman Networks, to finance the merger with Multiband and to pay related fees and expenses. Upon completion of the merger with Multiband, the Company redeemed the Stage I Notes in exchange for the issuance of an equivalent amount of our notes, or the tack-on notes, as a “tack-on” under and pursuant to the Indenture under which the Company previously issued the original notes.

Material Covenants under our Indenture and Credit Facility

We are subject to certain incurrence and maintenance covenants under the Indenture and the Credit Facility, as described below.

 

    

Applicable Test

Applicable Ratio

   Indenture    Credit Facility

Fixed Charge Coverage Ratio

   At least 2.0 to 1.0    At least 1.25 to 1.0
beginning 4/1/14

Leverage Ratio

   No more than 2.5 to 1.0    No more than:

6.0 to 1.0 on and after 1/1/14

5.5 to 1.0 on and after 7/1/14

5.0 to 1.0 on and after 1/1/15

 

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Definitions

Under the Indenture, “Consolidated EBITDA”, “Fixed Charge Coverage Ratio” and “Total Leverage Ratio” are defined as follows:

“Consolidated EBITDA” means EBITDA, as adjusted to eliminate the impact of certain items, including: (i) share-based compensation (non-cash portion), (ii) certain professional and consulting fees identified in the Indenture, (iii) severance expense (paid to certain senior level employees) and (iv) amortization of debt issuance costs.

“Fixed Charge Coverage Ratio” means the ratio of (a) Consolidated EBITDA to (b) the Fixed Charges (as defined in the Indenture) for the applicable period.

“Total Leverage Ratio” means the ratio of (a) total indebtedness of the Company to (b) the Company’s Consolidated EBITDA for the most recently ended four fiscal quarters.

Under the Credit Facility, “Fixed Charge Coverage Ratio” and “Leverage Ratio” are defined as follows:

“Fixed Charge Coverage Ratio” means the ratio of (a) EBITDA plus fees, costs and expenses incurred in connection with the Recapitalization minus unfinanced capital expenditures made during such period but only to the extent made after the occurrence of the most recent Triggering Event; to (b) all senior debt payments made during such period plus cash taxes paid during such period plus all cash dividends paid during such period, but only to the extent paid after the occurrence of the most recent Triggering Event. We are not required to comply with the Fixed Charge Coverage Ratio until the later of (i) the last day of the fiscal quarter ending March 31, 2014 or (ii) upon the occurrence of a Triggering Event that is continuing.

“Leverage Ratio” means the ratio of (a) funded debt of the Company to (b) EBITDA for the trailing twelve months ending as of the last day of such fiscal period. We are not required to comply with the Leverage Ratio until the later of (i) the last day of the fiscal quarter ending March 31, 2014 or (ii) upon the occurrence of a Triggering Event that is continuing.

We previously referred to Consolidated EBITDA as “Adjusted EBITDA” throughout our external communications, however in this prospectus and our external communications we now refer to Consolidated EBITDA as “Consolidated EBITDA.” References to Adjusted EBITDA are to a different measure. These financial measures and the related ratios described above are not calculated in accordance with generally accepted accounting principles, or GAAP, and are presented below for the purpose of demonstrating compliance with our debt covenants.

Applicability of Covenants

As described in more detail below, compliance with such ratios is only required upon the incurrence of debt or the making of a restricted payment, as applicable. If we are permitted to incur any debt or make any restricted payment under the Indenture, we will be permitted to incur such debt or make such restricted payment under the Credit Facility.

Under the Indenture, if we do not meet a Fixed Charge Coverage Ratio of at least 2.0 to 1.0, we may not consummate any of the following transactions:

 

    Restricted payments, including the payment of dividends (other than the enumerated permitted payment categories);

 

    Mergers, acquisitions, consolidations, or sale of all assets, consolidations (other than sales, assignments, transfers, conveyances, leases, or other dispositions of assets between or among the Company and the guarantors);

 

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    Incurrence of additional indebtedness (other than the enumerated permitted debt categories); or

 

    Issuance of preferred stock (other than pay-in-kind preferred stock);

Under the terms of the Credit Facility, beginning with the quarter ending March 31, 2014, we must maintain a Fixed Charge Coverage Ratio equal to at least 1.25 to 1.00 (which ratio was 1.27 to 1.00 at December 31, 2013) and a Leverage Ratio no greater than as described in the table above (which ratio was 8.28 to 1.00 at December 31, 2013) during such time as a Triggering Event is continuing. A “Triggering Event” occurs when our undrawn availability (measured as of the last date of each month) on the Credit Facility has failed to equal at least $10 million for two consecutive months and continues until our undrawn availability equals $20 million for at least three consecutive months. We are only required to maintain such ratios at such time that a Triggering Event is in existence. Failure to comply with such ratios during the existence of a Triggering Event constitutes an Event of Default (as defined therein) under the Credit Facility. Had we been required to meet these ratio tests as of December 31, 2013, we would have met the Fixed Charge Coverage Ratio and would not have met the Leverage Ratio (in each case with respect to the ratio required for the fiscal quarter ending March 31, 2014).

Under the terms of the Indenture, we are required to meet certain ratio tests giving effect to anticipated transactions, including borrowing debt and making restricted payments prior to entering these transactions. Under the Indenture, these ratio tests include a Fixed Charge Coverage Ratio of at least 2.00 to 1.00 (which ratio was 0.67 to 1.00 at December 31, 2013) and a Leverage Ratio not greater than 2.50 to 1.00 (which ratio was 13.13 to 1.00 at December 31, 2013). Excluding the merger with Multiband, with respect to which holders of the notes waived compliance with both ratios pursuant to the Consent Letter, we have not entered into any transaction that requires us to meet these tests as of December 31, 2013. Had we been required to meet these ratio tests as of December 31, 2013, we would not have met the Fixed Charge Coverage Ratio or the Leverage Ratio.

Reconciliation of Non-GAAP Financial Measures

EBITDA represents net income before income tax expense, interest, depreciation and amortization. We present EBITDA because we consider it to be an important supplemental measure of our operating performance and we believe that such information will be used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. We consider EBITDA to be an operating performance measure, and not a liquidity measure, that provides a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies.

We present Consolidated EBITDA, which is referred to as Consolidated EBITDA in the Indenture, because certain covenants in the Indenture that affect our ability to incur additional indebtedness as well as to enter into certain other transactions are calculated based on Consolidated EBITDA. Consolidated EBITDA adjusts EBITDA to eliminate the impact of certain items, including: (i) share-based compensation (non-cash portion); (ii) certain professional and consultant fees identified in the Indenture; (iii) severance expense (paid to certain senior level employees); (iv) amortization of debt issuance costs; (v) restatement fees and expenses; (vi) a tax gross-up payment made to the Company’s Chief Executive Officer to cover his tax obligation for an award of common stock and (vii) transaction fees and expenses related to acquisitions, the making of certain permitted investments, the issuance of equity or the incurrence of permitted debt.

Because EBITDA and Consolidated EBITDA are not recognized measurements under U.S. GAAP, they have limitations as analytical tools. Because of these limitations, when analyzing our operating performance, investors should use EBITDA and Consolidated EBITDA in addition to, and not as an alternative for, net income, operating income or any other performance measure presented in accordance with GAAP. Similarly, investors should not use EBITDA or Consolidated EBITDA as an alternative to cash flow from operating activities or as a measure of our liquidity.

 

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The following table reconciles our net income to EBITDA and EBITDA to Consolidated EBITDA (in thousands):

 

    

Year Ended December 31,

 
   2011     2012     2013  
     (Dollars in thousands)  

EBITDA and Consolidated EBITDA:

      

Net income (loss) from continuing operations

   $ 15,911      $ (5,099   $ (43,238

Income tax expense (benefit)

     10,309        (4,176     7,506   

Interest expense

     20,548        31,998        40,287   

Depreciation and amortization

     4,519        3,621        9,758   
  

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations

     51,287        26,344        14,313   

Income (loss) from discontinued operations, net of tax

     3,407        2,568        —     

Income tax expense (benefit) from discontinued operations

     1,867        1,568        —     
  

 

 

   

 

 

   

 

 

 

EBITDA from discontinued operations

     5,274        4,136        —     
  

 

 

   

 

 

   

 

 

 

Total EBITDA

     56,561        30,480        14,313   

Share-based compensation (a)

     1,023        5,629        4,507   

Specified professional fees (b)

     651        —          —     

Severance expense (c)

     1,228        —          —     

Amortization of debt issuance costs (d)

     (695     (1,195     (1,990

Restatement fees and expenses (e)

     —          8,075        3,382   

Tax gross up on CEO stock grant (f)

     —          3,226        —     

Acquisition related transaction expenses (g)

     —          352        5,546   
  

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 58,768      $ 46,567      $ 25,758   
  

 

 

   

 

 

   

 

 

 

 

(a) Represents non-cash expense related to equity-based compensation.
(b) Includes: (i) third-party consultant fees for a review of various business process and cost improvement initiatives; (ii) third-party consultant fees as a result of an investment in our company by affiliates of The Stephens Group, LLC; (iii) fees paid to an executive recruiting firm and (iv) operations review expenses.
(c) Represents severance costs paid to certain senior level employees upon termination of their employment with us.
(d) Amortization of debt issuance costs is included in interest expense but excluded in the calculation of Adjusted EBITDA per the Indenture governing the notes.
(e) Represents accounting advisory and audit fees incurred in connection with completing the restatement of the Company’s financial statements for the years ended December 31, 2009, 2010 and 2011, and preparing the Company’s financial statements for the year ended December 31, 2012, on the completed contract method and modifying the Company’s business processes to account for construction projects under the completed contract method going forward.
(f) Represents a tax gross-up payment made to cover the tax obligation for share grant made to the Company’s Chief Executive Officer in connection with his transition into that role.
(g) Represents fees and expenses incurred relating to our recent acquisitions.

Mortgage

On March 28, 2014, Multiband Special Purpose, LLC, or MB SPE, a Minnesota limited liability company, and a wholly owned subsidiary of Multiband Corporation, refinanced its existing indebtedness and mortgage on Multiband’s headquarters in Minnetonka, Minnesota. Multiband and MB SPE are currently party to an intercompany agreement, pursuant to which Multiband Corporation leases the premises from MB SPE. In connection with the refinancing, MB SPE delivered a promissory note in favor of Commerce Bank, a Minnesota banking corporation, for the amount of $3,750,000 at a rate of 5.75% per annum. The loan is payable in monthly installments, with the final payment due on March 28, 2019. Multiband has delivered an unsecured guaranty as further security for the payment of the obligations of MB SPE under the loan documents.

 

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Capital Expenditures

We estimate that we will spend approximately $20 million in 2014 on capital expenditures. The increase over previous years is primarily related to network construction costs. We expect to recover a portion of these costs through arrangements with wireless carriers.

Acquisition-Related Contingent Consideration

In our acquisitions of CSG and DBT, we have agreed to make future cash earn-out payments to the sellers, which are contingent upon the future performance of the acquired businesses. The estimated fair value, which is the estimated payout discounted for the time value of money, of the of earn-out obligations recorded as of December 31, 2013 was $10.4 million, $3.2 million of which was recorded as a current liability in our consolidated balance sheet.

Contractual Payment Obligations

As of December 31, 2013, our future contractual obligations are as follows (dollars in thousands):

 

    Total     2014     2015     2016     2017     2018     2019 and
thereafter
 

Long-term debt obligations:

             

Senior notes payable (1)

  $ 502,372      $ 39,451      $ 39,406      $ 39,406      $ 39,406      $ 344,703      $ —     

Credit facility (2)

    541        261        189        91        —          —          —     

Other notes payable (3)

    4,251        456        450        448        477        2,420        —     

Operating lease obligations

    23,656        10,265        6,549        3,004        1,840        1,450        548   

Capital lease obligations

    3,166        1,537        1,098        452        79        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual commitments

  $ 533,986      $ 51,970      $ 47,692      $ 43,401      $ 41,802      $ 348,573      $ 548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The amounts due presented in the table above include interest obligations related to long-term debt. These obligations include amounts related to additional interest penalties at the rate of 0.25% of the principal amount of the principal amount of the $100 million tack-on notes through April 2014 because the exchange registration statement related to the tack-on notes was not declared effective on or before February 27, 2014.
(2) Includes an availability fee of 0.375% of the unused capacity and a charge of 3.25% on the portion of the Credit Facility utilized for letters of credit.
(3) The amounts due presented in the table above include interest obligations related to long-term debt.

Off-Balance Sheet Arrangements

We have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with non-cancellable operating leases, letter of credit obligations, and performance and payment bonds entered into in the normal course of business. We have not engaged in any off-balance sheet financing arrangements through special purpose entities.

Leases

We enter into non-cancellable operating leases for certain of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. We may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease.

 

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Guarantees

In October 2011, we issued a letter of credit as a guarantee of a related party’s line of credit. The maximum available to be drawn on the line of credit is $4.0 million. In the event of default on the line of credit by the related party, we will have the option to enter into a note purchase agreement with the lender or to permit a drawing on the letter of credit in an amount not to exceed the amount by which the outstanding obligation exceeds the value of the related party’s collateral securing the line of credit, but in no event more than $4.0 million. Our letter of credit was originally due to expire in July 2012, then subsequently amended to expire in July 2013. Prior to the expiration, the letter of credit was amended to extend the guarantee of the related party’s line of credit until July 2014.

Our exposure with respect to the letter of credit is supported by a reimbursement agreement from the related party, secured by a pledge of assets and stock of the related party. As of December 31, 2011, we concluded that we will likely be required to perform for the full exposure under the guarantee and therefore recorded a liability in the amount of $4.0 million included in accrued liabilities in our consolidated financial statements in the fourth quarter of 2011. This guarantee liability for the full amount of $4.0 million remains in accrued liabilities as of December 31, 2013.

Other Guarantees

We generally indemnify our customers for the services we provide under our contracts, as well as other specified liabilities, which may subject us to indemnity claims, liabilities and related litigation. As of December 31, 2013, we are not aware of any asserted claims for material amounts in connection with these indemnity obligations.

Seasonality

Historically we have experienced seasonal variations in our business, primarily due to the capital planning cycles of certain of our customers. Generally, AT&T’s annual capital plans are not finalized to the project level until sometime during the first three months of the year, resulting in reduced capital spending in the first quarter relative to the rest of the year. This results in a significant portion of contracts related to our Infrastructure Services segment being completed during the fourth quarter of each year. Because we have adopted the completed contract method, we do not recognize revenue or expenses on contracts until we have substantially completed the contract. Accordingly, a significant portion of our revenues and costs are recognized during the fourth quarter of each year. The recognition of revenue and expenses on contracts that span quarters may also cause our reported results of operations to experience significant fluctuations.

Our Field Services segment’s results of operations may also fluctuate significantly from quarter to quarter. We typically generate more revenues in our Field Services segment during the third quarter of each year due to favorable weather conditions and our sports promotional efforts. Because a significant portion of the Field Services segment’s expenses are relatively fixed, a variation in the number of customer engagements or the timing of the initiation or completion of those engagements can cause significant fluctuations in operating results from quarter to quarter.

As a result, we have historically experienced, and may continue to experience significant differences in operations results from quarter to quarter. As a result of these seasonal variations and our methodology for the recognition of revenue and expenses on projects, comparisons of operating measures between quarters may not be as meaningful as comparisons between longer reporting periods.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base

 

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estimates on our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. For a more detailed discussion of our significant accounting policies, see Note 2 to the audited historical consolidated financial statements.

Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Revenue Recognition

We enter into contracts that require the construction and/or installation of specific units within a network system. Revenue from construction and installation contracts in our Infrastructure Services segment is recorded using the completed contract method of accounting in accordance with Accounting Standards Codification, or ASC, 605, Revenue Recognition. While percentage of completion is generally the preferred method of accounting for construction contracts, we concluded that the completed contract method of accounting would be a more appropriate and reliable method under which to recognize revenue from our construction contracts given our current processes and systems. Under the completed contract method, revenues and costs from construction and installation projects are recognized only upon substantial completion of the project. Direct costs typically include direct materials, labor and subcontractor costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are recognized when it has been determined that a loss is probable.

We also enter into contracts to provide engineering and integration services related to network architecture, transformation, reliability and performance. Revenues from service contracts are generally recognized as the services are completed under the completed performance method, whereby costs are deferred until the related revenues are recognized. Services are generally performed under master or other services agreements and are billed on a contractually agreed price per unit on a work order basis.

Revenues for projects based on time and materials are recognized as labor and material costs are incurred. Revenues from other incidental services are recognized as the service is performed.

The Field Services segment provides installation services to pay television (satellite and broadband cable) providers, Internet providers and commercial customers. The related revenues are recognized when services have been completed.

Within our Other Services segment, we recognized our MDU revenues in the period in which the related services are provided, and we recognize revenue from long-term EE&C contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to the estimated total costs for each contract.

We intend to continually evaluate the application of the completed contract method of accounting, and in the future we may change our accounting method back to the percentage of completion method for some of our construction contracts. Items that would be considered in our analysis concerning the applicability of the completed contract method of accounting would include: (i) our assessment of the improvements we are currently working on related to our internal controls surrounding our ability to estimate project costs and related profit margins; and (ii) new or emerging accounting standards that we may be required to adopt that could potentially impact how we are required to account for our long-term construction projects.

 

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Revenue Recognition Matters

In connection with the audit of our financial statements for the year ended December 31, 2011 both we and our auditors identified accounting errors and internal control deficiencies that collectively called into question our ability to properly apply the percentage of completion method of accounting to our long-term construction contracts, which is the method that we had historically applied to recognize revenue on our long-term construction contracts. After consultations with KPMG LLP and with the SEC Staff, we concluded that the completed contract method of accounting would be a more appropriate and reliable method under which to recognize revenue from our construction contracts. Accordingly, we restated our financial statements for each of the three years ended December 31, 2011 so that our revenues from construction contracts were recognized using the completed contract method, which we have also applied in the preparation of our financial statements for the years ended December 31, 2012 and 2013.

While the percentage of completion method is the preferred method of recognizing revenue for construction contracts, the weaknesses in internal controls that limited our ability to make proper estimates of project costs and margins required us to apply the completed contract method. We believe that we have properly applied the completed contract method of accounting and have not identified any material control weaknesses in its application to our revenue recognition in the financial statements presented elsewhere in this prospectus. We are continually seeking to refine, enhance and strengthen all of our internal controls, but particularly those that affect our revenue recognition. Once we believe we have implemented adequate controls to properly estimate project costs, revenues and margins from the inception of each project, we will re-evaluate the application of the completed contract method and may change the revenue for some or all of our construction projects back to the percentage of completion method.

Goodwill and Other Intangible Assets with Indefinite Lives

Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual impairment test at the reporting unit level or more frequently if events occur or circumstances change that would indicate that a triggering event. A reporting unit is defined as an operating segment or one level below an operating segment. The reporting units are equivalent to the reportable segment. All of our reporting units have goodwill assigned.

We test goodwill for impairment annually, as of October 1 of the current year, or more frequently if circumstances suggest that impairment may exist. During each quarter, we perform a review of certain key components of the valuation of the reporting units, including the operating performance of the reporting units compared to plan (which is the primary basis for the prospective financial information included in the annual goodwill impairment test) and the weighted average cost of capital.

To determine whether goodwill is impaired, a multi-step impairment test is performed. We perform a qualitative assessment of each reporting unit to determine whether facts and circumstances support a determination that their fair values are greater than their carrying values. If the qualitative analysis is not conclusive, or if we elect to proceed directly with quantitative testing, we will measure the fair values of the reporting units and compare them to their carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, the second step of the impairment test is performed for the purposes of measuring the impairment. In this step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss shall be recognized in an amount equal to that excess.

We estimate the fair values of the reporting units using discounted cash flows, which include assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of cash flow (including significant assumptions about operations and target

 

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capital requirements), long term growth rates for determining terminal value, and discount rates. Forecasts and long term growth rates used for the reporting units are consistent with, and use inputs from, the internal long term business plan and strategy. During the forecasting process, we assess revenue trends, operating cost levels and target capital levels. A range of discount rates that correspond to a market based weighted average cost of capital are used. Discount rates are determined for each reporting unit based on the implied risk inherent in their forecasts. This risk is evaluated using comparisons to market information such as peer company weighted average costs of capital and peer company stock prices in the form of revenue and earnings multiples. The most significant estimates in the discount rate determinations include the risk free rates and equity risk premium. Company specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.

Although we believe that the financial projections used are reasonable and appropriate, the use of different assumptions and estimates could materially impact the analysis and resulting conclusions. In addition, due to the long term nature of the forecasts there is significant uncertainty inherent in those projections. The passage of time and the availability of additional information regarding areas of uncertainty in regards to the reporting units’ operations could cause these assumptions used in the analysis to change materially in the future. If the assumptions differ from actual, the estimates underlying the goodwill impairment tests could be adversely affected.

We periodically review amortizing intangible assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, assumptions regarding estimated future cash flows and other factors must be made to determine if an impairment loss may exist, and, if so, estimate fair value. If these estimates or their related assumptions change in the future, we may be required to record impairment losses for these assets.

Share-Based Compensation

We account for share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. Determining the fair value of share-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using a pricing model is affected by our common stock fair value as well as by assumptions including our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, and expected dividends, which are estimated as follows:

 

    Fair Value of Our Common Stock. Because our stock is not currently publicly traded, we must estimate the fair value of common stock, as discussed in “Common Stock Valuation” below.

 

    Expected Term. The expected term was estimated using the simplified method under SEC Staff Accounting Bulletin No. 107, giving consideration to the contractual terms of the share-based awards, vesting schedules, and expectations of future employee behavior as influenced by changes to the terms of our share-based awards.

 

    Volatility. As a non-public entity, historic volatility is not available for our shares. As a result, we estimated volatility based on a peer group of companies, which collectively provide a reasonable basis for estimating volatility. We intend to continue to consistently use the same group of publicly traded peer companies to determine volatility in the future until sufficient information regarding volatility of our share price becomes available or the selected companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

    Risk-Free Interest Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

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    Dividend Yield. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

The fair values of option awards granted since January 1, 2011, were estimated at the grant date using the Black-Scholes pricing model with the following assumptions:

 

     Year Ended December 31,  
         2011             2012                      2013              

Expected volatility

     48.4 %     n/a         54.06% - 60.65%   

Risk-free interest rate

     2.29 %     n/a         0.91% - 1.63%   

Expected life (in years)

     6.0        n/a         5.19    - 5.80      

Expected dividend yield

     0.0 %     n/a         0.00%   

The Company did not grant any stock options during the year ended December 31, 2012. The weighted average grant date fair value for the options granted in the years ended December 31, 2011 and 2013 was $12.65 and $41.90, respectively.

As of December 31, 2011, 2012 and 2013 we had $0.7 million, $0.1 million and $8.0 million, respectively, of unrecognized compensation costs, excluding estimated forfeitures, related to unvested stock option awards, which are expected to be recognized over a weighted average period of 1.2 years, 0.5 years and 1.1 years, respectively.

Common Stock Valuation

Given the absence of any active market for our common stock, the fair value of the common stock underlying stock options granted was determined by our board of directors, with input from our management, and based in part on third-party valuations. The valuations were made with the intent to grant options at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant.

We considered numerous objective and subjective factors in valuing our common stock at each valuation date in accordance with the guidance outlined in the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issues as Compensation, or the AICPA Practice Guide. These objective and subjective factors included, but were not limited to:

 

    valuation analyses performed by an unrelated third party specialist (including the application of appropriate valuation techniques and inputs);

 

    lack of marketability of our common stock;

 

    our actual operating and financial performance;

 

    our state of development;

 

    the composition of, and changes to, our management team and board of directors;

 

    revenue and expense projection;

 

    likelihood of achieving a liquidating event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;

 

    market performance of comparable publicly traded companies; and

 

    overall U.S. and global economic and capital market conditions.

 

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We believe the valuation methodology employed for each date of determination provided a reasonable basis for estimating the fair value of our common stock.

The following table sets forth all common stock awards since January 1, 2011 through the date of this prospectus:

 

Common Stock Award Dates

   Number of
Shares Granted
     Common Stock
Market Value ($)
 

December 31, 2012

     30,000       $ 82.70   

January 7, 2013

     30,000       $ 82.70   

The following table sets forth all stock option grants since January 1, 2011 through the date of this prospectus:

 

Option Grant Dates

   Number of Shares
Underlying

Options Granted
     Exercise
Price ($)
     Common Stock
Market Value ($)
 

February 12, 2013

     320,500       $ 82.70       $ 82.70   

July 22, 2013

     12,000       $ 82.70       $ 82.70   

Common Stock Valuation Methods

The determination of the fair value price of our common stock was made in accordance with the guidelines in the AICPA Practice Guide, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. We generally used the income and market approaches in our valuations. When applying the market approach, we used the guideline company and precedent transaction methodologies based on inputs from comparable public companies’ equity valuations to estimate our enterprise value. In applying the income approach, we applied the discounted cash flow method based on the Company’s projections.

When considering which companies to include in our peer group for valuation purposes, we focused on companies which we consider to be closely related competitors with publicly traded equity securities. We searched for companies similar to Goodman Networks based on Standard Industrial Classification, or SIC, Code 4899, Communications Services, Not Elsewhere Classified.

Of the companies reviewed, five were selected as being most comparable. Those not selected were eliminated for various reasons including broad differences in the business focus, size, profitability, and geographic focus, or for other reasons such as lack of published information, limited trading activity in the stock market, or negative operating results. The selection of guideline companies reflects those companies that we believe could hypothetically acquire Goodman Networks. We believe the selected companies we selected are a representative group for purposes of performing valuations.

December 31, 2012 Valuation

We estimated that a share of our common stock had a value of $82.70 per share on December 31, 2012. In estimating the fair value of the common stock, our Board of Directors reviewed and considered an independent valuation report for our common stock as of September 30, 2012 on a minority, non-marketable basis, or the valuation report.

The valuation report derived our enterprise value using an income approach, discounted cash flow method and market approach, guideline public company method. The valuation report weighted the income approach and the market approach equally to determine the aggregate equity value before factoring in any discounts or allocations.

 

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The income approach, discounted cash flow method, considers the present value of future cash flows during the projection period along with the present value of a terminal value at the end of the explicit projection period. For purposes of determining a terminal value, we applied a multiple consistent with the observed next-twelve-month revenue of our peer group companies. The terminal value and the cash flows during the projection period then were discounted at a cost of capital of 15.0%, which was based on the risks attributable to our size, industry and projected operations.

The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. Based on trading multiples of the comparable companies, a representative market value multiple is determined which is applied to the subject company’s operating results to estimate the value of the subject company. The estimated value was then increased by a control premium of 25.0%. For purposes of the guideline publicly traded company method, we reviewed the comparable companies with each valuation to ensure that the companies continue to best reflect our industry and business model.

The enterprise value was then allocated to the common stock and was reduced by a discount for lack of control of 20.0% and a discount for lack of marketability of 30.0% to yield the fair value of our common stock on a non-marketable, minority basis.

Our Board of Directors considered our most recent operating results and developmental progress, as well as the valuation report, when it determined the fair value of our common stock was $82.70 per share at December 31, 2012. In addition, the Board of Directors determined that there were no events or circumstances that warranted a different fair value determination from the December 31, 2012 valuation to the grant dates of share-based compensation prior to the date of this prospectus.

Income Taxes

We apply the asset and liability method in accounting and reporting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax rates expected to be in effect when these differences are expected to reserve. The measurement of deferred income tax assets are adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, that it is more likely than not such benefits will be realized. We recognize income tax related interest and penalties on income taxes as a component of income tax expense.

Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes. Under the authoritative guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

We are not subject to examination by the U.S. Federal taxing authorities for years prior to 2009 and by state and local taxing authorities for years prior to 2008.

Valuation of Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such asset is necessary. This requires us to make long-term forecasts of the future revenues and costs related to the assets subject to review. Forecasts require assumptions about demand for our products and future market

 

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conditions. Estimating future cash flows requires significant judgment, and our projections may vary from the cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision for impairment in a future period. The effect of any impairment would be to expense the difference between the fair value of such asset and its carrying value. In addition, we estimate the useful lives of our long-lived assets and periodically review these estimates to determine whether these lives are appropriate.

Quantitative and Qualitative Disclosures About Market Risk

Our primary exposure to market risk relates to unfavorable changes in concentration of credit risk and interest rates.

Credit Risk

We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and our accounts receivable, including amounts related to costs in excess of billings on uncompleted projects. Substantially all of our cash investments are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest this cash in a diversified portfolio of what we believe to be high-quality investments, which primarily include short-term dollar denominated bank deposits to provide Federal Deposit Insurance Corporation backing of the deposits. We do not currently believe the principal amounts of these investments are subject to any material risk of loss. In addition, as we grant credit under normal payment terms, generally without collateral, we are subject to potential credit risk related to our customers’ ability to pay for services provided. This risk may be heightened as a result of the depressed economic and financial market conditions that have existed in recent years. However, we believe the concentration of credit risk related to trade accounts receivable and costs in excess of billings on uncompleted contracts is limited because of the financial strength of our customers. We perform ongoing credit risk assessments of our customers and financial institutions.

Interest Rate Risk

The interest on outstanding balances under our Credit Facility accrues at variable rates based, at our option, on the agent bank’s base rate (as defined in the Credit Facility) plus a margin of between 1.50% and 2.00%, or at LIBOR (not subject to a floor) plus a margin of between 2.50% and 3.00%, depending on certain financial thresholds. We had no outstanding borrowings under our Credit Facility as of December 31, 2013. Our notes payable balance at December 31, 2013 is comprised of our original notes and tack-on notes due in 2018, which bear a fixed rate of interest of 12.125%. Due to the fixed rate of interest on the notes, changes in interest rates would not have an impact on the related interest expense.

Emerging Growth Company Status

Section 107 of the Jumpstart Our Business Startup Act, or the JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We have elected to take advantage of the following provisions of the JOBS Act:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

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    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Internal Controls and Procedures

Background

Since December 23, 2013, we have been required to comply with certain aspects of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, that we have previously not been required to comply with. For example, as a voluntary filer, beginning with the filing of our annual report on Form 10-K on March 31, 2014, we have been required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which require our management to certify financial and other information in our quarterly and annual reports. We will also be subject to and required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act. This standard requires management to establish and maintain internal control over financial reporting and make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. We will be required to make our first assessment of our internal control over financial reporting as of December 31, 2014, which is the year-end following the year that our first annual report is filed or required to be filed with the SEC. Because we are currently a debt filer, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting. To better ensure compliance with the requirements of being a public company, we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and financial reporting staff.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Although we did not perform a formal assessment of internal control over financial reporting, we evaluated deficiencies identified in connection with the preparation and audit of our consolidated financial statements for the fiscal years ended December 31, 2012 and 2013 in accordance with the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (1992). The following control deficiency represents a material weakness in our internal control over financial reporting as of December 31, 2012 and 2013:

Purchasing and Inventory Management: We did not maintain sufficient controls over our purchasing and inventory management process. Specifically (a) the controls surrounding the tracking of inventory movements between warehouses and job sites was not sufficient to ensure that inventory was appropriately recorded and that inventory not used at job sites was returned to warehouses on a timely basis; and (b) controls and processes to properly match returned inventory to the appropriate project to ensure accurate project costs and profitability either were not present or did not operate effectively.

