DECEMBER 31, 2012
Otelco Inc. (the “Company”) provides a broad range of telecommunications services on a retail and wholesale basis. These services include local and long distance calling; network access to and from our customers; data transport; digital high-speed and legacy dial-up internet access; cable, satellite and internet protocol television; wireless; and other telephone related services. The principal markets for these services are residential and business customers residing in and adjacent to the exchanges the Company serves in Alabama, Massachusetts, Maine, Missouri, Vermont, and West Virginia. In addition, the Company serves business customers throughout Maine and New Hampshire and provides legacy dial-up internet service throughout the states of Maine and Missouri. The Company offers various communications services that are sold to economically similar customers in a comparable manner of distribution. The majority of our customers buy multiple services, often bundled together at a single price. The Company views, manages and evaluates the results of its operations from the various communications services as one company and therefore has identified one reporting segment as it relates to providing segment information.
Recent Developments
In June 2012, Time Warner Cable Information Systems (“TW”) officially notified the Company that it would not renew its contract with the Company for wholesale network connections. This contract and related carrier access revenue, representing approximately 15% of the Company’s 2012 revenue, expired on December 31, 2012. Additionally, in November 2011, the Federal Communications Commission (“FCC”) released an order which made substantial changes to the way telecommunications carriers are compensated for serving high cost areas and for completing traffic with other carriers, requiring a lowering of intrastate rates where they exceed interstate rates. The FCC order has and will continue to negatively impact the operations of the Company over the coming years.
Management has taken measures to reduce costs and align margins in response to the anticipated decline in revenues. During second quarter 2012, the Company ceased paying dividend payments indefinitely, reduced senior management and board of director compensation and reduced employees. These measures alone were not sufficient to allow the Company to continue to service its approximately $270 million of debt. The Company’s current senior secured term loan had a maturity date of October 31, 2013 and the Company and its management team diligently explored a variety of potential transactions in an effort to refinance the existing debt or acquire additional capital resources.
In May 2012, the Company retained Evercore Group, L.L.C. as its financial advisor to assist the Company to engage in negotiations with the lenders under its senior secured credit facility with respect to a potential balance sheet restructuring. The Company provided the lenders under its senior secured credit facility with information regarding its operations, projections, and business plan to facilitate their ability to negotiate and assess a potential restructuring plan with the Company. After good-faith, arms-length negotiations, on January 31, 2013, the Company reached an agreement with the lenders under its senior secured credit facility on a prepackaged chapter 11 plan of reorganization (the “Plan”). Terms of the agreement were released in a Form 8-K filed by the Company on February 1, 2013.
Bankruptcy Filing of the Company and Its Direct and Indirect Subsidiaries
On March 24, 2013, the Company and each of its direct and indirect subsidiaries filed voluntary petitions for reorganization (the “Reorganization Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to effectuate the Plan. Chapter 11 of the Bankruptcy Code is the principal business reorganization chapter of the Bankruptcy Code. Chapter 11 allows the Company to remain in possession of its assets, and to continue to manage and operate its business while restructuring its debt, without the need to liquidate and go out of business. If the Plan is approved by the Bankruptcy Court and consummated, the following transactions will occur:
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the $162 million of outstanding principal term loan obligations under the Company’s senior credit facility will be reduced to a maximum of $142 million (or such higher amount that is agreed to in writing by the agent under the Company’s senior credit facility and the holders of more than 50% in number and 66 2/3% in amount of the outstanding principal term loan obligations under the Company’s senior credit facility) through a cash payment;
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the maturity of the outstanding principal term loan obligations under the Company’s senior credit facility will be extended to April 30, 2016;
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the holders of the outstanding principal term loan obligations under the Company’s senior credit facility will receive their pro rata share of the Company’s new Class B common stock, which new Class B common stock will represent 7.5% of the total economic and voting interests in the Company immediately following the effectiveness of the Plan, subject to dilution of up to 10% on account of the issuance of equity interests in the Company pursuant to a management equity plan which is expected to be adopted by the Company following its emergence from bankruptcy (the “Management Equity Plan”);
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certain revolving loan commitments under the Company’s senior credit facility will be reinstated, with availability of up to $5 million;
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the Company’s outstanding senior subordinated notes, including the outstanding senior subordinated notes constituting part of the Company’s Income Deposit Securities (“IDSs”), will be cancelled and the holders of outstanding senior subordinated notes, including senior subordinated notes held through IDSs, will receive their pro rata share of the Company’s new Class A common stock, which new Class A common stock will represent 92.5% of the total economic and voting interests in the Company immediately following the effectiveness of the Plan, subject to dilution of up to 10% on account of the issuance of equity interests in the Company pursuant to the Management Equity Plan; and
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the outstanding shares of the Company’s existing Class A common stock (“common stock”), all of which currently constitute part of the IDSs, will be cancelled.
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There can be no assurance as to the timing for approval of the Plan or that the Plan will be confirmed.
Going Concern
As shown in the accompanying consolidated financial statements, the Company has incurred substantial losses from operations, and as of December 31, 2012, the Company’s current liabilities exceeded its current assets by $240.2 million and the Company had a retained deficit of $141.7 million.
The indenture governing the Company’s senior subordinated notes, as well as the Company’s senior credit facility, contain acceleration clauses pursuant to which the debt outstanding under these instruments becomes immediately due and payable upon the occurrence of certain triggering events. The filing of the Reorganization Cases on March 24, 2013 constituted such a triggering event. The accompanying consolidated financial statements have been classified to reflect this triggering event as of the year ended December 31, 2012.
In addition, the filing of the Reorganization Cases terminated the revolving loan commitments under the Company's senior credit facility. The Company believes that any efforts to enforce its payment obligations under its senior credit facility and the indenture governing its senior subordinated notes are stayed while the Company remains in the bankruptcy process. There has been no decision on whether fresh start accounting is applicable upon confirmation of the Plan by the Bankruptcy Court.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, failure to receive approval of the Plan may raise substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are either directly or indirectly wholly owned. These include: Otelco Telecommunications LLC (“OTC”); Otelco Telephone LLC (“OTP”); Hopper Telecommunications LLC (“HTC”); Brindlee Mountain Telephone LLC (“BMTC”); Blountsville Telephone LLC (“BTC”); Otelco Mid-Missouri LLC (“MMT”) and its wholly owned subsidiary I-Land Internet Services LLC; Mid-Maine Telecom LLC (“MMTI”); Mid-Maine Telplus LLC (“MMTP”); Granby Telephone LLC (“GTT”); War Telephone LLC (“WT”); Pine Tree Telephone LLC (“PTT”); Saco River Telephone LLC (“SRT”); Shoreham Telephone LLC (“ST”); CRC Communications LLC (“PTN”); and Communications Design Acquisition LLC (“CDAC”).
The accompanying consolidated financial statements include the accounts of the Company and all of the aforesaid subsidiaries after elimination of all material intercompany balances and transactions.
Use of Estimates
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements.
Significant accounting estimates include the recoverability of goodwill, identified intangibles, long-term assets, deferred tax valuation allowances and allowance for doubtful accounts.
Regulatory Accounting
The Company follows the accounting for regulated enterprises, Accounting Standards Codification 980,
Regulated Operations
(“ASC 980”), as issued by the Financial Accounting Standards Board (the “FASB”). This accounting practice recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, ASC 980 requires the Company to depreciate telecommunications property and equipment over the estimated useful lives approved by regulators, which could be different than the estimated useful lives that would otherwise be determined by management. ASC 980 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. Criteria that would give rise to the discontinuance of accounting in accordance with ASC 980 include (1) increasing competition restricting the ability of the Company to establish prices that allow it to recover specific costs and (2) significant changes in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. The Company periodically reviews the criteria to determine whether the continuing application of ASC 980 is appropriate for its rural local exchange carriers.
The Company is subject to reviews and audits by regulatory agencies. The effect of these reviews and audits, if any, will be recorded in the period in which they first become known and determinable.
Intangible Assets and Goodwill
Intangible assets consist of customer related intangibles, non-compete agreements and long-term customer contracts. Goodwill represents the excess of total acquisition cost over the assigned value of net identifiable tangible and intangible assets acquired through various business combinations, less any impairment. Due to the regulatory accounting required by ASC 980, the Company did not record acquired regulated telecommunications property and equipment at fair value as required by ASC 805,
Business Combinations
(“ASC 805”), through 2004. In accordance with 47 CFR 32.2000, the federal regulation governing acquired telecommunications property and equipment, such property and equipment is accounted for at original cost, and depreciation and amortization of property and equipment acquired is credited to accumulated depreciation.
