Attached files
| file | filename |
|---|---|
| 8-K/A - FORM 8-K/A - OTELCO INC. | t72190_8ka.htm |
| EX-99.2 - EXHIBIT 99.2 - OTELCO INC. | ex99-2.htm |
| EX-99.1 - EXHIBIT 99.1 - OTELCO INC. | ex99-1.htm |
| EX-23.1 - EXHIBIT 23.1 - OTELCO INC. | ex23-1.htm |
Exhibit 99.3
Introduction to Unaudited Pro Forma Financial Statements
The following unaudited pro forma consolidated balance sheet as of September 30, 2011 and unaudited pro forma consolidated statements of income for the year ended December 31, 2010 and for the nine months ended September 30, 2011 are based on the corresponding historical financial statements of Otelco Inc. (“Otelco”) and Shoreham Telephone Company, Inc. (“Shoreham”), after giving effect to the acquisition of Shoreham which occurred on October 14, 2011.
The unaudited pro forma consolidated balance sheet gives effect to the acquisition of Shoreham as if it had occurred on September 30, 2011. The unaudited pro forma consolidated statements of income give effect to the acquisition of Shoreham as if it had occurred on January 1, 2010.
The unaudited pro forma financial statements are based on available information and certain estimates and assumptions set forth in the accompanying notes to such financial statements. These unaudited pro forma financial statements do not give effect to any integration costs or any synergies, cost savings or other operating efficiencies that could result from the acquisition. These unaudited pro forma financial statements are provided for informational purposes only, and do not purport to represent our financial condition or our results of operations that would have been achieved if the acquisition had occurred on the dates noted above, or to project the financial condition or results of operations for any future date or period.
The acquisition has been recorded at fair value in accordance with Accounting Standards Codification 805, Business Combinations, resulting in a plant acquisition adjustment for Shoreham. Otelco acquired identifiable assets associated with the territory served by Shoreham, including a non-compete agreement with one of the former owners and the customer lists. We have reflected the preliminary assessment of the purchase price allocation. It includes assignment of value to intangibles associated with a non-compete agreement and the acquisition of customers. The final assessment of the fair value of the assets and liabilities could change. Any such change would be reflected in regular quarterly financial reporting.
These unaudited pro forma financial statements should be read in conjunction with the historical financial statements of Otelco included in its annual report on Form 10-K for the year ended December 31, 2010; its quarterly reports on Form 10-Q for the fiscal quarters ended March 31, 2011, June 30, 2011 and September 30, 2011; and the historical financial statements of Shoreham included elsewhere in this Current Report on Form 8-K/A.
OTELCO INC.
Pro Forma Consolidated Balance Sheet
As of September 30, 2011
(unaudited)
|
Historical
|
||||||||||||||||
|
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Otelco Inc.
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Shoreham
Telephone
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Pro Forma
Adjustments
|
Pro Forma
Consolidated
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||||||||||||
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Assets
|
||||||||||||||||
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Current assets
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||||||||||||||||
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Cash and cash equivalents
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$ | 17,761,824 | $ | 401,461 | $ | (5,439,043 | ) 2 | $ | 12,724,242 | |||||||
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Accounts receivable - customers
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4,360,122 | 170,975 | 4,531,097 | |||||||||||||
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Unbilled receivables
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2,197,367 | 29,684 | 2,227,051 | |||||||||||||
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Other receivables
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5,486,213 | 178,173 | 5,664,386 | |||||||||||||
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Materials and supplies
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1,999,397 | 134,281 | 2,133,678 | |||||||||||||
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Prepaid expenses
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1,180,987 | 33,656 | 1,214,643 | |||||||||||||
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Deferred income taxes
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626,267 | - | 626,267 | |||||||||||||
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Total current assets
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33,612,177 | 948,230 | (5,439,043 | ) | 29,121,364 | |||||||||||
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Property and equipment, net
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62,616,216 | 3,894,007 | 648,760 | 1 | 67,158,983 | |||||||||||
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Other assets
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||||||||||||||||
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Goodwill
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188,190,078 | - | (3,421,760 | ) 1 | 188,250,580 | |||||||||||
| 1,321,655 | 1 | |||||||||||||||
| 5,282,815 | 2 | |||||||||||||||
| (3,120,427 | ) 5 | |||||||||||||||
| (34,681 | ) 4 | |||||||||||||||
| 32,900 | 1 | |||||||||||||||
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Intangible assets, net
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20,501,145 | - | 2,666,900 | 1 | 23,241,245 | |||||||||||
| 23,200 | 1 | |||||||||||||||
| 50,000 | 1 | |||||||||||||||
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Investments
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1,947,963 | 1,000 | (1,000 | ) 3 | 1,947,963 | |||||||||||
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Deferred financing costs
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4,731,752 | - | 4,731,752 | |||||||||||||
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Deferred income taxes
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4,415,097 | - | 4,415,097 | |||||||||||||
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Due from prior owners
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- | - | 34,681 | 4 | 34,681 | |||||||||||
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Other assets
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122,940 | - | 122,940 | |||||||||||||
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Total assets
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$ | 316,137,368 | $ | 4,843,237 | $ | (1,956,000 | ) | $ | 319,024,605 | |||||||
| See accompanying notes to the unaudited pro forma consolidated financial statements. |
- 2 -
OTELCO INC.