During the quarter ended June 30, 2013, we designed and implemented additional controls and procedures intended to strengthen and enhance its period end accounting close process related to preparation of our financial statements under the Completed Contract method of accounting for its construction projects. These controls include (i) enhanced reconciliations of revenue, cost of revenue and gross profit and the related balance sheet accounts of costs in excess of billing on uncompleted projects and billings in excess of costs on uncompleted projects; and (ii) enhanced financial analysis of margin performance by groups outside of the

 

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finance organization to evaluate the financial results and compare against the expectations of the business people running the operations of the Company. During the course of designing and implementing these enhanced controls and procedures, we discovered certain errors that existed in our financial statements for the three-month period ended March 31, 2013. These errors were corrected in the preparation of our financial statements for each of the three-and six-month periods ended June 30, 2013, and they did not aggregate to a material amount in either period. We do not believe the Company’s financial statements for the three months ended March 31, 2013 were materially misstated. These errors were a result of a material weakness in the Company’s internal controls over financial reporting that existed at March 31, 2013 related to controls surrounding the Company’s cutover to processes used to capture results based upon the completed contract method of accounting in 2013. The Company believes the control activities described above serve to remediate this material weakness as of June 30, 2013.

 

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BUSINESS

Overview

Since our founding in 2000, we have grown to be a leading national provider of end-to-end network infrastructure and professional services to the wireless telecommunications industry. Our wireless telecommunications services span the full network lifecycle, including the design, engineering, construction, deployment, integration, maintenance and decommissioning of wireless networks. We perform these services across multiple network infrastructures, including traditional cell towers as well as small cell and DAS. We also serve the satellite television industry by providing onsite installation, upgrading and maintenance of satellite television systems to both the residential and commercial markets. These highly specialized and technical services are critical to the capability of our customers to deliver voice, data and video services to their end users. For the year ended December 31, 2012, we generated revenues of $609.2 million and a net loss of $2.5 million. For the year ended December 31, 2013, we generated revenues of $931.7 million and a net loss of $43.2 million.

The wireless telecommunications industry is characterized by favorable trends that are driving our growth. This industry is going through an unprecedented and sustained phase of expansion and increased complexity as the number of wireless devices and demand for greater speed and availability of mobile data continues to grow rapidly. Users continue to upgrade to more advanced mobile devices, such as smartphones and tablets, and access more bandwidth-intensive applications. According to the Cisco VNI Mobile Update, mobile data traffic will increase in North America 660% between 2013 and 2018, or an average of over 50% percent annually. By 2018, North American mobile data traffic will reach approximately 3.0 exabytes per month, and the number of 4G-LTE annual connections will grow 2.6 times compared to 2013. These developments are creating significant challenges for wireless carriers to manage increasing network congestion and continually deliver a high quality customer experience. In response, carriers, governments and other enterprises are making significant investments in their wireless infrastructures, such as increasing the 4G-LTE capacity of their wireless networks as well as integrating small cell technology and DAS (supporting both Wi-Fi and cellular solutions, within wireless networks). To address the challenges presented by expanding increasingly complex network infrastructures, wireless carriers and OEMs have increased their dependency on an outsourcing model in an effort to control costs, deploy capital more efficiently and ensure schedule attainment. We believe our leading reputation and capacity to provide services on a national scale positions us to increase our market share and capitalize on future growth opportunities in the wireless telecommunications industry.

We have established strong, long-standing relationships with Tier-1 wireless carriers and OEMs, including AT&T, Alcatel-Lucent and Sprint, as well as DIRECTV. Over the last few years, we have diversified our customer base within the telecommunications industry by leveraging our long-term success and reputation for quality to win new customers such as NSN, T-Mobile and Verizon. We generated nearly all of our revenues over the past several years under MSAs that establish a framework, including pricing and other terms, for providing ongoing services. We have also significantly expanded our relationship with Sprint and AT&T and continue to grow our business in new strategic areas. Specifically, we extended our business in October 2013 into Sprint’s enterprise channel by providing end-to-end management of Sprint’s enterprise femtocells application. Currently, we are conducting a number of key strategic small cell trials with multiple top-tier operators with which we expect to secure contracts with in the first half of 2014. We recently entered into a Cell Site Construction Agreement with a subsidiary of Verizon to provide these services. It is our belief that our long-standing relationships with our largest customers, which are governed by MSAs that historically have been renewed or extended, provide us with high visibility to our future revenue. During 2013, we also provided small cell or DAS services to over 100 enterprises including higher education institutions, stadiums for professional and collegiate sports events, hotels and resorts, major retailers, hospitals and government agencies.

Our relationship with AT&T Inc. began in 2002 with Cingular Wireless LLC and Southwestern Bell Telephone Company and has subsequently grown in scope. Currently, we provide site acquisition, construction, technology upgrades, Fiber to the Cell and maintenance services for AT&T in nine states, comprising nine distinct Turf Markets, pursuant to the Mobility Turf Contract, a multi-year MSA that we entered into with AT&T and

 

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have amended and replaced from time to time. On October 30, 2012, approximately two years prior to the scheduled expiration of the Mobility Turf Contract, AT&T extended the term of the Mobility Turf Contract to November 30, 2015.

In November 2009, we entered into an outsourcing arrangement with Alcatel-Lucent whereby we moved 461 U.S.-based engineering and integration specialists from Alcatel-Lucent to our payroll and secured the five-year Alcatel-Lucent Contract, which currently expires on December 31, 2014.

In addition, we have a long-standing 17-year relationship with DIRECTV. In December 2013, we extended our MSA with DIRECTV, which now expires on December 31, 2017.

On a pro forma basis giving effect to the merger with Multiband as if it occurred on January 1, 2012, these three customers generated approximately 94.2% and 87.3% of our revenues for the years ended December 31, 2012 and 2013, respectively, and we believe our long-standing relationships and multi-year contracts with these customers create a level of predictability and visibility to our future revenue and profitability. Our 18-month estimated backlog, which is based on historical trends, anticipated seasonal impacts and estimates of customer demand based upon communications with our customers, was $1.9 billion as of December 31, 2013. The 18-month estimated backlog as of December 31, 2013 includes $0.4 billion of estimated backlog from DIRECTV.

Our Businesses

We primarily operate through three business segments, Professional Services, Infrastructure Services and Field Services. Through our Professional Services and Infrastructure Services segments, we help wireless carriers and OEMs design, engineer, construct, deploy, integrate, maintain and decommission critical elements of wireless telecommunications networks. Through our Field Services segment, we install, upgrade and maintain satellite television systems for both residential and commercial customers.

For the years ended December 31, 2012 and 2013, the Professional Services (PS) segment generated 13.0% and 12.0% of our revenue, the Infrastructure Services (IS) segment generated 87.0% and 76.8% of our revenue and the Field Services (FS) segment generated 0.0% and 9.5% of our revenue, respectively. Revenues, cost of revenues, gross profit, and gross margin by segment as of and for the three-year period ended December 31, 2013 are as follows (dollars in millions):

 

    Year Ended December 31,  
    2011     2012     2013  
    PS     IS     FS     Other     PS     IS     FS     Other     PS     IS     FS     Other  

Revenues

  $ 91.7      $ 637.4      $ —        $ —        $ 79.1      $ 530.1      $ —        $ —        $ 111.5      $ 715.5      $ 88.2      $ 16.5   

Cost of revenues

  $ 78.4      $ 532.4      $ —        $ —        $ 65.2      $ 434.1      $ —        $ —        $ 91.6      $ 622.4      $ 77.9      $ 14.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 13.3      $ 104.9      $ —        $ —        $ 13.9      $ 96.0      $ —        $ —        $ 19.9      $ 93.1      $ 10.3      $ 2.3   

Gross margin

    14.5     16.5     0.0     0.0     17.6     18.1     0.0     0.0     17.8     13.0     11.7     13.9

 

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The following diagram illustrates our customers’ recurring need for the services we provide in our Professional Services and Infrastructure Services segments:

 

LOGO

As illustrated in the graphic above, wireless carriers continually monitor network traffic and usage patterns. As they identify network inefficiencies, service problems or capacity constraints, they often engage companies like us to perform maintenance or network enhancements, such as adding equipment to the network, to alleviate the issue.

Professional Services. Our Professional Services segment provides customers with highly technical services primarily related to designing, engineering, integration and performance optimization of transport, or “backhaul,” and core, or “central office,” equipment of enterprise and wireless carrier networks. When a network operator integrates a new element into its live network or performs a network-wide upgrade, a team of in-house engineers from our Professional Services segment can administer the complete network design, equipment compatibility assessments and configuration guidelines, the migration of data traffic onto the new or modified network and the network activation.

In addition, we provide services related to the design, engineering, installation, integration and maintenance of small cell and DAS networks. Our acquisition of CSG was incorporated into our Professional Services segment, which has enhanced our ability to provide end-to-end in-building services from design and engineering to maintenance. Our enterprise small cell and DAS customers often require most or all of the services listed above and may also purchase consulting, post-deployment monitoring, performance optimization and maintenance services.

Infrastructure Services. Our Infrastructure Services segment provides program management services of field projects necessary to deploy, upgrade, maintain or decommission wireless outdoor networks. We support wireless carriers in their implementation of critical technologies such as 4G-LTE, the addition of new macro and small cell sites, increase of capacity at their existing cell sites through additional spectrum allocations, as well as other performance optimization and maintenance activities at cell sites. When a network provider requests our services to build or modify a cell site, our Infrastructure Services segment is able to: (i) handle the required pre-construction leasing, zoning, permitting and entitlement activities for the acquisition of the cell site, (ii) prepare

 

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site designs, structural analysis and certified drawings, and (iii) manage the construction or modification of the site including tower-top and ground equipment installation. These services are managed by our wireless project and construction managers and are performed by a combination of scoping engineers, real estate specialists, ground crews, line and antenna crews and equipment technicians, either employed by us or retained by us as subcontractors.

Our Infrastructure Services segment also provides fiber and wireless backhaul services to carriers. Our Fiber to the Cell services connect existing points in the fiber networks of wireline carriers to thousands of cell sites needing the bandwidth and ethernet capabilities for upgrading capacity. Our microwave backhaul services provide a turnkey solution offering site audit, site acquisition, microwave line of sight surveys, path design, installation, testing and activation services. This fiber and wireless backhaul work often involves planning, route engineering, right-of-way (for fiber work) and permitting, logistics, project management, construction inspection, and optical fiber splicing services. Backhaul work is performed to extend an existing optical fiber network, owned by a wireline carrier, typically between several hundred yards to a few miles, to the cell site.

We began operating the following additional segments in connection with the closing of the merger with Multiband:

Field Services. Our Field Services segment provides installation and maintenance services to DIRECTV, commercial customers and a provider of internet wireless service primarily to rural markets. Our wholly owned subsidiary Multiband, which we acquired in August 2013, fulfilled over 1.5 million satellite television installations, upgrade or maintenance work orders during 2013 for DIRECTV, which represented 27.6% of DIRECTV’s outsourced work orders for residents of single-family homes during 2013. We were the second largest DIRECTV in-home installation provider in the United States for the year ended December 31, 2013.

Other Services. The Other Services segment includes our Engineering, Energy & Construction, or EE&C, line of business and, until we disposed of such assets to an affiliate of DIRECTV on December 31, 2013, included the assets related to the Multi-Dwelling Unit, or MDU, line of business.

Engineering, Energy & Construction Services. Our EE&C services include the provision of engineering and construction services for the wired and wireless telecommunications industry, including public safety networks, renewable energy services including wind and solar applications and other design and construction services which are usually done on a project basis.

Multi-Dwelling Unit Services. Our MDU services included the provision of voice, data and video services to residents of MDU facilities as an owner/operator of the rights under the related subscription agreements with those residents. From 2004 until 2013, Multiband operated under a Master System Operator agreement for DIRECTV, through which DIRECTV offered satellite television services to residents of MDUs. On December 31, 2013 we sold the assets related to MDU, or the MDU Assets, from which we provided the MDU services, to DIRECTV for $12.5 million and the assumption of certain liabilities. We continue to perform certain administrative functions for DIRECTV for a limited period of time after which we expect our involvement to cease. We expect our financial results with respect to the MDU services during the first quarter of 2014 to be limited to revenue related to the performance of these transition services.

We intend to integrate the EE&C line of business into our Infrastructure Services and Professional Services segments, and we expect that we will no longer have an Other Services segment.

Our Industries

We participate in the large and growing market for connectivity and essential wireless telecommunications infrastructure services. We also participate in the significant satellite pay television

 

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installation and maintenance market for both residential and commercial customers as well as providing satellite access links for an internet service provider. Although we do not anticipate significant growth in the Field Services segment, we do believe our Professional Services and Infrastructure Services segments are poised for substantial growth consistent with the growth in the wireless telecommunications industry generally. We believe the following trends are driving growth in this market:

Increasing Demand for Wireless Services

We are addressing a vast and growing market opportunity resulting from an unprecedented and sustained escalation in both the number of wireless devices and the demand for those mobile devices to deliver and transmit larger quantities of mobile data traffic at ever increasing speeds. Mobile device manufacturers are rapidly introducing advanced mobile devices that have faster processors, increased memory and larger high-resolution screens that are capable of supporting advanced media and require faster data connections for an enhanced experience. Traffic and usage patterns continually change as users discover new services on their devices and upgrade or acquire new devices (such as smartphones and tablets). According to the Cisco VNI Mobile Update, wireless data growth in North America is forecasted to increase on average 50% annually from 2013 through 2018, as smartphones, tablets, laptops, 3G and 4G-LTE modems and other telecommunications devices are becoming increasingly utilized by consumers. Moreover, a growing number of consumers are using their mobile devices as their primary means to access the internet, according to the Pew Internet & American Life Project’s Cell Internet Use 2013 Report, dated September 16, 2013. This growth in wireless data demand will require service carriers to invest in existing infrastructure and build-out new infrastructure to prevent slow or unavailable data connections that negatively impact the experience of their customers and result in costly churn.

 

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Spending on U.S. wireless data services has grown at double digit rates since 2005 and is forecasted to increase on average at approximately 18% annually from $95 billion in 2012 to $184 billion in 2016, according to the TIA Report. Domestic spending on data rose by 33% in 2012, and through 2016 it is expected to increase by approximately 94%. By 2016, data is expected to comprise more than 72% of total domestic wireless services spending. The following chart illustrates historical and projected growth in the domestic wireless data services market:

U.S. Wireless Data Services Market

 

($ in billions)

 

LOGO

Sources: Telecommunications Industry Association, citing Consumer Electronics Association and Wilkofsky Gruen Associates, 2013.

Need for Ongoing Capacity Management for 4G-LTE

Over the last few years, AT&T, Sprint, T-Mobile and Verizon have made significant investments to provide 4G-LTE coverage to their customers and have undertaken have begun initiatives to increase capacity and performance of their existing networks. The capacity of those networks, however, will continue to need to be enhanced to meet the needs of new users of 4G-LTE devices and the growing appetite for data by those users. As wireless carriers rapidly complete their first phase of 4G-LTE deployment to establish their geographic coverage, we believe they will utilize the following methods to continue to increase the capacity of their networks to meet the growing demand for wireless data: (i) allocating additional spectrum that is already licensed by the wireless carrier to its 4G-LTE network, (ii) acquiring additional lower band spectrum that could come to auction by the FCC in 2015, which in turn would require new, wide-band antennas to be deployed at many cell sites, (iii) increasing the density of the macro network layer by lowering the antenna systems on existing sites, which in turn creates a requirement to add additional cell sites, (iv) adding additional sectors by affixing additional antennas and radios to existing cell sites, (v) increasing backhaul capacity, (vi) harvesting older technology at cell sites to provide physical space, power, spectrum and capacity to be allocated to the 4G-LTE infrastructure, and (vii) supplementing the macro network with small cell and DAS technology, creating a heterogeneous network.