To allow the audit committee of the Company’s board of directors sufficient time to review the assessment of goodwill for impairment, management performs the annual goodwill impairment testing with an effective date of October 1. The Company believes this testing date closely aligns the analysis with the Company’s budgeting and forecasting process. In September 2011, the Company adopted Accounting Standards Update (“ASU”) 2011-08,
Testing Goodwill for Impairment
(“ASU 2011-08”). ASU 2011-08 allows an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. As discussed in note 3, Impairments, below, the Company had indicators of impairment in the second quarter of 2012 and management performed steps 1 and 2, recording an impairment charge. As a result of this action, the annual goodwill impairment testing performed as of October 1, 2012 utilized the qualitative assessment.
The Company performs a quarterly review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.
For the acquisition of ST, property has been recorded at fair value in accordance with ASC 805, resulting in a plant acquisition adjustment in 2011. The Company has acquired identifiable intangible assets associated with the territories it serves, including a non-compete agreement with one of the former owners of ST, and the customer lists of ST. The total purchase price over the amounts assigned to tangible and identifiable assets was recorded as goodwill.
Revenue Recognition
Local service revenue
. Local service revenue for monthly recurring local services is billed in advance to a portion of the Company’s customers and in arrears to the balance of the customers. The Company records revenue for charges that have not yet been invoiced to its customers as unbilled revenue when services are rendered. The Company records revenue billed in advance as advance billings and defers recognition until such revenue is earned. Long distance service is billed to customers in arrears based on actual usage except when it is included in service bundles. The Company records unbilled long distance revenue as unbilled revenue when services are rendered. In bundles, unlimited usage is billed in arrears at a flat rate.
Network access
. Network access revenue is derived from several sources. Revenue for interstate access services is received through tariffed access charges filed by the National Exchange Carrier Association (“NECA”) with the FCC on behalf of the NECA member companies for our regulated subsidiaries. These access charges are billed by the Company to interstate interexchange carriers and pooled with like-revenues from all NECA member companies. A portion of the pooled access charge revenue received by the Company is based upon its actual cost of providing interstate access service, plus a return on the investment dedicated to providing that service. The balance of the pooled access charge revenue received by the Company is based upon the nationwide average schedule costs of providing interstate access services. Rates for our competitive subsidiaries are set by FCC rule to be no more than the interconnecting interstate rate of the predominant local carrier.
Revenue for intrastate access service is received through tariffed access charges billed by the Company to the originating intrastate carrier using access rates filed with the Alabama Public Service Commission (the “APSC”), the Maine Public Utilities Commission (the “MPUC”), the Massachusetts Department of Telecommunications and Cable (the “MDTC”), the Missouri Public Service Commission (the “MPSC”), the New Hampshire Public Utilities Commission (the “NHPUC”), the Vermont Public Service Board (the “VPSB”) and the West Virginia Public Service Commission (the “WVPSC”) and are retained by the Company.
Revenue for the intrastate/interLATA access service is received through tariffed access charges as filed with the APSC, MDTC, MPSC, MPUC, NHPUC, VPSB and WVPSC. These access charges are billed to the intrastate carriers and are retained by the Company. Revenue for terminating and originating long distance service is received through charges for providing usage of the local exchange network. Toll revenues are recognized when services are rendered.
The FCC’s Intercarrier Compensation order, released in November 2011, has and will significantly change the way telecommunication carriers receive compensation for exchanging traffic. Over the next three years, all intrastate rates that exceed the interstate rate will be reduced to the interstate rate. Beginning in 2014, the interstate rate will be reduced over six years to “bill and keep” in which carriers bill their customers for services and keep those charges, but neither pay for or receive compensation from traffic sent to or received from other carriers. In addition, subsidies to carriers serving high cost areas will be phased out over an extended period.
Cable television, internet and transport services
. Cable television, internet and transport service revenues are recognized when services are rendered. Operating revenues from the lease of dark fiber covered by indefeasible rights-of-use agreements are recorded as earned. In some cases, the entire lease payment is received at inception of the lease and recognized ratably over the lease term after recognition of expenses associated with lease inception. The Company has deferred revenue reflected in advance billings and payments in the accompanying consolidated balance sheets as of December 31, 2011 and 2012 of $656,968 and $840,303, respectively, related to transport services.
Cash and Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality, short-term money market instruments and highly liquid debt instruments with an original maturity of three months or less when purchased. The cash equivalents are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.
Accounts Receivable
The Company extends credit to its commercial and residential customers based upon a written credit policy. Service interruption is the primary vehicle for controlling losses. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate for the amount of probable credit losses in the Company’s existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Materials and Supplies
Materials and supplies are stated at the lower of cost or market value. Cost is determined using an average cost basis.
Property and Equipment
Regulated property and equipment is stated at original cost less any impairment. Unregulated property and equipment purchased through acquisitions is stated at its fair value at the date of acquisition less any impairment. Expenditures for improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed when incurred. Depreciation of regulated property and equipment is computed principally using the straight-line method over useful lives determined by the APSC, MDTC, MPSC, MPUC, NHPUC, VPSB and WVPSC as discussed above. Depreciation of unregulated property and equipment primarily employs the straight-line method over industry standard estimated useful lives.
Long-Lived Assets
The Company reviews its long-lived assets for impairment at each balance sheet date and whenever events or changes in circumstances indicate that the carrying amount of an asset should be assessed. To determine if an impairment exists, the Company estimates the future undiscounted cash flows expected to result from the use of the asset being reviewed for impairment. If the sum of these expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss in accordance with guidance included in ASC 360,
Property, Plant, and Equipment
(“ASC 360”). The amount of the impairment recognized is determined by estimating the fair value of the assets and recording a loss for the excess of the carrying value over the fair value. See note 3, Impairments, below.
Deferred Financing Costs
Deferred financing and loan costs consist of debt issuance costs incurred in obtaining long-term financing, which are amortized over the life of the related debt using the effective yield method. Amortization of deferred financing and loan costs is classified as “Interest expense”. When amendments to debt agreements are considered to extinguish existing debt per guidance included in ASC 470,
Debt
, the remaining deferred financing costs are written off at the time of amendment.
Derivative Financial Instruments
Derivative financial instruments are accounted for under guidance included in ASC 815,
Derivatives and Hedging
(“ASC 815”). Under ASC 815, all derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value.
The Company was exposed to the market risk of adverse changes in interest rates. The Company utilized two interest rate swaps which matured on February 8, 2012. The first swap had a notional amount of $90 million with the Company paying a fixed rate of 1.85% and the counterparty paying a variable rate based upon the three month LIBOR interest rate. It was effective from February 9, 2009 through February 8, 2012. The second swap had a notional amount of $60 million with the Company paying a fixed rate of 2.0475% and the counterparty paying a variable rate based upon the three month LIBOR interest rate. It was effective from February 9, 2010 through February 8, 2012. From an accounting perspective, the documentation for both swaps did not meet the technical requirements of ASC 815 to allow the swaps to be considered highly effective hedging instruments and, therefore, the swaps did not qualify for hedge accounting. The change in fair value of the swaps was charged or credited to income as a change in fair value of derivatives. Over the life of the swaps, the cumulative change in fair value was zero.
Income Taxes
The Company accounts for income taxes using the asset and liability approach in accordance with guidance included in ASC 740,
Income Taxes
(“ASC 740”). The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The provision for income taxes consists of an amount for the taxes currently payable and a provision for the tax consequences deferred to future periods.
Interest and penalties related to income tax matters would be recognized in income tax expense. As of December 31, 2012, we did not have an amount recorded for interest and penalties.
The Company conducts business in multiple jurisdictions and, as a result, one or more subsidiaries file income tax returns in the U.S. federal, various state and local jurisdictions. All tax years since 2006 are open for examination by various tax authorities.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and derivative liabilities approximate their fair value as of December 31, 2011 and 2012. The fair value of debt instruments at December 31, 2011 and 2012 is disclosed in the footnotes to the financial statements.
Income (Loss) per Common Share
The Company computes net income (loss) per common share in accordance with the provision included in ASC 260,
Earnings per Share
(“ASC 260”). Under ASC 260, basic and diluted income per share is computed by dividing net income (loss) available to stockholders by the weighted average number of common shares and common share equivalents outstanding during the period. Basic income (loss) per common share excludes the effect of potentially dilutive securities, while diluted income (loss) per common share reflects the potential dilution that would occur if securities or other contracts to issue common shares were exercised for, converted into or otherwise resulted in the issuance of common shares. Net income (loss) is adjusted for the Class B derivative liability in calculating diluted earnings. On June 8, 2010, all of the Company’s Class B shares were exchanged for IDSs, which include a common share, on a one-for-one basis.