 

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While each of the above methods represents a significant revenue opportunity for companies that provide services to wireless carriers, the addition of cell sites to an existing network alone is a substantial market opportunity. According to the TIA Report, wireless data growth will result in a 16% cumulative increase in the number of new cell sites between 2013 and 2016. Based on our cost estimate of $212,000 per macro cell site, these new domestic cell sites would generate revenue for wireless infrastructure services companies of approximately $10.4 billion.

Given the multiple approaches that carriers are utilizing to address the growing demand placed on their networks, these networks are becoming increasingly complex and require active monitoring and management. As a result, wireless carriers will be required to perform ongoing performance optimization of their networks to ensure competitive service levels to their customers. These needs provide an opportunity for professional service partners of carriers to provide ongoing solutions related to network balancing, performance optimization and capacity alignment.

Increasing Implementation of Small Cell and DAS Technology

Escalating wireless data consumption has caused carriers to begin offloading mobile traffic from macro networks to preserve available spectrum and to increase wireless data capacity through small cell and DAS technology solutions. Small cells are low-powered radio access units that have a relatively short range of approximately 10 to 300 meters as compared to a typical wireless macro cell having a range of 2 to10 kilometers. Compared to the traditional macro cell, small cell technology features a higher quantity of smaller transmitters in a given area. This dispersion of transmitting devices boosts the capacity and the efficiency of wireless networks, resulting in fewer “dead zones” and reduces competition for cellular tower resources. In addition, small cells have the inherent ability to serve multiple technologies including Wi-Fi and wireless carrier standards such as GSM, UMTS, CDMA and 4G-LTE.

Similarly, installing a DAS system in a building allows users to access the wireless network through antennas located inside the building rather than through an outdoor macro cell site, thereby providing the user better indoor wireless coverage and capacity. Offloading these customers from the outdoor network to a DAS benefits the wireless carrier and the user by providing the user with improved wireless coverage and capacity at a lower cost to the wireless carrier. DAS technology is particularly well suited for larger facilities, such as sports stadiums, large office buildings and shopping malls. DAS technology can also consolidate multiple cellular standards, emergency bands and Wi-Fi.

Wireless carriers are in the early stages of implementing indoor and outdoor small cell and DAS technology to extend their service precisely and inexpensively in dense urban areas. According to SNS Research’s Wireless Infrastructure Bible: 2014-2020, industry studies estimate that more than 850,000 small cells, exclusive of self-installed femtocells, will be deployed in North America by the end of 2018. Increased network complexities and capacity needs will require network providers to evolve their networks into a heterogeneous architecture involving a combination of macro cells and small cells. These diversified architectures will require a full array of network services, which we expect will drive increasing reliance on infrastructure service providers. The deployment and performance optimization of small cell and DAS technologies will create a new set of challenges for wireless carriers and their providers of outsourced infrastructure services including complex logistics and differentiated backhaul and site acquisition strategies.

The large volume of deployments and unique technological challenges will drive the need for increased standardization, consistency and efficient processes. We believe that these trends will drive the need for fewer, larger and more financially stable outsourced wireless infrastructure service providers that will be capable of providing a full range of services across a large geographic footprint in a cost effective manner.

 

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Increasing Trend for Wireless Carriers to Outsource Capital and Operating Expenditures

Wireless carriers are under mounting competitive pressure to deliver a high level of performance and additional next generation services to their customers. As a result, many wireless carriers have outsourced many of the services required to design, build and maintain their complex network offerings, which provides them better flexibility, efficiency and lower costs than self-performing these services.

According to Wilkofsky Gruen Associates, over two-thirds of this spending on services in support of wireless infrastructure is outsourced. The following chart illustrates such spending on wireless equipment since 2005:

 

LOGO

Sources: Blumberg Advisory Group, Telecommunications Industry Association, Wilkofsky Gruen Associates; figures for 2013-2016 are estimates.

We believe that U.S. wireless carriers are increasing the amount of the capital and operating expenditures that they outsource.

According to the Booz & Co. research report, Second-Generation Telecom Outsourcing Regaining Control and Innovation Power, published July 17, 2013, the top four factors driving outsourcing in telecommunications are: (i) economic efficiency, (ii) capabilities focus, (iii) partnership integration and (iv) technology convergence. According to the Infonetics Research 2013 Report, Service Provider Outsourcing to Vendors, published March 18, 2013, or the Infonetics Report, reduction in operating expenditures, including tasks such as designing, building and maintaining, continues to be the primary driver for carriers outsourcing and is forecasted to grow at an annual rate of 8% through 2016. We believe that U.S. wireless carriers have a limited number of vendors, especially those without any equipment brand bias, that can provide comprehensive services and scale required to manage the size and complexity of their needs.

Growing Demand for Wireless Services in Adjacent Markets

The positive trends in the wireless telecommunications industry are also relevant to numerous other markets, including the public safety and enterprise markets. We believe that there is a large opportunity in the government telecommunications infrastructure market. In February 2012, a federal law was amended that provides for the creation of a nationwide interoperable broadband network for police, firefighters, emergency medical service professionals and other federal, state and local public safety personnel. This legislation established the FirstNet, charged with the deployment and operation of this network, and allocated FirstNet $7 billion in funding towards deployment of this network, as well as $135 million for a new state and local implementation grant program.

Historically, many enterprises had limited their use of wireless networks due to reliability, security and complexity issues but are now seeking to strategically integrate wireless networks for business-critical converged

 

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voice, video and data applications. We believe that we are in the beginning of a long-term transition to increase usage of wireless networks within enterprises and that a significant opportunity exists for wireless specialists to serve the increasingly complex requirements of those enterprises.

Stable Industry Dynamics in the Satellite Television Market

The U.S. market for satellite television subscribers is significant. DIRECTV is the largest satellite television provider with 20.2 million subscribers according to public filings. During the year ended December 31, 2013, we performed approximately 27.6% of all of DIRECTV’s outsourced installation, upgrade and maintenance activities. We believe that the demand for our outsourced installation and maintenance services related to the satellite television market will remain steady as leading national providers continue to upgrade technology and add customers by investing in competitive marketing efforts.

Business Strengths

We believe the following business strengths position us to capitalize on the anticipated growth in demand for our services:

End-to-end Service Offering Providing Compelling Value Proposition

As the telecommunications sector continues to evolve and become more complex due to increasing demand for wireless data, wireless carriers and OEMs will continue a long-term trend of increasingly seeking outsourced providers that can service the full wireless network lifecycle on a national level. We believe our end-to-end service offering provides a compelling and differentiated value proposition to the marketplace. Many infrastructure service providers do not offer the professional network services of business consulting, design, integration and performance optimization. As a result, telecommunication companies typically need to hire professional services companies to provide complementary and higher-end services, creating incremental project coordination costs and financial risks. Our ability to seamlessly provide these solutions to our customers reduces the risks and limits inefficiencies caused by using multiple vendors. We believe this single vendor approach improves overall quality, schedule attainment and reduces costs for wireless carriers and OEMs.

Reputation for Consistent, High Customer Satisfaction and Technical Expertise

We maintain an exemplary track record with our customers and regularly outperform customer satisfaction and on-time delivery targets. In 2013, we performed critical wireless work in AT&T’s Turf Markets faster than all other Turf Market vendors. In 2013, our safety rating (reported incidents) assigned by OSHA for work provided to the telecommunications industry was less than half of the composite rating for our industry. Also in 2013, Multiband had customer satisfaction ratings, as measured by a third party, of over 95% when fulfilling DIRECTV work orders. We believe our reputation for technical expertise, reliable service and high customer satisfaction provides us with an advantage when competing for new contracts and maintaining and expanding our current customer relationships.

Long-term Relationships with Key Customers

We have long-standing relationships with three of the largest national telecommunication companies, AT&T Inc., Alcatel-Lucent and Sprint. We believe we serve as a strategic partner to our customers, having, for example, assisted AT&T with the deployment of 4G-LTE network services in the first five cities in which AT&T launched 4G-LTE service. Substantially all of our revenue is derived from work performed under multi-year MSAs with these customers. AT&T assigns work to us under our MSA on a market-by-market basis as the sole, primary or secondary vendor in 9 of AT&T’s 31 Turf Markets. Our reputation and experience enhance the loyalty of our customers and position us to become an increasingly important service provider in the outsourced wireless telecommunications industry, and our visibility into future revenues provided by these long-term

 

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relationships assists us in profitably managing our business. These executive-level long-term relationships with our customers have provided us with valuable insight into their medium and long-term direction, allowing us to make the right strategic investments in our business. We are seeking to develop similar long-term relationships with T-Mobile and Verizon built upon the rapidly expanding scope of work performed for these customers.

We have maintained a long-term strategic relationship with DIRECTV for over 17 years. We are one of three in-home installation and maintenance service providers that DIRECTV utilizes in the United States, and during the year ended December 31, 2013, we performed approximately 27.6% of all of DIRECTV’s outsourced installation, upgrade and maintenance activities.

National Footprint with Scalability of Operations

We have developed a nationwide platform for the provision of our services with 62 regional offices and warehouses in 23 states across the United States as of March 31, 2014. We employed over 4,900 people, including over 650 employees in our Professional Services segment, over 1,000 employees in our Infrastructure Services segment and over 2,900 employees in our Field Services segment, as of March 31, 2014. We also have the proven ability to increase our operations to meet the needs of our customers. The technician-based workforce that we acquired in the Multiband transaction is not only available to meet the needs of our Field Service segment, but selected technicians are also being cross-trained to deploy and maintain small cell and DAS services in support of our Professional Services segment. We also utilize an extensive network of subcontractors, which combined with our existing employee workforce enables us to execute large, complex and multi-location telecommunications projects across the United States by allocating personnel and resources quickly and efficiently, thereby maximizing efficiency. Through our MSA with AT&T, our largest customer, we serviced 5 of the 10 most populous cities in the United States as of March 31, 2014. The Turf Markets that AT&T has assigned to us as of March 31, 2014 cover an estimated 26.7% of the total U.S. population based upon 2010 census data.

Experienced Management Team with Exceptional Track Record

Our proven and experienced management team has an exceptional track record and plays a significant role in establishing and maintaining long-term relationships with our customers, supporting the growth of our business and managing the financial aspects of our operations. Under their leadership, we have grown substantially to become one of the largest providers of wireless infrastructure and professional services in the United States as well as a leader in the satellite television installation market. Our management team possesses significant industry experience and has a deep understanding of our customers and their performance requirements.

Under their leadership our revenue has increased to $931.7 million for the year ended December 31, 2013. Over the four years ended December 31, 2013, we have experienced a compounded annual revenue growth rate of 30.6%, which includes revenue growth both organically and through acquisitions. Many of our new business relationships have been developed from our long-standing relationships within the industry. As evidenced by the 2013 acquisitions of Multiband, CSG and DBT, our management team has demonstrated a strong ability to grow the business through strategic acquisitions in an effort to better position the Company to be able to compete for new business opportunities in the future. As of December 31, 2013, we had materially completed the integration of CSG and DBT and completed integration planning for the merger with Multiband.

Our Growth Strategies

We intend to leverage our market leading capabilities to take advantage of a number of favorable long-term industry trends by utilizing the following strategies:

Capitalize on Rapid Growth in the Wireless Carrier Sector and Continue to Grow Our Core Business

Rapidly increasing data usage on wireless networks is driving wireless carriers to increase capacity and upgrade cell sites nationwide while at the same time working to improve wireless quality, reliability and

 

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performance. The wireless industry will have completed much of its first phase of 4G-LTE coverage buildout by the end of 2014. In order to continue to meet the projected demand for wireless data, carriers will need to add additional capacity to these 4G-LTE sites on an on-going basis, which will be heavily dependent on wireless carriers allocating capital expenditures to services that optimize and add capacity to those sites. In addition, we anticipate that significant capacity enhancements will be realized via small cell site proliferation and DAS deployments. We expect to benefit from these developments in both the near- and long-term.

We have had over a decade of experience in successfully working with Tier-1 wireless carriers and OEMs as they designed, built, upgraded, optimized, maintained and decommissioned their networks. We believe that our focus on the wireless telecommunications market, end-to-end service capabilities, national scale, reputation for quality and ability to acquire and integrate new and strategic businesses positions us well to capitalize on these opportunities and trends in the wireless sector and to continue to grow our business.

Continue to Expand Our Market Leading Services Capabilities

We believe our comprehensive range of network services and reputation for outstanding performance differentiates us in the marketplace. We plan to continue to develop our end-to-end service portfolio and technical capabilities to ensure we remain highly valued by our customers.

Throughout our history, we have added services capabilities to meet our customers’ changing needs. Our acquisition of CSG in 2013 expanded our professional services capabilities to offer in-building wireless network design. This offering has already been leveraged to help expand our relationship with existing customers, such as AT&T. Additionally, in response to broad market trends, we are focused on building competencies and driving opportunities in the small cell and DAS markets with new and existing customers. We believe the addition of Multiband’s technician-based workforce will allow us to better serve our customers, increase our ability to take on larger scale small cell and DAS deployments and provide local onsite maintenance services post initial deployments. As of March 31, 2014, Multiband employed 2,576 technicians, and selected technicians are being cross-trained to provide advanced wireless installation and maintenance solutions for our customers.

As the enterprise small cell and DAS markets continue to grow, we believe that there is a tremendous opportunity to provide managed services to these customers. We believe that as venue owners increasingly choose to own the networks in their buildings they will need to rely on a provider with extensive wireless telecommunications experience to help them install, integrate and manage those networks. We are experienced in providing venue owners with network monitoring, network performance optimization, preventative maintenance and field technician repair and replacement services. Furthermore, as network technologies continue to evolve and become more complex, we are focused on continuing to supplement our high value-added services capabilities that help our enterprise customers maintain, upgrade and manage those networks. In addition, our strategy to enhance our managed services capability with incremental network services, including cloud and network virtualization, content delivery and network performance optimization, can drive additional business and enhance margins.

Continue to Grow our Small Cell and DAS Business

We anticipate the demand for small cell and DAS technologies will continue to increase as a result of need for wireless carriers to reduce stress on existing macro cell networks, expand network coverage and add capacity to their networks. Additionally, these technologies are a logical solution to serve an increasing number of enterprises that desire to expand and own their local wireless networks. For many enterprises, small cell and DAS are effective solutions to increase data throughput in their networks. DAS technology is particularly well suited for larger facilities, such as sports stadiums, large office buildings and shopping malls.

 

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Our acquisitions of CSG and Multiband provide us a powerful combination of design, technician workforce and dispatch, scheduling and maintenance capabilities to be leveraged for small cell and DAS services. We believe our service offerings addressing these technologies distinguish us in the marketplace. We are currently a small cell strategic deployment development partner for AT&T, an exclusive partner for enterprise femtocell for Sprint and one of two partners selected for a strategic small cell trial for Verizon. We have also signed an MSA to support future small cell deployments for T-Mobile.

Selectively Pursue New Profitable Long-Term Relationships

We have developed strong relationships with our three largest customers, AT&T Inc., DIRECTV and Alcatel-Lucent. We intend to pursue similar long-term relationships with new customers. Our ability to secure these contractual relationships is demonstrated through the recent establishment of relationships with CenturyLink, NSN, Sprint, T-Mobile, Verizon and Windstream. Historically, we have often declined opportunities for short-term service projects in order to focus on long-term opportunities that generate more predictable revenue without sacrificing acceptable profit margins. We believe that there are significant opportunities to continue expanding our scope of work with our new and legacy customers.

Extend Capabilities to Adjacent Wireless Markets Including Enterprise and Government Networks

We plan to apply the wireless expertise we have developed serving wireless carriers and OEMs to further expand into the enterprise and public safety markets. According to a February 2014 ABI Research’s In-Building Wireless Market Data research report, the North American market for in-building wireless deployment revenue is estimated at $2.7 billion for 2014 and is expected to grow to $4.3 billion for 2019, representing a compound annual growth rate of 9.5%. As cloud-based services continue to penetrate the enterprise IT market and enterprise employees increase the use of mobile devices to conduct business critical activities, enterprises are requiring enhanced speed and coverage from their wireless networks. For many enterprises, small cell and DAS are effective solutions to increase data throughput in their networks. We believe we are well positioned to be a market leader in this field as significant overlap exists among the services we provide to network carriers and those needed by enterprise networks. Our February 2013 acquisition of CSG provides us a significant entry into the enterprise market including higher education institutions, stadiums for professional and collegiate events, hotels and resorts, major retailers, hospitals and government agencies. In 2013, we provided services to over 100 enterprise customers for whom we deployed small cell or DAS infrastructure.

We also believe there is a considerable opportunity to address the public safety market. Our initial entry would focus on providing services to federal and state agencies. The initial $7 billion allocated by FirstNet to deploy a nationwide interoperable broadband network for public safety officials over the next several years represents a medium-to-long term opportunity for growth in the public safety sector. Government officials have already performed a significant amount of planning and preparation for this project, and we offer the capabilities, scale, reputation and knowledge to provide substantial support in the design, deployment and maintenance of the network. Our leadership team, as well as our government relationships team, is focused on leveraging existing relationships to help ensure participation in this initiative, including relationships developed through our implementation of the new public safety systems at the new World Trade Center.

Continue to Improve our Operational Efficiencies and Expand our Margins

We are planning to implement and continue several initiatives that we believe will create operational efficiencies in our business. Key initiatives include continuing our 2013 plan of increasing our self-perform capabilities in an effort to decrease our dependence upon subcontractor-performed services in our Infrastructure Services segment, either organically or through targeted acquisitions, such as DBT, and utilizing technology to gather real-time business intelligence to provide faster visibility on operational and financial performance and improving scoping accuracy. In addition, our strategy to enhance our managed services capability with

 

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incremental network services, including cloud and network virtualization, content delivery and network performance optimization, can drive additional business and enhance margins.

Pursue Complementary Strategic Acquisitions

We plan to selectively pursue strategic acquisitions in the wireless industry that will enhance our service offerings, diversify our business and enable margin expansion. One area of interest would be the potential acquisition of subcontractors that perform tower services. The market for tower service companies is highly fragmented, and a number of high quality subcontractors exist that could provide us better control of these resources and improve our margins. Other strategic acquisitions may provide us with the opportunity to build market share and provide geographic density in a cost-effective and efficient manner.

Customers

Although we served over 100 customers in 2013, the vast majority of our revenues are from subsidiaries of AT&T Inc., Alcatel-Lucent and DIRECTV. Our customer list includes several of the largest carriers and OEMs in the telecommunications industry. Revenues earned from customers other than subsidiaries of AT&T Inc., Alcatel-Lucent and DIRECTV grew from 3.7% of our total revenues in the year ended December 31, 2012 to 12.7% of our total revenues for the year ended December 31, 2013. This increase in revenues is the result of acquisitions and inorganic growth.

Revenue concentration by dollar amount and as a percentage of total consolidated revenue, on an actual and a pro forma basis as if the merger with Multiband had occurred on January 1, 2012, is as follows (dollars in thousands):

 

    Years Ended December 31,  
   

2011

   

2012

   

2013

    2012, on a
pro forma basis
for the merger
with Multiband (1)
    2013, on a
pro forma basis
for the merger
with Multiband (1)
 
    Revenue     Percent
of Total
    Revenue     Percent
of Total
    Revenue     Percent
of Total
    Revenue     Percent
of Total
    Revenue     Percent
of Total
 

Revenue from:

                   

Subsidiaries of AT&T Inc.

  $ 650,372        89.2   $ 532,082        87.3   $ 662,758        71.1   $ 532,082        58.9   $ 662,758        58.4

DIRECTV

    —          —          —          —          92,425        9.9     263,754        29.2     270,329        23.8

Alcatel-Lucent

    72,332        9.9     55,022        9.0     57,940        6.2     55,022        6.1     57,940        5.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 722,704        99.1   $ 587,104        96.3   $ 813,123        87.3   $ 850,858        94.2   $ 991,027        87.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Giving effect to the merger with Multiband as if it occurred on January 1, 2012.

AT&T

We provide site acquisition, construction, technology upgrades, Fiber to the Cell, and maintenance services for AT&T at cell sites in 9 of 31 distinct Turf Markets as the sole, primary or secondary vendor, pursuant to a multi-year MSA that we entered into with AT&T and have amended and replaced from time to time. We refer to our MSAs with AT&T related to its turf program collectively as the “Mobility Turf Contract.” We have generated an aggregate of approximately $2.4 billion of revenue from subsidiaries of AT&T Inc. collectively for the period from January 1, 2009 through December 31, 2013.

Our Mobility Turf Contract provides for a term expiring on November 30, 2015, and AT&T has the option to renew the contract on a yearly basis thereafter. In connection therewith, AT&T reassigned certain of its

 

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Turf Markets, including the assignment to us of two additional Turf Markets, Missouri/Kansas and San Diego, and the assignment of the Pacific Northwest region, which was previously assigned to us, to another company effective December 31, 2011. Although our contract for the Pacific Northwest region expired on December 31, 2011, we continued to provide transitional services to AT&T in the Pacific Northwest region throughout 2012, and thereby concluded that we did not meet the criteria to report the results of operations from the Pacific Northwest as discontinued operations as a result of significant continuing cash flows as of December 31, 2012. During the three months ended March 31, 2013, the transitional services ceased, and accordingly, we have presented the results of operations for the Pacific Northwest region as discontinued operations for all periods presented. The results of operations of the Pacific Northwest now reported as a discontinued operation were previously included within our Infrastructure Services segment.

We provide other services to AT&T in addition to those provided under the Mobility Turf Contract. Those services include the deployment of indoor small cell systems, DAS systems and microwave transmission facilities and central office services. We recently entered into a DAS Installation Services Agreement and Subordinate Material and Services Agreement with a subsidiary of AT&T Inc. to provide these services. We continually seek to expand our service offerings to AT&T.

DIRECTV

DIRECTV is the largest provider of satellite television services in the United States, with approximately 20.1 million subscribers. DIRECTV has an approximate 20% share in the pay-TV market and an approximate 60% share in the satellite television market. With the acquisition of Multiband, DIRECTV became our second largest customer. The relationship between Multiband and DIRECTV has lasted for over 15 years and is essential to the success of our Field Services segment operations. We are one of three in-home installation providers that DIRECTV utilizes in the United States, and during the year ended December 31, 2013, Multiband performed 27.6% of all DIRECTV’s outsourced installation, upgrade and maintenance activities. Our contract with DIRECTV has a term expiring on December 31, 2017, and contains an automatic one-year renewal. Until December 31, 2013, we also provided customer support and billing services to certain of DIRECTV’s customers through our Field Services segment.

Alcatel-Lucent

In November 2009, we entered into a five-year MSA with Alcatel-Lucent, or the Alcatel-Lucent Contract. Pursuant to the Alcatel-Lucent Contract, 461 of Alcatel-Lucent’s domestic engineering and integration specialists became employees of Goodman Networks. The Alcatel-Lucent Contract grants us the right to perform, subject to certain conditions, certain deployment engineering, integration engineering and radio frequency engineering services for Alcatel-Lucent in the United States. The outsourcing agreement expires on December 31, 2014, and renews on an annual basis thereafter for up to two additional one-year terms unless notice of non-renewal is first provided by either party.

During 2014, we anticipate that our revenues under the Alcatel-Lucent Contract will continue to decrease compared to the amount that we have historically realized thereunder, correlative with the decline in contractual minimum levels of services described above. In addition, Alcatel-Lucent may elect not to renew the Alcatel-Lucent Contract, which may cause Alcatel-Lucent to ramp down the services that we currently provide to it prior to the December 31, 2014 expiration date. We are currently in negotiations with Alcatel-Lucent to secure additional work; however, if we are unable to come to terms with Alcatel-Lucent regarding such additional work and Alcatel-Lucent decides not to extend the term of the Alcatel-Lucent Contract beyond the expiration date, Alcatel-Lucent may no longer remain a material customer.

Sprint

In May 2012 we entered into an MSA with Sprint, or the Sprint Agreement, to provide decommissioning services for Sprint’s iDEN (push-to-talk) network. We are removing equipment from Sprint’s

 

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network that is no longer in use and restoring sites to their original condition. We recognized $11.9 million of revenue during the year ended December 31, 2012 and $34.0 million of revenue during the year ended December 31, 2013, related to the services we provide for Sprint. The Sprint Agreement has an initial term of five years, and automatically renews on a monthly basis thereafter unless notice of non-renewal is provided by either party. As of December 31, 2013, Sprint has formally awarded us decommissioning work on over 8,500 cell sites under the Sprint Agreement. To date, we have completed over 6,000 sites.

Enterprise Customers

We provide services to enterprise customers through our Professional Services segment. These service offerings consist of the design, installation and maintenance of DAS systems to customers such as Fortune 500 companies, hotels, hospitals, college campuses, airports and sports stadiums.

Estimated Backlog

We refer to the amount of revenue we expect to recognize over the next 18 months from future work on uncompleted contracts, including MSAs and work we expect to be assigned to us under MSAs, and based on historical levels of work under such MSAs and new contractual agreements on which work has not begun, as our “estimated backlog.” We determine the amount of estimated backlog for work under MSAs based on historical trends, anticipated seasonal impacts and estimates of customer demand based upon communications with our customers. Our 18-month estimated backlog as of December 31, 2012 was $1.1 billion, and our 18-month estimated backlog as of December 31, 2013 was $1.9 billion, including $0.4 billion of estimated backlog from DIRECTV as of December 31, 2013. We expect to recognize approximately $1.1 billion of our estimated backlog as of December 31, 2013 in the next twelve months. The vast majority of estimated backlog as of December 31, 2013 has originated from multi-year customer relationships, primarily with AT&T, DIRECTV and Alcatel-Lucent.

Because we use the completed contract method of accounting for revenues and expenses from our long-term construction contracts, our estimated backlog includes revenue related to projects that we have begun but not completed performance. Therefore, our estimated backlog contains amounts related to work that we have already performed but not completed.

While our estimated backlog includes amounts under MSA and other service agreements, our customers are generally not contractually committed to purchase a minimum amount of services under these agreements, most of which can be cancelled on short or no advance notice. Therefore, our estimates concerning customers’ requirements may not be accurate. The timing of revenues for construction and installation projects included in our estimated backlog can be subject to change as a result of customer delays, regulatory requirements and other project related factors that may delay completion. Changes in timing could cause estimated revenues to be realized in periods later than originally expected or unrealized. Consequently, our estimated backlog as of any date is not a reliable indicator of our future revenues and earnings. See “Risk Factors—Risks Related to Our Business—Amounts included in our estimated backlog may not result in actual revenue or translate into profits, and our estimated backlog is subject to cancellation and unexpected adjustments and therefore is an uncertain indicator of future operating results.”

Seasonality and Variability of Results of Operations

Historically we have experienced seasonal variations in our business, primarily due to the capital planning cycles of certain of our customers. Generally, AT&T’s annual capital plans are not finalized to the project level until sometime during the first three months of the year, resulting in reduced capital spending in the first quarter relative to the rest of the year. This results in a significant portion of contracts related to our Infrastructure Services segment being completed during the fourth quarter of each year. Because we have adopted the completed contract method, we do not recognize revenue or expenses on contracts until we have

 

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substantially completed the contract. Accordingly, a significant portion of our revenues and costs are recognized during the fourth quarter of each year. The recognition of revenue and expenses on contracts that span quarters may also cause our reported results of operations to experience significant fluctuations.

Our Field Services segment’s results of operations may also fluctuate significantly from quarter to quarter. Variations in the Field Services segment’s revenues and operating results occur quarterly as a result of a number of factors, including the number of customer engagements, employee utilization rates, the size and scope of assignments and general economic conditions. Because a significant portion of the Field Services segment’s expenses are relatively fixed, a variation in the number of customer engagements or the timing of the initiation or completion of those engagements can cause significant fluctuations in operating results from quarter to quarter.

As a result, we have historically experienced, and may continue to experience significant differences in operations results from quarter to quarter. As a result of these seasonal variations and our methodology for the recognition of revenue and expenses on projects, comparisons of operating measures between quarters may not be as meaningful as comparisons between longer reporting periods.

Sales and Marketing

Our customers’ selection of long-term managed services partners is often made at the most senior levels within their executive, operations and procurement teams. Our marketing and business development teams play an important role sourcing and supporting these opportunities as well as maintaining and developing middle-level management relationships with our existing customers. Additionally, our executives and operational leaders play a significant role in maintaining and developing executive-level relationships with our existing and potential customers.

Our corporate business development and diversification strategy is the responsibility of all of the business stakeholders, executive management, operation leaders and the business development organization.

Competition

The markets in which we operate are highly competitive. Several of our competitors are large companies that have significant financial, technical and marketing resources. Within the Professional Services segment, we primarily compete with many smaller specialty engineering, installation and integration companies as well as an engineering group within MasTec, Inc. Within the Infrastructure Services segment, we primarily compete with MasTec, Inc., Bechtel Corporation, Black & Veatch Corporation, Dycom Industries, Inc. and sometimes with OEMs. Within the Field Services segment, we primarily compete with MasTec, Inc. and UniTek Global Services, Inc. We and two of our competitors provide 60% of DIRECTV’s installation services business, with the remaining 40% performed in-house by DIRECTV. DIRECTV provides in-house installation services primarily to rural areas of the United States where it is not profitable for independent installers such as us to operate.

Relatively few significant barriers to entry exist in the markets in which we operate and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor. Some of our customers employ personnel to perform infrastructure services of the type we provide. We compete based upon our industry experience, technical expertise, financial and operational resources, nationwide presence, industry reputation and customer service. While we believe our customers consider a number of factors when selecting a service provider, most of their work is awarded through a bid process. Consequently, price is often a principal factor in determining which service provider is selected.

Employees and Subcontractors

As of March 31, 2014, we employed a total of 4,948 persons, 693 of which were employed by our Professional Services segment, 1,068 of which were employed by our Infrastructure Services segment, 2,935 of

 

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which were employed by our Field Services segment and the remainder of which provided general corporate services. Additionally, we utilize an extensive network of subcontractor relationships to complete work on certain of our projects. The use of subcontractors allows us to quickly scale our workforce to meet varied levels of demand without significantly altering our full-time employee base.

We attract and retain employees by offering training, bonus opportunities, competitive salaries and a comprehensive benefits package. We believe that our focus on training and career development helps us to attract and retain quality employees. We provide opportunities for promotion and mobility within our organization that we also believe helps us to retain our employees.

Facilities

We lease our headquarters in Plano, Texas and other facilities throughout the United States. Our facilities are used for offices, equipment yards, warehouses, storage and vehicle shops. As of March 31, 2014, our Infrastructure Services and Professional Services segments operate out of 32 offices located in 12 states throughout the United States, all of which are leased. Our Field Services and Other Services segments operated out of 30 field offices over 16 states as of March 31, 2014. We do not own any of our offices other than Multiband’s headquarters in Minnetonka, Minnesota. We believe that our existing facilities are sufficient for our current needs. In addition, we operate a number of on-site project offices maintained on a temporary basis as the need arises.