Recently Adopted Accounting Pronouncements
In June 2011, the FASB issued ASU 2011-05
, Presentation of Comprehensive Income
(“ASU 2011-05”) an update to ASC 220,
Comprehensive Income
. This ASU requires the components of net income and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but continuous statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income or how earnings per share is calculated or presented. ASU 2011-05 is effective for public entities for interim and annual periods beginning after December 15, 2011. As ASU 2011-05 impacts presentation only, the adoption of this update did not have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, an update to ASC 350. This ASU provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test in accordance with ASC 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests for fiscal years beginning after December 15, 2011. The Company performed its 2012 annual goodwill impairment testing using the qualitative assessment provided in ASU 2011-08. The implementation of this update did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
During 2012, the FASB issued ASUs 2012-01 through 2012-07. Except for ASU 2012-02, which is discussed below, these ASUs provide technical corrections to existing guidance and to specialized industries or entities and therefore, have minimal, if any, impact on the Company.
In July 2012, the FASB issued ASU 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment
, an amendment to ASC 350. This ASU provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The implementation of this ASU is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
3. Impairments
ASC 350 requires that goodwill be tested for impairment annually, unless potential interim indicators exist that could result in impairment. During the second quarter of 2012, an interim goodwill impairment test was performed in response to indicators revealed in the annual forecasting process. The forecast included the non-renewal of the TW contract beyond its December 31, 2012 expiration date and the impact of the recent FCC reform. Forecasted operating profits were reduced below the levels projected during the fourth quarter of 2011 and first quarter of 2012.
The FCC’s Intercarrier Compensation order, released in November 2011, has and will significantly change the way telecommunication carriers receive compensation for exchanging traffic. Over the next three years, all intrastate rates that exceed the interstate rate will be reduced to the interstate rate. Beginning in 2014, the interstate rate will be reduced over three years to “bill and keep” in which carriers bill their customers for services and keep those charges but neither pay for or receive compensation from traffic sent to or received from other carriers. In addition, subsidies to carriers serving high cost areas will be phased out over an extended period.
The Company performed an impairment test on each reporting unit (Alabama, Missouri, and New England) using the two step approach prescribed in ASC 350. Step one compares the fair value of each reporting unit to its carrying value. Fair value was calculated using a blended analysis of the income approach and the market approach of valuation. The Company believes the blended approach is the best method for determining fair value because this approach compensates for inherent risk associated with either model on a stand-alone basis. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. The impact of the non-renewal of the TW contract impacts the New England reporting unit. The FCC’s Intercarrier Compensation order impacts all three reporting units with the largest impact being in New England in 2012 and all reporting units in 2013. In addition, the FCC’s Intercarrier Compensation order is likely to have an impact on the market valuation of all wireline telecommunications businesses, including the Company, as future revenue streams are reduced.
The income approach method utilized was the discounted cash flow method. This method requires the use of estimates and judgments about the future cash flows of the reporting units. Although cash flow forecasts are based on assumptions that are consistent with plans and estimates used to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes, tax rates, capital spending, discount rate and working capital changes. The market approach method employed in the analysis was the public company method. This method is based on a comparison of the Company to comparable publicly traded firms in similar lines of business. The estimates and judgments used to determine comparable companies include such factors as size, growth, profitability, risk and return on investment.
The Company determined that the fair values of the three reporting units were below their carrying value, which necessitated a step two review to determine whether or not to record a charge to goodwill impairment. The step two review involved determining the fair value of the identifiable net assets of each reporting unit, excluding goodwill, and comparing this to the fair value from step one. The Company performed its interim goodwill impairment testing as of April 30, 2012 and recorded impairment charges of $62,404,000, $12,071,000 and $69,523,000 to reduce the carrying value of goodwill to its implied fair value for its three reporting units: Alabama, Missouri and New England, respectively. In third quarter 2012, the New England impairment charges were reduced by $344,256 due to an adjustment related to the acquisition of Shoreham Telephone Company, Inc. (“STC”). See note 4, Acquisitions, below.
The changes in the carrying amounts of goodwill for the twelve months ended December 31, 2012 are as follows:
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New England
Reporting Unit
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Balance as of December 31, 2011
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Goodwill
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$
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101,602,718
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$
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17,829,122
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$
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69,523,000
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$
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188,954,840
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Accumulated impairment losses
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-
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-
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-
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-
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101,602,718
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17,829,122
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69,523,000
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188,954,840
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Adjustment related to STC acquisition
(1)
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-
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-
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344,256
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344,256
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Impairment losses
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(62,404,000
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)
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(12,071,000
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)
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(69,178,744
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)
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(143,653,744
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)
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Balance as of December, 31 2012
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Goodwill
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101,602,718
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17,829,122
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69,178,744
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188,610,584
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Accumulated impairment losses
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(62,404,000
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)
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(12,071,000
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)
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(69,178,744
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)
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(143,653,744
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)
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$
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39,198,718
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$
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5,758,122
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$
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-
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$
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44,956,840
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(1)
Third quarter 2012 adjustment to the finalized purchase price allocation of the STC acquisition. See note 4, Acquisitions, below.
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During the impairment review, the Company determined that the fair value of the New England reporting unit’s intangible assets was below its carrying value. Fair value of intangible assets was calculated using the income approach of valuation. The Company recorded an impairment charge of $5,748,000 to reduce the carrying value of intangible assets to its implied fair value for its New England reporting unit.
The changes in the carrying amount of intangible assets for the twelve months ended December 31, 2012, are as follows:
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New England
Reporting Unit
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Balance as of December 31, 2011
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Intangible assets
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$
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128,441
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$
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356,384
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$
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20,060,866
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$
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20,545,691
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Accumulated impairment losses
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-
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-
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-
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-
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128,441
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356,384
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20,060,866
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20,545,691
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Amortization
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(48,068
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)
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(120,000
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)
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|
|
(7,959,231
|
)
|
|
|
(8,127,299
|
)
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,748,000
|
)
|
|
|
(5,748,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December, 31 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
80,373
|
|
|
|
236,384
|
|
|
|
12,101,635
|
|
|
|
12,418,392
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,748,000
|
)
|
|
|
(5,748,000
|
)
|
Intangible asset adjusted cost basis
|
|
$
|
80,373
|
|
|
$
|
236,384
|
|
|
$
|
6,353,635
|
|
|
$
|
6,670,392
|
|
Prior to completing the ASC 350 testing, the Company determined the fair value of property and equipment in the New England reporting unit was below its carrying value in accordance with ASC 360. Fair value of property and equipment was calculated primarily by using the indirect cost approach. This method requires estimates and judgments about asset replacement cost, including physical deterioration, functional obsolescence and economic obsolescence. The Company recorded an impairment charge of $2,874,000 to reduce the carrying value of property and equipment to its implied fair value for its New England reporting unit.
4. Acquisitions
On October 14, 2011, ST acquired 100% of the issued and outstanding common stock of STC and, immediately thereafter, STC merged with and into ST. ST provides telecommunications solutions, including voice, data and internet services, to residential and business customers in western Vermont.
The stock purchase agreement related to the acquisition of STC provided for cash consideration of $5,248,134, including the extinguishment of notes payable of $410,904 and accrued interest of $3,081, which were paid at closing. During third quarter 2012, the Company finalized the calculation of deferred income tax liability acquired. The Company determined the deferred income tax liability to be $1,889,202, rather than $2,233,458 as previously reported. The excess of the purchase price over the fair value of identifiable assets and liabilities is reflected as goodwill of $420,505. As part of the goodwill impairment testing conducted during second quarter 2012, all goodwill in our New England reporting unit was determined to be impaired, including the goodwill associated with the STC acquisition.
The allocation of the net purchase price for the STC acquisition was as follows:
|
|
|
Cash
|
|
$
|
237,850
|
|
Other current assets
|
|
|
552,331
|
|
Property and equipment
|
|
|
4,529,760
|
|
Intangible assets
|
|
|
1,729,600
|
|
Goodwill
|
|
|
420,505
|
|
Current liabilities
|
|
|
(332,710
|
)
|
Deferred income tax liabilities
|
|
|
(1,889,202
|
)
|
Purchase price
|
|
$
|
5,248,134
|
|
The acquisition was recorded at fair value in accordance with ASC 805 resulting in a plant acquisition adjustment in 2011. Property and equipment have depreciable lives consistent with those shown in note 7, Property and Equipment below. The intangible assets at time of acquisition included regulated customer based assets at fair value of $1,672,200 which had remaining lives of 10 years; trade name fair valued at $16,200 which had a remaining life of 5 years; and a non-competition agreement fair valued at $41,200 which had a remaining life of 2 years. The acquisition was accounted for using the acquisition method of accounting and, accordingly, the accompanying consolidated financial statements include the financial position and results of operations from the date of acquisition.
The following unaudited pro forma information presents the combined results of operations of the Company as though the acquisition of the STC had occurred at the beginning of 2010. The results include certain adjustments, including increased interest expense on notes payable and increased amortization expense related to intangible assets. The pro forma financial information does not necessarily reflect the results of operations had the acquisition been completed at the beginning of 2010 or those which may be obtained in the future.
|
|
|
|
|
Revenue
|
|
$
|
106,812,024
|
|
|
$
|
103,707,313
|
|
Income from operations
|
|
$
|
26,422,934
|
|
|
$
|
24,705,377
|
|
Net income
|
|
$
|
722,165
|
|
|
$
|
1,935,327
|
|
Net income per common share
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
5. Income Deposit Securities Issued
On June 8, 2010, the Company issued 544,671 IDSs, representing an aggregate of 544,671 shares of common stock and $4,085,033 aggregate principal amount of our 13% senior subordinated notes due 2019, in exchange for all 544,671 shares of our issued and outstanding Class B common stock. There were no proceeds to the Company from this exchange. The $4.1 million of senior subordinated notes was reclassified from the mezzanine section of the balance sheet to long-term notes payable. Interest on the $4.1 million of senior subordinated notes was reflected in interest expense beginning June 8, 2010.
6. Goodwill and Intangible Assets
ASC 350 requires that goodwill be tested for impairment annually, unless potential interim indicators exist that could result in impairment. During 2012, the Company reduced the carrying amount of goodwill to approximately $45.0 million, from approximately $189.0 million in 2011. See note 3, Impairments, above. Although the Company has only one reporting segment, it considers its three territories (Alabama, Missouri, and New England) to be reporting units for purposes of goodwill impairment testing. As of December 31, 2012, goodwill for Alabama and Missouri represented 87.2% and 12.8%, respectively, of total goodwill for the Company. The Company performed its annual goodwill impairment testing as of October 1, 2012. With the detailed review of goodwill and long-lived assets conducted in second quarter 2012 by outside experts and the lack of any material change in the Company’s business since that review, the annual test was performed based on a qualitative assessment. Based on the results of its impairment test, the Company believes that it is more likely than not there is no further impairment of the goodwill balance as of December 31, 2012. The Company determined that no events or circumstances from October 1, 2012 through December 31, 2012 indicated that a further assessment was necessary.
Intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
29,429,882
|
|
|
$
|
(15,483,937
|
)
|
|
$
|
-
|
|
|
$
|
13,945,945
|
|
Contract relationships
|
|
|
19,600,000
|
|
|
|
(13,066,667
|
)
|
|
|
-
|
|
|
|
6,533,333
|
|
Non-competition
|
|
|
95,103
|
|
|
|
(44,080
|
)
|
|
|
-
|
|
|
|
51,023
|
|
Trade name
|
|
|
16,200
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
15,390
|
|
Total
|
|
$
|
49,141,185
|
|
|
$
|
(28,595,494
|
)
|
|
$
|
-
|
|
|
$
|
20,545,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
29,429,882
|
|
|
$
|
(18,065,687
|
)
|
|
$
|
(5,728,889
|
)
|
|
$
|
5,635,306
|
|
Contract relationships
|
|
|
19,600,000
|
|
|
|
(18,579,167
|
)
|
|
|
-
|
|
|
|
1,020,833
|
|
Non-competition
|
|
|
95,103
|
|
|
|
(74,672
|
)
|
|
|
(12,452
|
)
|
|
|
7,979
|
|
Trade name
|
|
|
16,200
|
|
|
|
(3,267
|
)
|
|
|
(6,659
|
)
|
|
|
6,274
|
|
Total
|
|
$
|
49,141,185
|
|
|
$
|
(36,722,793
|
)
|
|
$
|
(5,748,000
|
)
|
|
$
|
6,670,392
|
|
These intangible assets have a range of 2 to 15 years of useful lives and utilize both the sum-of-the-years’ digits and straight-line methods of amortization, as appropriate. The following table presents current and expected amortization expense of the existing intangible assets as of December 31, 2012 for each of the following periods:
Aggregate amortization expense:
|
|
|
|
For the year ended December 31, 2010
|
|
$
|
8,271,338
|
|
For the year ended December 31, 2011
|
|
|
7,117,951
|
|
For the year ended December 31, 2012
|
|
|
8,129,326
|
|
|
|
|
|
|
Expected amortization expense for the years ending December 31,
|
|
|
|
|
|
|
2013
|
|
$
|
2,596,453
|
|
2014
|
|
|
1,203,289
|
|
2015
|
|
|
761,030
|
|
2016
|
|
|
523,611
|
|
2017
|
|
|
404,889
|
|
Thereafter
|
|
|
1,181,120
|
|
Total
|
|
$
|
6,670,392
|
|
7. Property and Equipment
A summary of property and equipment is shown as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
$
|
1,156,843
|
|
|
$
|
1,156,843
|
|
Building and improvements
|
|
20-40
|
|
|
|
12,246,942
|
|
|
|
12,296,102
|
|
Telephone equipment
|
|
6-20
|
|
|
|
227,825,838
|
|
|
|
223,465,617
|
|
Cable television equipment
|
|
7
|
|
|
|
10,918,212
|
|
|
|
11,266,855
|
|
Furniture and equipment
|
|
8-14
|
|
|
|
2,967,337
|
|
|
|
2,989,944
|
|
Vehicles
|
|
7-9
|
|
|
|
6,089,630
|
|
|
|
6,185,199
|
|
Computer software equipment
|
|
5-7
|
|
|
|
15,590,697
|
|
|
|
15,892,452
|
|
Internet equipment
|
|
5
|
|
|
|
3,923,314
|
|
|
|
3,870,817
|
|
Total property, plant and equipment
|
|
|
|
|
|
280,718,813
|
|
|
|
277,123,829
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
(214,836,838
|
)
|
|
|
(218,880,926
|
)
|
Net property, plant and equipment
|
|
|
|
|
$
|
65,881,975
|
|
|
$
|
58,242,903
|
|
The Company’s composite depreciation rate for property and equipment was 21.7%, 19.2% and 18.0% in 2010, 2011 and 2012, respectively. Depreciation expense for the years ended December 31, 2010, 2011 and 2012 was $13,837,560, $11,891,474, and $10,495,725, respectively. The Company recorded an impairment charge of $2,874,000 for the year ended December 31, 2012. See note 3, Impairments, above. Amortization expense for telephone plant adjustment was $1,554,932, $1,216,739 and $652,163 for the years ended December 31, 2010, 2011 and 2012, respectfully.
8. Other Accounts Receivable
Other accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Wholesale contracts receivable
|
|
$
|
1,880,608
|
|
|
$
|
1,677,891
|
|
Carrier access bills receivable
|
|
|
1,561,174
|
|
|
|
1,669,118
|
|
NECA receivable
|
|
|
682,016
|
|
|
|
930,115
|
|
Receivables from Alabama Service Fund
|
|
|
423,356
|
|
|
|
245,328
|
|
Connect America Fund receivable
|
|
|
–
|
|
|
|
232,241
|
|
Other miscellaneous
|
|
|
901,920
|
|
|
|
581,469
|
|
|
|
$
|
5,449,074
|
|
|
$
|
5,336,162
|
|
9. Investments
Investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Investment in CoBank stock, at cost
|
|
$
|
1,474,920
|
|
|
$
|
1,474,920
|
|
Rental property
|
|
|
397,644
|
|
|
|
372,134
|
|
Other miscellaneous
|
|
|
71,241
|
|
|
|
72,273
|
|
|
|
$
|
1,943,805
|
|
|
$
|
1,919,327
|
|
The investment in CoBank stock is carried at historical cost due to no readily determinable fair value for those instruments being available. Management believes there has been no other than temporary impairment in such investment. This investment consists of patronage certificates that represent ownership in the financial institution where the Company has, and in the past had, debt. These certificates yield dividends on an annual basis, and the investment is redeemed ratably subsequent to the repayment of the debt.
10. Leases
Minimum future rental commitments under non-cancellable operating leases, primarily for real property and office facilities at December 31, 2012, consist of the following:
2013
|
|
$
|
589,340
|
|
2014
|
|
|
257,029
|
|
2015
|
|
|
117,786
|
|
2016
|
|
|
96,393
|
|
2017
|
|
|
82,661
|
|
Thereafter
|
|
|
308,284
|
|
Total
|
|
$
|
1,451,493
|
|
Rent expense for the years ended December 31, 2010, 2011 and 2012 was $499,928, $599,569 and $649,080, respectively.