Regulations

Our operations are subject to various federal, state, local and international laws and regulations including:

 

    licensing, permitting and inspection requirements applicable to contractors, electricians and engineers;

 

    regulations relating to worker safety and environmental protection;

 

    permitting and inspection requirements applicable to construction projects;

 

    wage and hour regulations;

 

    regulations relating to transportation of equipment and materials, including licensing and permitting requirements;

 

    building and electrical codes;

 

    telecommunications regulations relating to our fiber optic licensing business; and

 

    special bidding, procurement and other requirements on government projects.

We believe we have all the licenses materially required to conduct our operations, and we are in substantial compliance with applicable regulatory requirements. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses, as well as give rise to termination or cancellation rights under our contracts or disqualify us from future bidding opportunities.

 

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Legal Proceedings

We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.

In December 2009, the U.S. Department of Labor sued various individuals that are either stockholders, directors, trustees and/or advisors to DirecTECH Holding Company, Inc., or DTHC, and its Employee Stock Ownership Plan. Multiband was not named in this complaint. In May 2011, three of these individuals settled the complaint with the U.S. Department of Labor (upon information and belief, a portion of this settlement was funded by the individuals’ insurance carrier) in the approximate amount of $8.6 million and those same individuals have filed suit against Multiband for reimbursement of certain expenses. The basis for these reimbursement demands are certain corporate indemnification agreements that were entered into by the former DTHC operating subsidiaries and Multiband. Two of those defendants had their claims denied during the second quarter of 2012, in a summary arbitration proceeding. This denial was appealed and the summary judgment award was overturned by a federal court judge in February 2013. Multiband appealed the federal court’s decision to the Sixth Circuit Court of Appeals. In January 2014, the Sixth Circuit Court of Appeals reversed the decision and reinstated the arbitration award granting summary judgment to Multiband.

On December 23, 2013, a putative Fair Labor Standards Act collective action was filed in the Southern District of Indiana alleging a subcontractor of Multiband, Satellite Direct, and Multiband misclassified a class of installers/technicians of DIRECTV services as independent contractors rather than employees. The remedy sought includes wages over a three-year period. Multiband denies the allegations, has demanded that Satellite Direct indemnify and defend it per Multiband’s 2009 Provider Agreement, and is filing a motion to dismiss the complaint against it for failure to state a claim upon which relief can be granted.

 

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MANAGEMENT

Directors

Our directors and their respective ages and positions as of April 11, 2014 are set forth below.

 

Name

  

Age

    

Positions

Ron B. Hill

     51       Director, Chief Executive Officer and President

John A. Goodman

     46       Director, Executive Chairman

J. Samuel Crowley

     63       Director

Steven L. Elfman

     58       Director

Larry Haynes

     64       Director

Ron B. Hill is our Chief Executive Officer and President. Mr. Hill has served as our Chief Executive Officer since January 2012 and as our President and Chief Operating Officer since May 2010, and previously served as our Executive Vice President of Professional Services from July 2008 until May 2010. Mr. Hill is a seasoned telecom executive with 26 years of management experience in sales, services and engineering, spending the majority of his time in technical roles. Mr. Hill began his career in 1985 with AT&T’s Consumer Products Division in Atlanta. Mr. Hill also served as the Vice President of Network Engineering-Integration and Optimization for Alcatel-Lucent from June 2002 until June 2008. In 1997, he earned a master’s degree in business administration from the Kellogg School of Business at Northwestern University.

Mr. Hill’s experience in the telecommunications industry, as well as his service as our Chief Executive Officer and his previous experience as an executive in the telecommunications industry, provides our Board of Directors with unique and valuable business and leadership experience. Our Board of Directors also benefits from his extensive knowledge of the Company and the telecommunications industry, and from his deep understanding of our customers, opportunities and workforce.

John A. Goodman is our co-founder and Executive Chairman. Mr. John Goodman has served as Executive Chairman since January 2012 and previously served as Chairman and Chief Executive Officer from our founding in 2000 through January 2012. Mr. John Goodman’s telecom career spans two decades, beginning with Bell Atlantic Professional Services, where he managed outside and inside plant services in the southwest United States. In 1997, he joined GTE’s Network Operations Center in Irving, Texas, where he supported Fortune 500 companies and provided broadband technical support services domestically. Following the merger of GTE and Bell Atlantic, now known as Verizon, Mr. John Goodman left Verizon in 2000 to co-found our Company. Mr. John Goodman holds a bachelor’s degree in business administration from Texas Tech University.

Mr. John Goodman’s experience in co-founding the Company and service as our current Executive Chairman and former Chief Executive Officer provides our Board of Directors with extensive business and leadership experience. Our Board of Directors also benefits from his extensive knowledge of the Company and the telecommunications industry, and from his deep understanding of our challenges, competition and customers.

J. Samuel Crowley. Mr. Crowley was appointed to our Board of Directors in April 2014. Mr. Crowley currently consults both large and small firms on the development and implementation of retail and internet technology concepts. Previously, Mr. Crowley served as the Chief Operating Officer of Gold’s Gym International from November 2005 to November 2007 and as the Senior Vice President of New Ventures for Michael’s Stores from August 2002 to 2004. From April 2000 to September 2002, Mr. Crowley was a Business Strategy Consultant for Insider Marketing. Mr. Crowley was also a co-founder of CompUSA, Inc. and served as its Executive Vice President of Operations from 1995 to 2000. Mr. Crowley is currently a member of the Board of Directors of United States Cellular Corporation, a position that he has held since 1998. Mr. Crowley holds a bachelor’s degree in English from Rice University and a master’s degree in business administration from the University of Texas at Dallas.

 

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Mr. Crowley’s substantial experience and expertise in management and operations as well as his significant involvement in the telecommunications industry provides our board with considerable business and leadership experience.

Steven L. Elfman. Mr. Elfman was appointed to our Board of Directors in April 2014. Mr. Elfman served as the President of Network Operations and Wholesale at Sprint Corp. from 2008 to 2014. He previously served as the Chief Operating Officer of Motricity, a mobile data technology company, from January 2008 to May 2008 and as Executive Vice President of Infospace Mobile (currently Motricity) from July 2003 to December 2007. From May 2003 to July 2003, he was an independent consultant working with Accenture Ltd., a consulting company. Mr. Elfman also served as Executive Vice President of Operations of Terabeam Corporation, a communications company, from May 2000 to May 2003, and as Chief Information Officer of AT&T Wireless from June 1997 to May 2000. Mr. Elfman holds a bachelor’s degree in computer science and business from the University of Western Ontario.

Mr. Elfman’s experience serving in numerous executive roles in the telecommunications industry provides our Board of Directors with extensive business and leadership experience.

Larry J. Haynes. Mr. Haynes was appointed to our Board of Directors in April 2014. Pursuant to his offer letter, we agreed to nominate Mr. Haynes to serve on our Board of Directors for two years. Mr. Haynes brings with him a wealth of financial and accounting experience gained during his time as a tax partner at the accounting firm of Ernst & Young LLP, at which he worked from 1978 until his retirement there in June 2010. During his time at Ernst & Young LLP, Mr. Haynes worked primarily with high growth public, venture and private equity backed private companies in technology, consumer products and the services sectors. Following retirement from Ernst & Young LLP in June 2010, Mr. Haynes accepted a position as Executive Relationship Consultant at Smith Frank Partners, LLC, an asset planning, risk management and wealth strategies firm, and also a position as Senior Adviser with Athens Partners, which assists professional services firms. Mr. Haynes serves on numerous boards, including Southwestern University’s Board of Trustees, the Baylor Oral Health Foundation Board, in which he serves on the Executive Committee and as Chair of the Audit Committee, and the Dallas Foundation Board. Mr. Haynes earned a BBA in accounting and economics from Southwestern University in 1972.

Mr. Haynes’ experience as a tax partner at one of the nation’s leading accounting firms as well as his experience serving on numerous boards provides our Board of Directors with financial expertise as well as unique and valuable leadership experience.

Executive Officers

Our executive officers and their respective ages and positions as of April 11, 2014 are set forth below.

 

Name

  

Age

    

Positions

Ron B. Hill

     51       Director, Chief Executive Officer and President

John A. Goodman

     46       Director, Executive Chairman

Randal S. Dumas

     44       Chief Financial Officer

Cari Shyiak

     54       Chief Operating Officer

Scott E. Pickett

     50       Chief Marketing Officer and Executive Vice President

James L. Mandel

     57       Chief Executive Officer of Multiband

Effective April 11, 2014, the Board of Directors appointed Ron B. Hill to have responsibility over the day-to-day management of our Company and to serve as our principal executive officer. Mr. Goodman will continue to serve on our Board of Directors as Executive Chairman and will maintain a strategic role as an executive officer.

The biographies of Messrs. Ron Hill and John Goodman are set forth under the heading “—Directors.”

Randal S. Dumas is our Chief Financial Officer. He has served as Chief Financial Officer since January 2012. Mr. Dumas previously served from May 2009 to December 2011 as the Senior Vice President and Chief

 

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Financial Officer of United Vision Logistics, a provider of expedited transportation and logistics services. From August 2008 to May 2009, Mr. Dumas was the Vice President and Chief Accounting Officer of GENBAND, Inc., a telecom equipment manufacturer. Mr. Dumas also previously served as the Vice President and Chief Accounting Officer of Accuro Healthcare Solutions Inc. (now MedAssets, Inc.), a provider of revenue-cycle management software solutions to the healthcare industry, from January 2008 until the sale of the company in August 2008. From September 2006 to December 2007, MetroPCS Communications, Inc., a wireless communications services provider, employed Mr. Dumas as its Staff Vice-President of Finance. Mr. Dumas holds a bachelor’s degree in accounting from the University of Texas at Dallas and a master’s degree in business administration from the University of Dallas.

Cari Shyiak was appointed as our Chief Operating Officer in February 2013. He joined as our President of Professional Services segment in May 2010. He has more than 25 years of international management experience covering operations, engineering, services and product management. Prior to joining our Company in May 2010, his last position was with Alcatel-Lucent where he served as Vice President of Services for Central and Southeastern Europe from April 2009 to May 2010. Previous to this, Mr. Shyiak held a number of leadership positions globally within Alcatel-Lucent and Lucent Technologies including VP of Network Solutions & Support Services, VP Global Technical Support Services and Director of Service Product Management Asia Pacific. He began his career in operations with Sasktel & Rogers Communications in Canada and earned his EMBA at the Institute for Management Development in Switzerland.

Scott E. Pickett is our Chief Marketing Officer and Executive Vice President of Strategic Planning and Mergers and Acquisitions. Mr. Pickett has served as our Chief Marketing Officer and Executive Vice President of Strategic Planning and Mergers and Acquisitions since September 2002. Prior to joining us in February 2002, he served as the Vice President of Sales for MindLever Corporation, an enterprise software company located in Research Triangle Park, North Carolina from 1999 to 2001. Mr. Pickett managed solutions-based sales organizations at two enterprise software companies prior to his time with MindLever. He graduated cum laude with a bachelor’s degree in computing and information science from McKendree College.

James Mandel has been the Chief Executive Officer and a director of Multiband since October 1, 1998. From October 1991 to October 1996, he was Vice President of Systems for Grand Casinos, Inc., a gaming company. Mr. Mandel serves on the board of GeoSpan Corporation, a geospatial imaging company, and is a director of the Independent Multi-Family Communications Council, a national trade group for the private cable industry. Mr. Mandel is a graduate of the Leed’s School of Business Administration at the University of Colorado at Boulder.

Board of Directors Composition

Our board of directors will consist of          members upon completion of this offering. In accordance with our certificate of incorporation to be filed in connection with this offering, immediately after this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:

 

    The Class I directors will be                     ,                      and                     , and their terms will expire at the annual meeting of stockholders to be held in 2015;

 

    The Class II directors will be                     ,                      and                     , and their terms will expire at the annual meeting of stockholders to be held in 2016; and

 

    The Class III directors will be                     ,                      and                     , and their terms will expire at the annual meeting of stockholders to be held in 2017.

 

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We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.

Director Independence

The listing requirements and rules of NASDAQ generally require that independent directors comprise a majority of the members of the boards of directors of listed companies within one year of the closing of their initial public offerings.

Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that         ,          and          do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements and rules of NASDAQ. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

Committees of the Board of Directors

We expect that, immediately following this offering, the standing committees of our board of directors will consist of an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The expected composition and functions of the audit committee, compensation committee and nominating and corporate governance committee are described below. Members will serve on committees until their resignation or until otherwise determined by our board of directors.

Audit Committee

Immediately following the offering, our audit committee will consist of                 ,                  and                 . Our board of directors has determined that                 ,                  and                  are independent under the NASDAQ listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee will be         . Our board of directors has determined that                  is an “audit committee financial expert” within the meaning of the SEC regulations. Our board of directors has also determined that each member of our audit committee can read and understand fundamental financial statements in accordance with applicable requirements. In arriving at these determinations, the board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector. The functions of this committee include:

 

    selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

 

    helping to ensure the independence and performance of the independent registered public accounting firm;

 

    discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

 

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    developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

    reviewing our policies on risk assessment and risk management;

 

    reviewing related party transactions;

 

    obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

 

    approving (or, as permitted, pre-approving) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

Compensation Committee

Immediately following the offering, our compensation committee will consist of             ,              and             . Our board of directors has determined that each of             ,              and              is independent under the NASDAQ listing standards, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and is an “outside director” as that term is defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, or Section 162(m). The chair of our compensation committee will be             . The functions of the compensation committee will include:

 

    reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;

 

    reviewing and recommending that our board of directors approve the compensation of our directors;

 

    reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;

 

    administering our stock and equity incentive plans;

 

    selecting independent compensation consultants and assessing conflict of interest compensation advisers;

 

    reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans; and

 

    reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.

Nominating and Corporate Governance Committee

Immediately following the offering, our nominating and corporate governance committee will consist of             ,              and             . Our board of directors has determined that each of             ,              and              is independent under the NASDAQ listing standards and applicable SEC rules and regulations. The chair of our compensation committee will be             . The functions of the nominating and governance committee will include:

 

    identifying and recommending candidates for membership on our board of directors;

 

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    including nominees recommended by stockholders;

 

    reviewing and recommending the composition of our committees;

 

    overseeing our code of business conduct and ethics, corporate governance guidelines and reporting; and

 

    making recommendations to our board of directors concerning governance matters.

The nominating and corporate governance committee also annually reviews the nominating and corporate governance committee charter and the committee’s performance.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of a compensation committee (or other committee serving an equivalent function) of any other entity whose executive officers served as a director of our Company.

Director Compensation

None of our directors received any compensation from us for service on the Board of Directors during the year ended December 31, 2013.

On March 28, 2014, the Board of Directors adopted a policy for compensation of non-employee directors. Under this policy, each non-employee director will receive an annual cash retainer of $140,000, $2,500 for each in-person Board of Directors meeting attended, $500 for any such meeting attended remotely and reimbursement for out of pocket expenses.

Each member of our board of directors will be indemnified for his actions associated with being a director to the fullest extent permitted under Delaware law.

In addition, prior to the completion of this offering, we will enter into indemnification agreements with each of our executive officers and directors. The indemnification agreements will provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under Delaware law.

Certain Relationships

There are no family relationships among our directors and executive officers. To our knowledge, there have been no material legal proceedings as described in Item 401(f) of Regulation S-K that are material to an evaluation of the ability or integrity of any of our directors or executive officers (in the last ten years), or our promoters or control persons (in the last year).

Code of Ethics

We have adopted a code of ethics that applies to all of our employees, including employees of our subsidiaries, as well as each of our directors and certain persons performing services for us. The code of ethics addresses, among other things, competition and fair dealing, conflicts of interest, financial matters and external reporting, Company funds and assets, confidentiality and corporate opportunity requirements and the process for reporting violations of the code of ethics, employee misconduct, improper conflicts of interest or other violations. We will provide a copy of our code of ethics without charge upon written request to Goodman Networks Incorporated, Attention: Monty West, 6400 International Parkway, Suite 1000, Plano, Texas 75093. If we amend or grant a waiver of one or more of the provisions of our Code of Ethics, we intend to satisfy the requirements under Item 5.05 of Form 8-K regarding the disclosure of amendments to, or waivers from, provisions of our Code of Ethics that apply to our principal executive, financial and accounting officers by posting the required information on our website. Our website is not a part of this prospectus.

 

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EXECUTIVE COMPENSATION

The following provides information about compensation that we pay or award to, or that is earned by: (i) the person who served as our principal executive officer during the fiscal year ended December 31, 2013; and (ii) our two most highly compensated executive officers, other than our principal executive officer, who were serving as executive officers, as determined in accordance with the rules and regulations promulgated by the SEC, as of December 31, 2013, with compensation during our 2013 fiscal year of $100,000 or more, or our Named Executive Officers. For our 2013 fiscal year, our Named Executive Officers and the positions in which they served were:

 

    John A. Goodman, Executive Chairman;

 

    Ron B. Hill, President and Chief Executive Officer; and

 

    Cari T. Shyiak, Chief Operating Officer.

Summary Compensation Table

The following table sets forth information concerning the total compensation received by, or earned by, our Named Executive Officers during the past two fiscal years.

Summary Compensation Table

Fiscal Year 2013

 

Name and Principal Position

 

Year

   

Salary

($)

   

Bonus

($)

   

Stock Awards

($)

   

Option
Awards

($) (1)

   

Non-Equity
Incentive

Plan
Compens-
ation
($)

   

All Other
Compensation

($)

   

Total

($)

 

John A. Goodman

    2013      $ 752,885      $ 1,087,500  (3)      —        $ 2,314,478        —        $ 504,502  (4)    $ 4,659,365   

(Executive Chairman) (2)

    2012        703,269        1,687,500  (5)      —          —          —          420,160  (6)      2,810,929   

Ron B. Hill

    2013        652,500        942,500  (8)    $ 2,481,000  (9)      2,314,478        —          2,201,593  (10)      8,592,071   

(President and Chief Executive Officer) (7)

    2012        602,884        2,462,500  (11)      2,481,000  (12)      —          —          1,885,388  (13)      7,431,772   

Cari T. Shyiak

(Chief Operating Officer) (14)

    2013        345,722        400,000  (15)      —          841,628        —          815,747  (16)      2,403,097   

 

(1) In accordance with SEC rules, this column reflects the aggregate fair value of the stock awards and option awards granted during the respective fiscal year computed as of their respective grant dates in accordance with Financial Accounting Standard Board Accounting Standards Codification Topic 718 for stock-based compensation transactions (ASC 718). Assumptions used in the calculation of these amounts are included in Note 7 to our consolidated financial statements for the year ended December 31, 2013, included elsewhere in this prospectus. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the stock awards or option awards, the exercise of the option awards, or the sale of the common stock underlying such stock awards and option awards.
(2) Mr. Goodman served as our Chief Executive Officer until January 23, 2012, when Mr. Goodman was appointed as our Executive Chairman, a position in which Mr. Goodman has continued to serve as our principal executive officer until April 11, 2014.
(3) Represents a retention bonus of $562,500 paid pursuant to his employment agreement and a bonus of $525,000 awarded pursuant to the Bonus Plan (as defined below) in March 2014 in respect of his performance during 2013.
(4) Includes premiums paid for medical, dental, vision and life insurance, reimbursement of out-of pocket medical expenses; the personal use of vehicles leased by the Company; payments for a tax consultant; payments for health club dues; and gross-ups for the payment of taxes on the foregoing and on cash bonuses in the amount of $449,683.
(5) Represents a retention bonus of $562,500 paid upon execution of an amendment to his employment agreement and a bonus of $1,125,000 awarded pursuant to the Bonus Plan in April 2013 in respect of his performance during 2012.

 

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(6) Includes premiums paid for medical, dental, vision and life insurance; reimbursement of out-of-pocket medical expenses; the personal use of vehicles leased by the Company; payments for a tax consultant; payments for country club dues; and gross-ups for the payment of taxes on the foregoing. Also includes a gross-up for the payment of taxes on his 2012 retention bonus in the amount of $354,419 paid in November 2013 pursuant to his employment agreement.
(7) Mr. Hill served as both our President and Chief Operating Officer until January 23, 2012, when Mr. Hill was appointed as our Chief Executive Officer in addition to his role as our President. Mr. Hill was appointed to serve as our principal executive officer on April 11, 2014.
(8) Represents a retention bonus of $487,500 paid pursuant to his employment agreement and a bonus of $455,000 awarded pursuant to the Bonus Plan in March 2014 in respect of his performance during 2013.
(9) Represents the grant date fair value of 30,000 shares of stock, based upon a stock price of $82.70 per share, the appraised value of our common stock.
(10) Includes premiums paid for medical, dental, vision and life insurance; reimbursement of out-of-pocket medical expenses; the personal use of vehicles leased by the Company; health club dues paid; and gross-ups for the payment of taxes on the foregoing, stock awards and cash bonuses in the amount of $2,140,592.
(11) Represents a CEO transition bonus in the amount of $1,000,000, a retention bonus in the amount of $487,500 paid upon execution of an amendment to his employment agreement and a bonus of $975,000 awarded pursuant to the Bonus Plan in April 2013 in respect of his performance during 2012.
(12) Represents the grant date fair value of 30,000 shares of stock, based upon a stock price of $82.70 per share, the appraised value of our common stock.
(13) Includes premiums paid for medical, dental, vision and life insurance; reimbursement of out-of-pocket medical expenses in the amount of $44,758; the personal use of vehicles leased by the Company in the amount of $19,281; health club dues paid in the amount of $50,667; reimbursement for housing expenses; and gross-ups for the payment of taxes on stock awards and the foregoing in the amount of $1,437,848. Also includes a gross-up for the payment of taxes on his 2012 retention bonus in the amount of $307,163 paid in February 2014 pursuant to his employment agreement.
(14) Mr. Shyiak was appointed our Chief Operating Officer effective February 18, 2013.
(15) Represents a retention bonus in the amount of $200,000 paid in October 2013 pursuant to his employment agreement and a bonus of $200,000 awarded pursuant to the Bonus Plan in March 2014 in respect of his performance during 2013.
(16) Includes premiums paid for medical, dental, vision and life insurance; reimbursement of out-of-pocket medical expenses; the personal use of vehicles leased by the Company; reimbursement for relocation expenses in the amount of $350,000; and gross-ups for the payment of taxes on the foregoing and on a cash bonus in the amount of $432,102.

Narrative Disclosure Regarding Summary Compensation Table

We have entered into employment agreements with each of our Named Executive Officers. A description of each of these agreements follows.

John A. Goodman. His employment agreement provided for an initial term expiring January 15, 2011, and automatically renewed for successive one-year terms. Effective April 1, 2012, pursuant to the discretion afforded by the terms of the employment agreement, the Board of Directors increased Mr. Goodman’s base salary to $750,000. He was also eligible to participate in our Goodman Networks Incorporated Executive Management Bonus Plan that we amended and restated in 2009, or the Bonus Plan. Further, Mr. Goodman was eligible to receive an additional cash bonus in the discretion of the Board of Directors. If terminated by us without cause, he was entitled to a severance payment of $1,125,000.

Effective October 16, 2012, we amended and restated Mr. Goodman’s employment agreement. The amended and restated employment agreement provided for a three (3) year term and a base salary of $750,000, subject to increase at the discretion of the Board of Directors. The amendment also increased the severance to which Mr. Goodman would be entitled to $1,500,000 if terminated by us without cause, by Mr. Goodman with good reason or upon a change of control. Mr. Goodman’s agreement also provided for a “Real Estate Keep Whole”

 

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benefit, which provided that Mr. Goodman has the right to receive a payment to compensate him for the difference, if any, between the original purchase price of his primary residence and its depreciated fair market value upon the earlier of: (i) the third anniversary of the amended and restated employment agreement and (ii) his termination by us without cause. The amended and restated employment agreement also required us to transfer to Mr. Goodman title to the vehicle we are currently leasing for him on the earliest of: (i) the date that is 36 months from the start of the lease; (ii) within 45 days after Mr. Goodman’s employment is terminated without cause or by him for good reason; and (iii) within 60 days of a change of control. The amended and restated employment agreement also entitled Mr. Goodman to benefits under our Executive Benefit Plan and cash bonuses under our Executive Management Bonus Plan and an annual retention bonus equal to 75% of his base salary, grossed up for the payment of taxes.

Effective February 1, 2013, we amended and restated Mr. Goodman’s employment agreement to conform to Section 409A of the Code and to extend the vesting period of a stock option we had previously agreed to issue Mr. Goodman.

In each of October 2012 and October 2013, we awarded Mr. Goodman a cash retention bonus in the amount of $562,500, grossed up for the payment of taxes, pursuant to his employment agreement.

Pursuant to his amended and restated employment agreement, on February 12, 2013, we granted Mr. Goodman an option to purchase 55,000 shares of our common stock at an exercise price equal to $82.70 per share. The shares underlying the options vest in three equal annual installments beginning on the first anniversary of the date of grant.

On March 28, 2014, the Board of Directors increased the annual base salary for Mr. Goodman to $1,100,000, effective May 1, 2014.

Effective April 11, 2014, we amended and restated Mr. Goodman’s employment agreement. The amended and restated employment agreement provides for an extended term expiring on March 31, 2017 and a base salary of $1,100,000 per annum, subject to increase at the discretion of the Board of Directors. The amendment also provides that Mr. Goodman will no longer have general management and control of the business. The amendment also increased the severance to which Mr. Goodman would be entitled to $3,300,000 if terminated by us without cause, by Mr. Goodman with good reason or by Mr. Goodman following a change of control. Mr. Goodman’s agreement also provides for a “Real Estate Keep Whole” benefit, which provides that Mr. Goodman has the right to receive a payment to compensate him for the difference, if any, between the original purchase price of his primary residence and its depreciated fair market value upon the earlier of: (i) October 16, 2015, and (ii) his termination by us without cause. The amended and restated employment agreement also requires us to transfer to Mr. Goodman title to the vehicle we are currently leasing for him on the earliest of: (i) the date that is 36 months from the start of the lease; (ii) within 45 days after Mr. Goodman’s employment is terminated without cause or by him for good reason; and (iii) within 60 days of a change of control. The amended and restated employment agreement also entitles Mr. Goodman to benefits under our Executive Benefit Plan and cash bonuses under our Executive Management Bonus Plan, an annual retention bonus equal to 75% of his base salary, grossed up for the payment of taxes, cash bonuses in the discretion of the Board of Directors and an annual equity award in an amount to be determined by the Board of Directors.

Ron B. Hill. His employment agreement provided for an initial term expiring on July 14, 2012, and automatically renewed for successive one-year terms. Effective April 1, 2012, pursuant to the discretion afforded by the terms of the employment agreement, the Board of Directors increased Mr. Hill’s base salary to $650,000. He was also eligible to participate in our Bonus Plan. Further, Mr. Hill was eligible to receive an additional cash bonus in the discretion of the Board of Directors. If terminated by us without cause, he was entitled to a severance payment of $975,000.

Effective October 16, 2012, we amended and restated Mr. Hill’s employment agreement. The amended and restated employment agreement provided for a three (3) year term and a base salary of $650,000 per annum, subject to increase at the discretion of the Board of Directors. The amendment also increased the severance to

 

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which Mr. Hill would be entitled to $1,300,000 if terminated by us without cause, by Mr. Hill with good reason or upon a change of control. Mr. Hill’s agreement also provided for a “Real Estate Keep Whole” benefit, which provided that Mr. Hill had the right to receive a payment to compensate him for the difference, if any, between the original purchase price of his primary residence and its depreciated fair market value upon the earlier of: (i) the third anniversary of the amended and restated employment agreement and (ii) his termination by us without cause. The amended and restated employment agreement also required us to transfer to Mr. Hill title to the vehicle we are currently leasing for him on the earliest of: (i) the date that is 36 months from the start of the lease; (ii) within 45 days after Mr. Hill’s employment is terminated without cause or by him for good reason; and (iii) within 60 days of a change of control. The amended and restated employment agreement also entitled Mr. Hill to benefits under our Executive Benefit Plan and cash bonuses under our Executive Management Bonus Plan and an annual retention bonus equal to 75% of his base salary, grossed up for the payment of taxes.

Effective February 1, 2013, we amended and restated Mr. Hill’s employment agreement to conform to Section 409A of the Code and to extend the vesting period of a stock option we had previously agreed to issue Mr. Hill.

Pursuant to his amended and restated employment agreement, we granted Mr. Hill an aggregate of 60,000 shares of our common stock in two equal installments, the first in December 2012 and the second in January 2013, and on February 12, 2013, an option to purchase 55,000 shares of our common stock at an exercise price equal to $82.70 per share. The shares underlying the options vest in three equal annual installments beginning on the first anniversary of the date of grant. We also agreed to provide a gross-up to Mr. Hill to compensate him for the payment of taxes on the common stock grant.

In July 2012, we awarded Mr. Hill a one-time CEO transition cash bonus in the amount of $1,000,000, and in each of October 2012 and October 2013, we awarded him a cash retention bonus in the amount of $487,500, grossed up for the payment of taxes, pursuant to his employment agreement.

On March 28, 2014, the Board of Directors increased the annual base salary for Mr. Hill to $1,000,000, effective May 1, 2014.

Effective April 11, 2014, we amended and restated Mr. Hill’s employment agreement. The amended and restated employment agreement provides for an extended term expiring on March 31, 2017 and a base salary of $1,000,000 per annum, subject to increase at the discretion of the Board of Directors. The amendment also provides that Mr. Hill will have general management and control of the business and report directly to the Board of Directors. The amendment also increased the severance to which Mr. Hill would be entitled to $3,000,000 if terminated by us without cause, by Mr. Hill with good reason or by Mr. Hill following a change of control. Mr. Hill’s agreement also provides for a “Real Estate Keep Whole” benefit, which provides that Mr. Hill has the right to receive a payment to compensate him for the difference, if any, between the original purchase price of his primary residence and its depreciated fair market value upon the earlier of: (i) October 16, 2015, and (ii) his termination by us without cause. The amended and restated employment agreement also requires us to transfer to Mr. Hill title to the vehicle we are currently leasing for him on the earliest of: (i) the date that is 36 months from the start of the lease; (ii) within 45 days after Mr. Hill’s employment is terminated without cause or by him for good reason; and (iii) within 60 days of a change of control. The amended and restated employment agreement also entitles Mr. Hill to benefits under our Executive Benefit Plan and cash bonuses under our Executive Management Bonus Plan, an annual retention bonus equal to 75% of his base salary, grossed up for the payment of taxes, cash bonuses in the discretion of the Board of Directors and an annual equity award in an amount to be determined by the Board of Directors.

Cari T. Shyiak. On February 18, 2013, in connection with his appointed as our Chief Operating Officer, we entered into an employment agreement with Mr. Shyiak. The employment agreement provides for a three (3) year term and a base salary of $400,000 per annum, subject to increase at the discretion of the Chief Executive Officer. Mr. Shyiak’s agreement provides for a one-time payment for relocation assistance in the amount of $350,000, grossed up for the payment of taxes. Further, the agreement provides that Mr. Shyiak may

 

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receive an additional cash bonus in the discretion of the Board of Directors. If terminated by us without cause or by him for good reason, he is entitled to a severance payment equal to the remainder of the unpaid base salary due under the term of his employment agreement, but in any case, no less than $600,000. The employment agreement also entitles Mr. Shyiak to benefits under our Executive Benefit Plan and cash bonuses under our Executive Management Bonus Plan and an annual retention bonus equal to 50% of his base salary, grossed up for the payment of taxes, payable on December 31st of each year of the term of the agreement.