11. Notes Payable
The Company’s credit agreement with General Electric Capital Corporation, originally dated December 21, 2004, has been amended and restated on two occasions to reflect requirements for funds to complete two acquisitions and the use of proceeds from the Company’s successful offering of 3,000,000 IDSs on July 5, 2007. On October 20, 2008, the Company completed its second amendment and restatement of its credit agreement, increasing the principal balance from $64.6 million to $173.5 million for the acquisition of Pine Tree Holdings, Inc., Granby Holdings, Inc. and War Holdings, Inc. from Country Road Communications LLC, and extending the maturity from July 3, 2011 to October 31, 2013. As of December 31, 2012, the variable margin based on leverage was 4.25% plus LIBOR. On May 9, 2011, November 9, 2010, and August 8, 2009, the Company made voluntary prepayments of $0.4 million, $6.1 million, and $5.0 million, respectively, reducing the credit facility notes payable balance to $162.0 million at December 31, 2012.
Notes Payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Term credit facility, General Electric Capital Corporation; variable interest rate of 4.46% at December 31, 2012. There are no scheduled principal payments. Interest payments are due on the last day of each LIBOR period or at one month intervals, whichever date comes first. The unpaid balance was scheduled to be due October 31, 2013. The credit facility is secured by the total assets of the subsidiary guarantors.
|
|
$
|
162,000,000
|
|
|
$
|
162,000,000
|
|
|
|
|
|
|
|
|
|
|
13% Senior subordinated notes due 2019; interest payments are due quarterly. On June 8, 2010, IDSs that included $4,085,033 in senior subordinated debt were issued in the conversion of Class B shares. Premium amortization for the years ended December 31, 2011 and 2012 was $103,640 and $116,364, respectively.
|
|
|
100,606,387
|
|
|
|
100,490,023
|
|
|
|
|
|
|
|
|
|
|
13% Senior subordinated notes, held separately, due 2019; interest payments are due quarterly.
|
|
|
8,500,000
|
|
|
|
8,500,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
271,106,387
|
|
|
|
270,990,023
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
–
|
|
|
|
(270,990,023
|
)
|
|
|
|
|
|
|
|
|
|
Long-term notes payable
|
|
$
|
271,106,387
|
|
|
$
|
–
|
|
Associated with these notes payable, the Company has capitalized and amortized deferred financing cost over the life of the debt obligation. The Company capitalized $5.3 million in deferred financing costs with the amendment of the credit facility in October 2008. The Company capitalized $4.2 million in deferred financing cost associated with subordinated debt. Amortization of deferred financing costs is reflected in interest expense.
As of December 31, 2012, the Company had a revolving credit facility of $15,000,000. There was no balance as of December 31, 2011 and 2012. The interest rate was the index rate plus a variable margin or LIBOR rate plus a variable margin, whichever was applicable. The margin at December 31, 2011 and 2012 was 4.25%. The Company pays a commitment fee of 0.50% per annum, payable quarterly in arrears, on the unused portion of the revolver loan. The commitment fee expense was $76,042 and $76,250 for the years ended December 31, 2011 and 2012, respectively.
Maturities of notes payable for the next five years are as follows:
2013
(1)
|
|
$
|
269,660,531
|
|
2014
|
|
|
–
|
|
2015
|
|
|
–
|
|
2016
|
|
|
–
|
|
2017
|
|
|
–
|
|
Thereafter
|
|
|
–
|
|
Total principal
|
|
|
269,660,531
|
|
Unamortized premium
(2)
|
|
|
1,329,492
|
|
Total
|
|
$
|
270,990,023
|
|
(1)
|
The filing of the Reorganization Cases constituted an event of default and triggered the automatic and immediate acceleration of debt outstanding under the terms of the Company’s senior credit facility and the indenture governing the Company’s senior subordinated notes. The repayment classification for the notes payable for 2013 reflects such acceleration.
|
(2)
|
The unamortized premium is associated with the 3,000,000 IDSs issued July 5, 2007.
|
The Company’s notes payable agreements are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. As of December 31, 2012, the Company was in compliance with all such covenants and restrictions.
12. Derivative and Hedge Activities
The Company utilized two interest rate swaps which matured on February 8, 2012. The first swap had a notional amount of $90 million with the Company paying a fixed rate of 1.85% and the counterparty paying a variable rate based upon the three month LIBOR interest rate. It was effective from February 9, 2009 through February 8, 2012. The second swap had a notional amount of $60 million with the Company paying a fixed rate of 2.0475% and the counterparty paying a variable rate based upon the three month LIBOR interest rate. It was effective from February 9, 2010 through February 8, 2012. From an accounting perspective, the documentation for both swaps did not meet the technical requirements of ASC 815 to allow the swaps to be considered highly effective hedging instruments and therefore the swaps did not qualify for hedge accounting. The change in fair value of the swaps was charged or credited to income as a change in fair value of derivatives. Over the life of the swaps, the cumulative change in fair value was zero.
13. Income Taxes
Income tax expense (benefit) for the years ended December 31, 2010, 2011 and 2012 is summarized below:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(3,015
|
)
|
|
$
|
(2,033
|
)
|
|
$
|
53,969
|
|
Deferred
|
|
|
278,383
|
|
|
|
(75,765
|
)
|
|
|
(20,261,348
|
)
|
Total federal tax expense (benefit)
|
|
|
275,368
|
|
|
|
(77,798
|
)
|
|
|
(20,207,379
|
)
|
State income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
184,726
|
|
|
|
25,000
|
|
|
|
2,380
|
|
Deferred
|
|
|
149,715
|
|
|
|
302,727
|
|
|
|
(4,662,842
|
)
|
Total state tax expense (benefit)
|
|
|
334,441
|
|
|
|
327,727
|
|
|
|
(4,660,462
|
)
|
Total income tax expense (benefit)
|
|
$
|
609,809
|
|
|
$
|
249,929
|
|
|
$
|
(24,867,841
|
)
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2011 and 2012 are presented below:
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Amortization
|
|
$
|
(28,374,977
|
)
|
|
$
|
(10,129,938
|
)
|
Depreciation
|
|
|
(13,924,912
|
)
|
|
|
(11,685,694
|
)
|
Amortized intangibles
|
|
|
(5,796,972
|
)
|
|
|
(839,560
|
)
|
Prepaid expense
|
|
|
(353,285
|
)
|
|
|
(430,896
|
)
|
Other
|
|
|
(15,523
|
)
|
|
|
(14,976
|
)
|
Total deferred tax liabilities
|
|
$
|
(48,465,669
|
)
|
|
$
|
(23,101,064
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards
|
|
$
|
6,058,180
|
|
|
$
|
4,426,198
|
|
Alternative minimum credits carryforwards
|
|
|
504,130
|
|
|
|
555,690
|
|
State net operating loss carryforwards
|
|
|
438,786
|
|
|
|
769,262
|
|
Restructuring expense
|
|
|
–
|
|
|
|
632,170
|
|
Deferred compensation
|
|
|
297,468
|
|
|
|
322,644
|
|
Advance payments
|
|
|
256,218
|
|
|
|
327,718
|
|
Bad debt
|
|
|
298,683
|
|
|
|
704,147
|
|
Other
|
|
|
327,288
|
|
|
|
381,328
|
|
Total deferred tax assets
|
|
$
|
8,180,753
|
|
|
$
|
8,119,157
|
|
(1)
|
The 2011 balances include net deferred tax liabilities in the amount of $2,233,458 related to the STC stock acquisition that occurred on October 14, 2011. In 2012 the acquired net deferred tax liability was adjusted to $1,889,202. See note 4, Acquisitions, above.
|
As of December 31, 2012, the Company had U.S. federal and state net operating loss carryforwards of $12.6 million and $23.9 million, respectively. These net operating loss carryforwards expire at various times beginning in 2021 through 2032. These acquired losses are subject to annual limitations imposed by Section 382 of the Internal Revenue Code. These net operating loss carryforwards are more likely than not to be used prior to their expiration.
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For each year ended December 31, 2010, 2011, and 2012, the Company did not identify any material uncertain tax positions. Tax years from 2006 forward remain open for audit.
Total income tax expense (benefit) was different than that computed by applying U.S. federal income tax rates to income (loss) before income taxes for the years ended December 31, 2010, 2011 and 2012. The reasons for the differences are presented below:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax at statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax provision (benefit) at statutory rate
|
|
$
|
455,183
|
|
|
$
|
856,571
|
|
|
$
|
(53,126,353
|
)
|
State income tax provision (benefit), net of federal income tax effects
|
|
|
217,387
|
|
|
|
213,022
|
|
|
|
(3,029,300
|
)
|
Goodwill impairment
|
|
|
–
|
|
|
|
–
|
|
|
|
31,418,821
|
|
Change in fair value of derivatives
|
|
|
307,482
|
|
|
|
(781,466
|
)
|
|
|
(84,503
|
)
|
Other
|
|
|
(370,243
|
)
|
|
|
(38,198
|
)
|
|
|
(46,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
609,809
|
|
|
$
|
249,929
|
|
|
$
|
(24,867,841
|
)
|
Effective income tax rate
|
|
|
46.9
|
%
|
|
|
10.2
|
%
|
|
|
16.4
|
%
|
14. Employee Benefit Program
Employees of all subsidiaries except BTC participate in a defined contribution savings plan under Section 401(k) of the Internal Revenue Code, which is sponsored by the Company. The terms of the plan provide for an elective contribution from employees not to exceed $16,500 for each of 2010 and 2011 and not to exceed $17,000 for 2012. The Company matches the employee’s contribution up to 6% of the employee’s annual compensation. For the years ended December 31, 2010, 2011 and 2012, the total expense associated with this plan was $742,288, $733,161 and $690,867, respectively.