Pursuant to his employment agreement, on February 12, 2013 we granted Mr. Shyiak an option to purchase 20,000 shares of our common stock at an exercise price equal to $82.70 per share. One-third of such shares underlying the option vested or will vest on each of the first three anniversaries of the date of grant.

In October 2013, we awarded Mr. Shyiak the cash retention bonus in the amount of $200,000, grossed up for the payment of taxes, pursuant to his employment agreement.

On March 28, 2014, the Board of Directors increased the annual base salary for Mr. Shyiak to $450,000, effective May 1, 2014.

Effective April 11, 2014, we amended Mr. Shyiak’s employment agreement to provide that he may be awarded cash bonuses in the discretion of the Board of Directors.

Goodman Networks Incorporated Executive Management Bonus Plan

Pursuant to their employment agreements, each of our Named Executive Officers is eligible to earn an annual cash bonus up to a specified percentage of such executive officer’s salary under the Bonus Plan. The purpose of the Bonus Plan is to encourage superior performance by and among our executive officers and to recognize their contributions to our success and profitability. Bonuses under the Bonus Plan have historically been paid in April of the year following the year in which the bonus was earned.

Pursuant to the Bonus Plan, our Named Executive Officers are eligible for a bonus equal to a percentage of their respective base salary that varies based upon whether we have met during the fiscal year certain target EBITDA and target revenue levels set by the Board of Directors as the administrator of the Bonus Plan. We have structured the Bonus Plan such that the threshold incentive will be paid if the Company achieves 100% of the target EBITDA and 90% of the target revenue, the target incentive will be paid if the Company achieves 120% of the target EBITDA and 90% of the target revenue, and the maximum incentive will be paid if the Company achieves 140% of the target EBITDA and 95% of the target revenue. However, the Board of Directors may also take into account the individual performance of a participant, as well as the overall financial performance of the Company, and adjust the bonus payable to any participant to an amount less than or greater than would otherwise be payable pursuant to the guidelines set forth in the Bonus Plan relating to EBITDA and revenue levels.

The table that follows sets forth the threshold, target and maximum incentive opportunities set for the Named Executive Officers for 2014.

 

   

Bonus as Percentage of Base Compensation

 
   

100% of Target
EBITDA and 90% of
Target Revenue

   

120% of Target
EBITDA and 90% of
Target Revenue

   

140% of Target
EBITDA and 95% of
Target Revenue

 

John A. Goodman

    40     70     100

Ron B. Hill

    40     70     100

Cari T. Shyiak

    35     50     70

 

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The table that follows sets forth the threshold, target and maximum incentive opportunities set for the Named Executive Officers for 2013.

 

   

Bonus as Percentage of Base Compensation

 
   

100% of Target
EBITDA and 90% of
Target Revenue

   

120% of Target
EBITDA and 90% of
Target Revenue

   

140% of Target
EBITDA and 95% of
Target Revenue

 

John A. Goodman

    40     70     100

Ron B. Hill

    40     70     100

Cari T. Shyiak

    35     50     70

Largely as the result of certain factors identified below, the Company did not meet its target EBITDA or threshold level of revenue for 2013. Due to the shortages of qualified tower crews currently being experienced by the wireless industry, we incurred significant additional costs during 2013 to hire additional tower crew personnel and pay additional incentives to subcontracted tower crews. In addition, the Company’s acquisition activity in 2013 diverted management time and resources and resulted in significant transaction and miscellaneous expenses. The Board of Directors set the 2013 EBITDA and revenue targets under the assumption that the Company would have not incurred these additional costs or undertaken such activities. The Board of Directors believes that the decisions to incur such additional costs and activities were in the best interests of the Company and that absent such decisions, the Company would have met its target EBITDA and revenue for 2013. As a result, the Board of Directors exercised the discretion afforded it under the Bonus Plan and determined to waive the 2013 EBITDA and revenue performance measures at the target incentive level for each of Messrs. Goodman, Hill and Shyiak. The table below sets forth the percentage of base compensation and dollar amount that was paid to each of the Named Executive Officers in March 2014 with respect to their performance during the year ended December 31, 2013.

 

    Bonus as Percentage
of Base Compensation
    Payment Under the
Bonus Plan
 

John A. Goodman

    70   $ 525,000   

Ron B. Hill

    70     455,000   

Cari T. Shyiak

    50     200,000   

Goodman Networks Incorporated 2014 Long-Term Incentive Plan

On April 8, 2014, the Board of Directors approved the 2014 Plan. The 2014 Plan is intended to enable us to remain competitive and innovative in our ability attract, motivate, reward and retain the services of key employees, certain key contractors and non-employee directors. The 2014 Plan provides for the granting of incentive stock options, or ISOs, subject to stockholder approval of the 2014 Plan, nonqualified stock options, stock appreciation rights, or SARs, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards which may be granted singly, in combination or in tandem, and which may be paid in cash or shares of our common stock. The following is a brief description of the 2014 Plan, a copy of which is filed as an exhibit to the registration statement of which this prospectus forms a part.

Effective Date and Expiration. The 2014 Plan will become effective upon the completion of this offering, and will terminate on the April 8, 2024. No award may be made under the 2014 Plan after its expiration date, but awards made prior thereto may extend beyond that date. Immediately prior to the time that the 2014 Plan becomes effective, the 2008 Plan will cease to be available for future issuances of awards. The terms of the 2008 Plan will remain in effect for outstanding awards.

Share Authorization. Subject to certain adjustments, the maximum number of shares of our common stock that may be delivered pursuant to awards under the 2014 Plan is                  shares, 100% of which may be delivered pursuant to ISOs. Subject to certain adjustments, the maximum number of the shares of common stock with respect to which stock options or SARs may be granted to any of our officers subject to Section 16 of the Exchange Act or a “covered employee” as defined in Section 162(m)(3) of the Internal Revenue Code of 1986, as amended, or the Code, during any calendar year is                  shares. In addition, to the extent Section 162(m) of the Code applies to

 

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awards granted under the 2014 Plan and we intend to comply with Section 162(m) of the Code, no participant may receive in any calendar year performance-based awards with an aggregate value of more than $4,200,000 (based on the fair market value of shares of our common stock at the time of the grant of the performance-based award). The 2014 Plan also provides that no more than 10% of the shares of common stock that may be issued pursuant to an award under the 2014 Plan may be designated as Exempt Shares (as defined in the 2014 Plan). The Committee (as defined below) has greater flexibility to accelerate the vesting for shares designated as Exempt Shares.

Administration. The 2014 Plan may be administered by the Board of Directors or a committee of the Board of Directors consisting of two or more members. At any time a committee is not established by the Board of Directors, the Board of Directors shall administer the 2014 Plan (as used herein, the term “Committee” refers to either a committee of the Board of Directors or the Board of Directors itself). The Committee will determine the persons to whom awards are to be made; determine the type, size and terms of awards; interpret the 2014 Plan; establish and revise rules and regulations relating to the 2014 Plan and make any other determinations that it believes necessary for the administration of the 2014 Plan. The Committee may delegate certain duties to one or more of our officers as provided in the 2014 Plan.

Eligibility. Employees (including any employee who is also a director or an officer), contractors and outside directors of us and our subsidiaries whose judgment, initiative and efforts contributed to or may be expected to contribute to our successful performance are eligible to participate in the 2014 Plan.

Stock Options. The Committee may grant either ISOs qualifying under Section 422 of the Code or nonqualified stock options, provided that only employees of us and our subsidiaries (excluding subsidiaries that are not corporations) are eligible to receive ISOs. Stock options may not be granted with an option price less than 100% of the fair market value of a share of common stock on the date the stock option is granted. If an ISO is granted to an employee who owns or is deemed to own more than 10% of the combined voting power of all classes of our stock (or stock of any parent or subsidiary), the option price shall be at least 110% of the fair market value of a share of common stock on the date of grant. The Committee will determine the terms of each stock option at the time of grant, including without limitation, the maximum term of each option, the times at which each option will be exercisable and the provisions requiring forfeiture of unexercised options at or following termination of employment or service.

Stock Appreciation Rights. The Committee is authorized to grant SARs as a stand-alone award, or freestanding SARs, or in conjunction with options granted under the 2014 Plan, or tandem SARs. SARs entitle a participant to receive an amount equal to the excess of the fair market value of a share of common stock on the date of exercise over the fair market value of a share of common stock on the date of grant. The grant price of a SAR cannot be less than 100% of the fair market value of a share on the date of grant. The Committee will determine the terms of each SAR at the time of the grant, including without limitation, the maximum term of each SAR, the times at which each SAR will be exercisable, and provisions requiring forfeiture of unexercised SARs at or following termination of employment or service.

Restricted Stock and Restricted Stock Units. The Committee is authorized to grant restricted stock and restricted stock units. Restricted stock consists of shares of common stock that may not be sold, transferred, pledged, hypothecated, encumbered, or otherwise disposed of, and that may be forfeited in the event of certain terminations of employment or service, prior to the end of a restricted period as specified by the Committee. Restricted stock units are the right to receive shares of common stock at a future date in accordance with the terms of such grant upon the attainment of certain conditions specified by the Committee, which include substantial risk of forfeiture and restrictions on their sale or other transfer by the participant. The Committee determines the eligible participants to whom, and the time or times at which, grants of restricted stock or restricted stock units will be made, the number of shares or units to be granted, the price to be paid, if any, the time or times within which the shares covered by such grants will be subject to forfeiture, the time or times at which the restrictions will terminate, and all other terms and conditions of the grants. Restrictions or conditions

 

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could include, but are not limited to, the attainment of performance goals, continuous service with us, the passage of time, or other restrictions and conditions. The value of the restricted stock units may be paid in shares, cash or a combination of both, as determined by the Committee.

Dividend Equivalent Rights. The Committee is authorized to grant a dividend equivalent right to any participant either as a component of another award or as a separate award, conferring on participants the right to receive cash or shares of common stock equal in value to dividends paid on a specific number of shares or other periodic payments. The terms and conditions of the dividend equivalent right shall be specified by the grant. Dividend equivalents credited to the holder of a dividend equivalent right may be paid currently or may be deemed to be reinvested in additional shares. Any such reinvestment shall be at the fair market value at the time thereof. A dividend equivalent right may be settled in cash, shares, or a combination thereof.

Performance Awards. The Committee may grant performance awards payable in cash, shares of common stock, a combination thereof or other consideration at the end of a specified performance period. Payment will be contingent upon achieving pre-established performance goals by the end of the performance period. The Committee will determine the length of the performance period, the maximum payment value of an award and the minimum performance goals required before payment will be made, so long as such provisions are not inconsistent with the terms of the 2014 Plan, and to the extent an award is subject to Section 409A of the Code, are in compliance with the applicable requirements of Section 409A of the Code and any applicable regulations or guidance. To the extent we determine that Section 162(m) of the Code shall apply to a performance award granted under the 2014 Plan, it is our intent that performance awards constitute “performance-based compensation” within the meaning of Section 162(m) of the Code and the regulations thereunder. In certain circumstances, the Committee may, in its discretion, determine that the amount payable with respect to certain performance awards will be reduced from the amount of any potential awards. However, the Committee may not, in any event, increase the amount of compensation payable to an individual upon the attainment of a performance goal intended to satisfy the requirements of Section 162(m) of the Code. With respect to a performance award that is not intended to satisfy the requirements of Section 162(m), if the Committee determines that the established performance measures or objectives are no longer suitable because of a change in our business, operations, corporate structure, or for other reasons that the Committee deemed satisfactory, the Committee may modify the performance measures or objectives and/or the performance period.

Other Awards. The Committee may grant other forms of awards payable in cash or shares if the Committee determines that such other form of award is consistent with the purpose and restrictions of the 2014 Plan. The terms and conditions of such other form of award shall be specified by the grant. Such other awards may be granted for no cash consideration, for such minimum consideration as may be required by applicable law, or for such other consideration as may be specified by the grant.

Vesting. The Committee, in its sole discretion, may determine that an award will be immediately vested in whole or in part, or that all or any portion may not be vested until a date, or dates, subsequent to its date of grant, or until the occurrence of one or more specified events, subject in any case to the terms of the 2014 Plan. If the Committee imposes conditions upon vesting, then, except as otherwise provided below, subsequent to the date of grant, the Committee may, in its sole discretion, accelerate the date on which all or any portion of the award may be vested. “Full Value Awards” (i.e., restricted stock or restricted stock units) that constitute performance awards must vest no earlier than one year after the date of grant, and Full Value Awards that are payable upon the completion of future services must vest no earlier than over the three year period commencing on the date of grant. Notwithstanding the foregoing, the Committee may, in its sole discretion, accelerate the vesting or waive any applicable restriction period for such Full Value Awards, provided that the shares of common stock subject to such awards shall be Exempt Shares (as defined in the 2014 Plan), unless such acceleration or waiver occurs by reason of the participant’s death, disability, retirement, or occurrence of a change in control. The number of Exempt Shares is limited to 10% of the number of shares available for issuance under the 2014 Plan.

 

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Forfeiture. The Committee may impose on any award at the time of grant or thereafter, such additional terms and conditions as the Committee determines, including, without limitation, terms requiring forfeiture of awards in the event of a participant’s termination of service. The Committee will specify the circumstances on which performance awards may be forfeited in the event of a termination of service by a participant prior to the end of a performance period or settlement of awards. Except as otherwise determined by the Committee, restricted stock will be forfeited upon a participant’s termination of service during the applicable restriction period.

Assignment. Awards granted under the 2014 Plan generally are not assignable or transferable except by will or by the laws of descent and distribution, except that the Committee may, in its discretion and pursuant to the terms of an award agreement, permit certain transfers as permitted under the 2014 Plan.

Adjustments Upon Changes in Capitalization. In the event that any dividend or other distribution (whether in the form of cash, common stock, other securities or other property), recapitalization, stock split, reverse stock split, rights offering, reorganization, merger, consolidation, split-up, spin-off, split-off, combination, subdivision, repurchase, or exchange of shares of common stock or other securities of ours, issuance of warrants or other rights to purchase shares of common stock or other securities of ours or other similar corporate transaction or event affects the fair value of an award, then the Committee shall make equitable adjustments so that the fair value of the award immediately after the transaction or event is equal to the fair value of the award immediately prior to the transaction or event. Notwithstanding the foregoing, no such adjustment shall be made or authorized to the extent that such adjustment would cause the 2014 Plan or any award to violate Section 422 of the Code or Section 409A of the Code. All such adjustments must be made in accordance with the rules of any securities exchange, stock market or stock quotation system to which we are subject.

Amendment or Discontinuance of the 2014 Plan. Our Board of Directors may at any time and from time to time, without the consent of the participants, alter, amend, revise, suspend, or discontinue the 2014 Plan in whole or in part, except that no amendment for which stockholder approval is required either: (i) by any securities exchange or inter-dealer quotation system on which the common stock is listed or traded or (ii) in order for the 2014 Plan and incentives awarded under the 2014 Plan to continue to comply with Sections 162(m), 421, and/or 422 of the Code, including any successors to such Sections, or other applicable law, shall be effective unless such amendment is approved by the requisite vote of our stockholders entitled to vote thereon. Any amendments made shall, to the extent deemed necessary or advisable by the Committee, be applicable to any outstanding awards granted under the