The employees of BTC participate in a multiemployer Retirement and Security Program (“RSP”) as a defined benefit plan and a Savings Plan (“SP”) provided through the National Telecommunications Cooperative Association (“NTCA”). The risks associated with participating in a multiemployer plan are different from a single-employer plan. Contributions to the multiemployer plan by the Company may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. Participation in the RSP requires a minimum employee contribution of 1% of their annual compensation. For each of 2010, 2011 and 2012, the Company contributes 6.0% of their annual compensation for every participating employee. SP is a defined contribution savings plan under Section 401(k) of the Internal Revenue Code to which the Company made no contribution for 2010, 2011 or 2012. The employee can make voluntary contributions to the SP as desired. For the years ended December 31, 2010, 2011 and 2012, the total expense associated with these plans was $60,030, $50,220, and $38,088, respectively
15. Income (Loss) per Common Share and Potential Common Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per common share reflects the potential dilution that would occur had all of the issued and outstanding shares of Class B common stock been exchanged for IDSs at the beginning of the period. On June 8, 2010, all of the Company’s issued and outstanding shares of Class B common stock were exchanged for IDSs on a one-for-one basis. Each of the IDSs issued in the exchange includes a common share. Diluted amounts are not included in the computation of diluted loss per common share when the inclusion of such amounts would be anti-dilutive.
A reconciliation of the common shares for the Company’s basic and diluted income (loss) per common share calculation is as follows:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares-basic
|
|
|
12,985,629
|
|
|
|
13,221,404
|
|
|
|
13,221,404
|
|
Effect of dilutive securities
|
|
|
235,775
|
|
|
|
–
|
|
|
|
–
|
|
Weighted average common shares and potential common shares-diluted
|
|
|
13,221,404
|
|
|
|
13,221,404
|
|
|
|
13,221,404
|
|
Net income (loss)
|
|
$
|
690,715
|
|
|
$
|
2,197,418
|
|
|
$
|
(126,899,565
|
)
|
Net income (loss) per basic and diluted common share
|
|
$
|
0.05
|
|
|
$
|
0.17
|
|
|
$
|
(9.60
|
)
|
16. Selected Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
25,392,000
|
|
|
$
|
25,501,062
|
|
|
$
|
25,302,747
|
|
|
$
|
25,647,758
|
|
Operating income
|
|
|
5,320,713
|
|
|
|
7,326,611
|
|
|
|
6,124,154
|
|
|
|
5,858,617
|
|
Net income
|
|
|
4,654
|
|
|
|
1,283,277
|
|
|
|
885,462
|
|
|
|
24,025
|
|
Net income per common share
|
|
$
|
–
|
|
|
$
|
0.10
|
|
|
$
|
0.07
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
25,374,241
|
|
|
$
|
24,713,773
|
|
|
$
|
24,427,896
|
|
|
$
|
23,888,322
|
|
Operating income (loss)
|
|
|
6,616,738
|
|
|
|
(148,061,028
|
)
|
|
|
6,487,374
|
|
|
|
5,563,331
|
|
Net income (loss)
|
|
|
818,238
|
|
|
|
(128,010,613
|
)
|
|
|
316,306
|
|
|
|
(23,496
|
)
|
Net income (loss) per common share
|
|
$
|
0.06
|
|
|
$
|
(9.68
|
)
|
|
$
|
0.02
|
|
|
$
|
–
|
|
17. Fair Value Measurement
The Company adopted ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The framework that is set forth in this standard is applicable to the fair value measurements where it is permitted or required under other accounting pronouncements.
ASC 820 defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date. ASC 820 establishes a three-tier value hierarchy that prioritizes inputs to valuation techniques used for fair value measurement.
|
●
|
Level 1 consists of observable market data in an active market for identical assets or liabilities.
|
|
●
|
Level 2 consists of observable market data, other than that included in Level 1, that is either directly or indirectly observable.
|
|
●
|
Level 3 consists of unobservable market data. The input may reflect the assumptions of the Company, not a market participant, if there is little available market data and the Company’s own assumptions are considered by management to be the best available information.
|
In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets and liabilities as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
241,438
|
|
|
$
|
–
|
|
|
$
|
241,438
|
|
|
$
|
–
|
|
Total liabilities
|
|
$
|
241,438
|
|
|
$
|
–
|
|
|
$
|
241,438
|
|
|
$
|
–
|
|
The interest rate swaps were valued at the end of 2011 based on available market information. The Company’s two interest rate swaps matured on February 8, 2012. See note 12, Derivative and Hedge Activities, above.
Fair Value Notes Payable
The fair value of the Company’s notes payable is determined using various methods, including quoted market prices for notes with similar terms of maturity, which is a Level 2 measurement, and discounted cash flows, which is a Level 3 measurement. The carrying amounts and estimated fair values of notes payable at December are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
269,660,531
|
|
|
$
|
171,841,824
|
|
The fair value of notes payable at December 31, 2011 approximated book value.
18. Subsidiary Guarantees
On October 1, 2011, MMT became a guarantor of the Company’s senior subordinated notes and on October 14, 2011, ST became a guarantor of the Company’s senior subordinated notes.
The Company has no independent assets or operations separate from its operating subsidiaries. The guarantees of its senior subordinated notes by 14 of its 15 operating subsidiaries are full and unconditional, joint and several. The operating subsidiaries have no independent long-term notes payable. As of December 31, 2012, there were no significant restrictions on the ability of the Company to obtain funds from its operating subsidiaries by dividend or loan. The condensed consolidated financial information is provided for the guarantor entities.
The following tables present condensed consolidating balance sheets as of December 31, 2011 and 2012; condensed consolidating statements of operations for the years ended December 31, 2010, 2011 and 2012; and condensed consolidating statements of cash flows for the years ended December 31, 2010, 2011 and 2012.
Otelco Inc.
Condensed Consolidating Balance Sheet
December 31, 2011
|
|
Parent
|
|
|
Guarantor Subsidiaries
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
12,393,441
|
|
|
$
|
351
|
|
|
$
|
–
|
|
|
$
|
12,393,792
|
|
Accounts receivable, net
|
|
|
–
|
|
|
|
11,445,049
|
|
|
|
543,122
|
|
|
|
–
|
|
|
|
11,988,171
|
|
Materials and supplies
|
|
|
–
|
|
|
|
827,194
|
|
|
|
953,626
|
|
|
|
–
|
|
|
|
1,780,820
|
|
Prepaid expenses
|
|
|
194,244
|
|
|
|
1,115,339
|
|
|
|
18,892
|
|
|
|
–
|
|
|
|
1,328,475
|
|
Deferred income taxes
|
|
|
726,310
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
726,310
|
|
Investment in subsidiaries
|
|
|
147,614,140
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(147,614,140
|
)
|
|
|
–
|
|
Intercompany receivable
|
|
|
(154,849,721
|
)
|
|
|
(688,391
|
)
|
|
|
688,391
|
|
|
|
154,849,721
|
|
|
|
–
|
|
Total current assets
|
|
|
(6,315,027
|
)
|
|
|
25,092,632
|
|
|
|
2,204,382
|
|
|
|
7,235,581
|
|
|
|
28,217,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
–
|
|
|
|
64,524,981
|
|
|
|
1,356,994
|
|
|
|
–
|
|
|
|
65,881,975
|
|
Goodwill
|
|
|
239,970,317
|
|
|
|
(47,435,761
|
)
|
|
|
(3,579,716
|
)
|
|
|
–
|
|
|
|
188,954,840
|
|
Intangibles assets, net
|
|
|
–
|
|
|
|
18,186,227
|
|
|
|
2,359,464
|
|
|
|
–
|
|
|
|
20,545,691
|
|
Investments
|
|
|
1,203,605
|
|
|
|
432,186
|
|
|
|
308,014
|
|
|
|
–
|
|
|
|
1,943,805
|
|
Deferred income taxes
|
|
|
7,454,443
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,454,443
|
|
Other long-term assets
|
|
|
4,485,324
|
|
|
|
240,667
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,725,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
246,798,662
|
|
|
$
|
61,040,932
|
|
|
$
|
2,649,138
|
|
|
$
|
7,235,581
|
|
|
$
|
317,724,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,306,872
|
|
|
$
|
4,793,854
|
|
|
$
|
1,424,095
|
|
|
$
|
–
|
|
|
$
|
7,524,821
|
|
Intercompany payables
|
|
|
–
|
|
|
|
(154,849,721
|
)
|
|
|
–
|
|
|
|
154,849,721
|
|
|
|
–
|
|
Other current liabilities
|
|
|
353,285
|
|
|
|
1,668,933
|
|
|
|
65,413
|
|
|
|
–
|
|
|
|
2,087,631
|
|
Total current liabilities
|
|
|
1,660,157
|
|
|
|
(148,386,934
|
)
|
|
|
1,489,508
|
|
|
|
154,849,721
|
|
|
|
9,612,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
26,421,911
|
|
|
|
20,354,646
|
|
|
|
1,335,827
|
|
|
|
–
|
|
|
|
48,112,384
|
|
Other liabilities
|
|
|
241,438
|
|
|
|
1,019,407
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,260,845
|
|
Long-term notes payable
|
|
|
230,842,911
|
|
|
|
40,263,476
|
|
|
|
–
|
|
|
|
–
|
|
|
|
271,106,387
|
|
Stockholders’ equity (deficit)
|
|
|
(12,367,755
|
)
|
|
|
147,790,337
|
|
|
|
(176,197
|
)
|
|
|
(147,614,140
|
)
|
|
|
(12,367,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
246,798,662
|
|
|
$
|
61,040,932
|
|
|
$
|
2,649,138
|
|
|
$
|
7,235,581
|
|
|
$
|
317,724,313
|
|
Otelco Inc.
Condensed Consolidating Balance Sheet
December 31, 2012
|
|
|
|
|
Guarantor
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
32,515,933
|
|
|
$
|
350
|
|
|
$
|
-
|
|
|
$
|
32,516,283
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
11,160,581
|
|
|
|
385,159
|
|
|
|
-
|
|
|
|
11,545,740
|
|
Materials and supplies
|
|
|
-
|
|
|
|
1,165,042
|
|
|
|
680,204
|
|
|
|
-
|
|
|
|
1,845,246
|
|
Prepaid expenses
|
|
|
459,021
|
|
|
|
1,555,192
|
|
|
|
(32,582
|
)
|
|
|
-
|
|
|
|
1,981,631
|
|
Deferred income taxes
|
|
|
1,843,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,843,160
|
|
Investment in subsidiaries
|
|
|
72,218,114
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72,218,114
|
)
|
|
|
-
|
|
Intercompany receivable
|
|
|
(219,453,880
|
)
|
|
|
(29,764,405
|
)
|
|
|
29,764,405
|
|
|
|
219,453,880
|
|
|
|
-
|
|
Total current assets
|
|
|
(144,933,585
|
)
|
|
|
16,632,343
|
|
|
|
30,797,536
|
|
|
|
147,235,766
|
|
|
|
49,732,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
56,819,459
|
|
|
|
1,423,444
|
|
|
|
-
|
|
|
|
58,242,903
|
|
Goodwill
|
|
|
239,970,317
|
|
|
|
(121,910,761
|
)
|
|
|
(73,102,716
|
)
|
|
|
-
|
|
|
|
44,956,840
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
5,580,175
|
|
|
|
1,090,217
|
|
|
|
-
|
|
|
|
6,670,392
|
|
Investments
|
|
|
1,203,605
|
|
|
|
407,708
|
|
|
|
308,014
|
|
|
|
-
|
|
|
|
1,919,327
|
|
Deferred income taxes
|
|
|
6,275,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,275,997
|
|
Other long-term assets
|
|
|
4,037,311
|
|
|
|
490,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,527,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
106,553,645
|
|
|
$
|
(41,980,945
|
)
|
|
$
|
(39,483,505
|
)
|
|
$
|
147,235,766
|
|
|
$
|
172,324,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
8,585,915
|
|
|
$
|
6,980,505
|
|
|
$
|
1,341,363
|
|
|
$
|
-
|
|
|
$
|
16,907,783
|
|
Intercompany payables
|
|
|
-
|
|
|
|
(219,453,880
|
)
|
|
|
-
|
|
|
|
219,453,880
|
|
|
|
-
|
|
Other current liabilities
|
|
|
430,896
|
|
|
|
1,581,987
|
|
|
|
69,040
|
|
|
|
-
|
|
|
|
2,081,923
|
|
Current notes payable
|
|
|
230,726,547
|
|
|
|
40,263,476
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270,990,023
|
|
Total current liabilities
|
|
|
239,743,358
|
|
|
|
(170,627,912
|
)
|
|
|
1,410,403
|
|
|
|
219,453,880
|
|
|
|
289,979,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
8,407,880
|
|
|
|
12,970,082
|
|
|
|
1,292,206
|
|
|
|
-
|
|
|
|
22,670,168
|
|
Other liabilities
|
|
|
-
|
|
|
|
1,272,657
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,272,657
|
|
Stockholders' equity (deficit)
|
|
|
(141,597,593
|
)
|
|
|
114,404,228
|
|
|
|
(42,186,114
|
)
|
|
|
(72,218,114
|
)
|
|
|
(141,597,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
106,553,645
|
|
|
$
|
(41,980,945
|
)
|
|
$
|
(39,483,505
|
)
|
|
$
|
147,235,766
|
|
|
$
|
172,324,961
|
|
Otelco Inc.
Condensed Consolidating Statement of Operations
For the Twelve Months Ended December 31, 2010
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
3,493,053
|
|
|
$
|
101,600,140
|
|
|
$
|
10,855,909
|
|
|
$
|
(11,548,883
|
)
|
|
$
|
104,400,219
|
|
Operating expenses
|
|
|
(3,493,053
|
)
|
|
|
(77,083,003
|
)
|
|
|
(9,004,282
|
)
|
|
|
11,548,883
|
|
|
|
(78,031,455
|
)
|
Income from operations
|
|
|
–
|
|
|
|
24,517,137
|
|
|
|
1,851,627
|
|
|
|
–
|
|
|
|
26,368,764
|
|
Other income (expense)
|
|
|
(24,856,925
|
)
|
|
|
(311,219
|
)
|
|
|
99,904
|
|
|
|
–
|
|
|
|
(25,068,240
|
)
|
Earnings from subsidiaries
|
|
|
26,157,449
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(26,157,449
|
)
|
|
|
–
|
|
Income before income tax
|
|
|
1,300,524
|
|
|
|
24,205,918
|
|
|
|
1,951,531
|
|
|
|
(26,157,449
|
)
|
|
|
1,300,524
|
|
Income tax expense
|
|
|
(609,809
|
)
|
|
|
(7,944,116
|
)
|
|
|
(761,943
|
)
|
|
|
8,706,059
|
|
|
|
(609,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income to common stockholders
|
|
$
|
690,715
|
|
|
$
|
16,261,802
|
|
|
$
|
1,189,588
|
|
|
$
|
(17,451,390
|
)
|
|
$
|
690,715
|
|
Otelco Inc.
Condensed Consolidating Statement of Operations
For the Twelve Months Ended December 31, 2011
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
3,289,457
|
|
|
$
|
99,770,739
|
|
|
$
|
4,234,814
|
|
|
$
|
(5,451,443
|
)
|
|
$
|
101,843,567
|
|
Operating expenses
|
|
|
(3,289,457
|
)
|
|
|
(75,146,885
|
)
|
|
|
(4,228,573
|
)
|
|
|
5,451,443
|
|
|
|
(77,213,472
|
)
|
Income from operations
|
|
|
–
|
|
|
|
24,623,854
|
|
|
|
6,241
|
|
|
|
–
|
|
|
|
24,630,095
|
|
Other income (expense)
|
|
|
(21,825,630
|
)
|
|
|
(356,881
|
)
|
|
|
(237
|
)
|
|
|
–
|
|
|
|
(22,182,748
|
)
|
Earnings from subsidiaries
|
|
|
24,272,977
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(24,272,977
|
)
|
|
|
–
|
|
Income before income tax
|
|
|
2,447,347
|
|
|
|
24,266,973
|
|
|
|
6,004
|
|
|
|
(24,272,977
|
)
|
|
|
2,447,347
|
|
Income tax expense
|
|
|
(249,929
|
)
|
|
|
(7,666,626
|
)
|
|
|
(2,395
|
)
|
|
|
7,669,021
|
|
|
|
(249,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income to common stockholders
|
|
$
|
2,197,418
|
|
|
$
|
16,600,347
|
|
|
$
|
3,609
|
|
|
$
|
(16,603,956
|
)
|
|
$
|
2,197,418
|
|
Otelco Inc.
Condensed Consolidating Statement of Operations
For the Twelve Months Ended December 31, 2012
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,317,930
|
|
|
$
|
91,099,939
|
|
|
$
|
3,986,363
|
|
|
$
|
–
|
|
|
$
|
98,404,232
|
|
Operating expenses
|
|
|
(5,350,563
|
)
|
|
|
(148,572,542
|
)
|
|
|
(73,874,713
|
)
|
|
|
–
|
|
|
|
(227,797,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,032,633
|
)
|
|
|
(57,472,603
|
)
|
|
|
(69,888,350
|
)
|
|
|
–
|
|
|
|
(129,393,586
|
)
|
Other income (expense)
|
|
|
(22,336,942
|
)
|
|
|
(36,827
|
)
|
|
|
(51
|
)
|
|
|
–
|
|
|
|
(22,373,820
|
)
|
Earnings from subsidiaries
|
|
|
(127,397,831
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
127,397,831
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(151,767,406
|
)
|
|
|
(57,509,430
|
)
|
|
|
(69,888,401
|
)
|
|
|
127,397,831
|
|
|
|
(151,767,406
|
)
|
Income tax benefit (expense)
|
|
|
24,867,841
|
|
|
|
(27,878,483
|
)
|
|
|
27,878,483
|
|
|
|
–
|
|
|
|
24,867,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss to common stockholders
|
|
$
|
(126,899,565
|
)
|
|
$
|
(85,387,913
|
)
|
|
$
|
(42,009,918
|
)
|
|
$
|
127,397,831
|
|
|
$
|
(126,899,565
|
)
|
Otelco Inc.
Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2010
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
690,715
|
|
|
$
|
16,261,802
|
|
|
$
|
1,189,588
|
|
|
$
|
(17,451,390
|
)
|
|
$
|
690,715
|
|
Adjustment to reconcile net income to cash flows from operating activities
|
|
|
5,075,290
|
|
|
|
18,105,293
|
|
|
|
3,206,795
|
|
|
|
–
|
|
|
|
26,387,378
|
|
Changes in operating assets and liabilities, net of operating assets and liabilities acquired
|
|
|
27,592,163
|
|
|
|
(25,289,272
|
)
|
|
|
(2,969,463
|
)
|
|
|
–
|
|
|
|
(666,572
|
)
|
Net cash provided by operating activities
|
|
|
33,358,168
|
|
|
|
9,077,823
|
|
|
|
1,426,920
|
|
|
|
(17,451,390
|
)
|
|
|
26,411,521
|
|
Cash flows used in investing activities
|
|
|
(218,301
|
)
|
|
|
(8,630,120
|
)
|
|
|
(1,379,294
|
)
|
|
|
–
|
|
|
|
(10,227,715
|
)
|
Cash flows used in financing activities
|
|
|
(33,139,867
|
)
|
|
|
1
|
|
|
|
–
|
|
|
|
17,451,390
|
|
|
|
(15,688,476
|
)
|
Net increase in cash and cash equivalents
|
|
|
–
|
|
|
|
447,704
|
|
|
|
47,626
|
|
|
|
–
|
|
|
|
495,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
–
|
|
|
|
17,617,266
|
|
|
|
113,778
|
|
|
|
–
|
|
|
|
17,731,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
–
|
|
|
$
|
18,064,970
|
|
|
$
|
161,404
|
|
|
$
|
–
|
|
|
$
|
18,226,374
|
|
Otelco Inc.
Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2011
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,197,418
|
|
|
$
|
33,204,304
|
|
|
$
|
3,608
|
|
|
$
|
(33,207,912
|
)
|
|
$
|
2,197,418
|
|
Adjustment to reconcile net income to cash flows from operating activities
|
|
|
(275,513
|
)
|
|
|
19,762,543
|
|
|
|
921,882
|
|
|
|
–
|
|
|
|
20,408,912
|
|
Changes in operating assets and liabilities, net of operating assets and liabilities acquired
|
|
|
24,266,264
|
|
|
|
(27,119,787
|
)
|
|
|
(222,670
|
)
|
|
|
–
|
|
|
|
(3,076,193
|
)
|
Net cash provided by operating activities
|
|
|
26,188,169
|
|
|
|
25,847,060
|
|
|
|
702,820
|
|
|
|
(33,207,912
|
)
|
|
|
19,530,137
|
|
Cash flows provided by (used in) investing activities
|
|
|
218,301
|
|
|
|
(15,075,741
|
)
|
|
|
(702,769
|
)
|
|
|
–
|
|
|
|
(15,560,209
|
)
|
Cash flows used in financing activities
|
|
|
(26,406,470
|
)
|
|
|
(16,603,952
|
)
|
|
|
–
|
|
|
|
33,207,912
|
|
|
|
(9,802,510
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
–
|
|
|
|
(5,832,633
|
)
|
|
|
51
|
|
|
|
–
|
|
|
|
(5,832,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
–
|
|
|
|
18,226,074
|
|
|
|
300
|
|
|
|
–
|
|
|
|
18,226,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
–
|
|
|
$
|
12,393,441
|
|
|
$
|
351
|
|
|
$
|
–
|
|
|
$
|
12,393,792
|
|
Otelco Inc.
Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2012
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(126,899,565
|
)
|
|
$
|
(180,220,349
|
)
|
|
$
|
(42,009,913
|
)
|
|
$
|
222,230,262
|
|
|
$
|
(126,899,565
|
)
|
Adjustment to reconcile net loss to cash flows from operating activities
|
|
|
1,010,294
|
|
|
|
76,126,680
|
|
|
|
71,052,777
|
|
|
|
–
|
|
|
|
148,189,751
|
|
Changes in operating assets and liabilities, net of operating assets and liabilities acquired
|
|
|
71,618,424
|
|
|
|
(34,473,960
|
)
|
|
|
(28,703,463
|
)
|
|
|
–
|
|
|
|
8,441,001
|
|
Net cash provided by (used in) operating activities
|
|
|
(54,270,847
|
)
|
|
|
(138,567,629
|
)
|
|
|
339,401
|
|
|
|
222,230,262
|
|
|
|
29,731,187
|
|
Cash flows used in investing activities
|
|
|
–
|
|
|
|
(6,018,939
|
)
|
|
|
(339,401
|
)
|
|
|
–
|
|
|
|
(6,358,340
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
54,270,847
|
|
|
|
164,709,059
|
|
|
|
–
|
|
|
|
(222,230,262
|
)
|
|
|
(3,250,356
|
)
|
Net increase in cash and cash equivalents
|
|
|
–
|
|
|
|
20,122,491
|
|
|
|
–
|
|
|
|
–
|
|
|
|
20,122,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
–
|
|
|
|
12,393,442
|
|
|
|
350
|
|
|
|
–
|
|
|
|
12,393,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
–
|
|
|
$
|
32,515,933
|
|
|
$
|
350
|
|
|
$
|
–
|
|
|
$
|
32,516,283
|
|
19. Revenue Concentrations
The Company fulfilled a contract with TW for the provision of wholesale network connections to TW customers in Maine and New Hampshire. Revenue received directly from TW represented approximately 11.7% and 12.5% of the Company’s consolidated revenue for the years ended December 31, 2011 and 2012, respectively. Additionally, other unrelated telecommunications providers also pay the Company access revenue for terminating calls through the Company to TW customers representing approximately 3% to 4% of the Company’s consolidated revenue for the years ended December 31, 2011 and 2012. This contract expired as of December 31, 2012. The Company negotiated a transition period during which customers moved to TW’s facilities by January 31, 2013.
Revenues for interstate access services are based on reimbursement of costs and an allowed rate of return. Revenues of this nature are received from the NECA in the form of monthly settlements. Such revenues amounted to 9.9%, 10.1%, and 9.8% of the Company’s total revenues from continuing operations for the years ended December 31, 2010, 2011 and 2012, respectively.
20. Commitments and Contingencies
From time to time, the Company may be involved in various claims, legal actions and regulatory proceedings incidental to and in the ordinary course of business, including administrative hearings of the APSC, MDTC, MPSC, MPUC, NHPUC, VPSB and WVPSC relating primarily to rate making. Currently, except as set forth in note 21, Subsequent Event, below, none of the legal proceedings are expected to have a material adverse effect on the Company’s business.
21. Subsequent Event.
On March 24, 2013, the Company and each of its direct and indirect subsidiaries filed the Reorganization Cases under the Bankruptcy Code in the Bankruptcy Court in order to effectuate the Plan. The Reorganization Cases are being jointly administered under the caption “In re Otelco Inc., et al.,” Case No. 13-10593. During the pendency of the Reorganization Cases, the Company will continue to operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. There can be no assurance as to the timing for approval of the Plan or that the Plan will be confirmed.