Pro Forma Consolidated Balance Sheet
As of September 30, 2011
(unaudited)
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Historical
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||||||||||||||||
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Otelco Inc.
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Shoreham
Telephone
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Pro Forma
Adjustments
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Pro Forma
Consolidated
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|||||||||||||
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Liabilities and Stockholders’ Equity (Deficit)
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Current liabilities
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||||||||||||||||
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Accounts payable
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$ | 1,460,497 | $ | 163,703 | $ | 1,624,200 | ||||||||||
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Accrued expenses
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7,217,175 | 134,385 | $ | (1,425 | ) 3 | 7,350,135 | ||||||||||
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Advance billings and payments
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1,485,017 | 132,965 | 1,617,982 | |||||||||||||
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Deferred income taxes
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353,285 | - | 353,285 | |||||||||||||
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Customer deposits
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179,524 | 8,462 | 187,986 | |||||||||||||
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Long-term debt - current portion
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- | 410,928 | (410,928 | ) 3 | - | |||||||||||
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Total current liabilities
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10,695,498 | 850,443 | (412,353 | ) | 11,133,588 | |||||||||||
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Deferred income taxes
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42,512,576 | - | 1,321,655 | 1 | 45,117,951 | |||||||||||
| 1,283,720 | 6 | |||||||||||||||
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Interest rate swaps
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830,299 | - | 830,299 | |||||||||||||
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Advance billings and payments
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625,930 | - | 625,930 | |||||||||||||
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Other liabilities
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401,144 | - | 401,144 | |||||||||||||
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Long-term notes payable
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271,133,432 | - | 271,133,432 | |||||||||||||
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Total liabilities
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326,198,879 | 850,443 | 2,193,022 | 329,242,344 | ||||||||||||
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Stockholders’ equity (deficit)
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||||||||||||||||
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Class A stock $.01 par value - Otelco
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132,214 | - | 132,214 | |||||||||||||
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Class A stock $.01 par value - Shoreham
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- | 43,615 | (43,615 | ) 5 | - | |||||||||||
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Additional paid in capital
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- | 37,560 | (37,560 | ) 5 | - | |||||||||||
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Retained earnings (deficit)
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(10,193,725 | ) | 3,911,619 | (156,228 | ) 2 | (10,349,953 | ) | |||||||||
| 411,353 | 3 | |||||||||||||||
| (3,039,252 | ) 5 | |||||||||||||||
| (1,283,720 | ) 6 | |||||||||||||||
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Total stockholders’ equity (deficit)
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(10,061,511 | ) | 3,992,794 | (4,149,022 | ) | (10,217,739 | ) | |||||||||
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Total liabilities and stockholders’ equity (deficit)
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$ | 316,137,368 | $ | 4,843,237 | $ | (1,956,000 | ) | $ | 319,024,605 | |||||||
| See accompanying notes to the unaudited pro forma consolidated financial statements. |
- 3 -
OTELCO INC.
Notes to the Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 2011
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1.
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The Company is still in the process of performing its allocation of the purchase, and the final allocation is subject to completion of a review by a independent valuation specialist. Our preliminary allocation consists of:
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A.
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Incremental value of intangible assets of $2,666,900 related to customer relationships.
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|
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B.
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Incremental value of intangible assets of $23,200 related to trade name.
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C.
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Purchase accounting adjustments of $648,760 to adjust net property and equipment assets acquired to fair value.
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D.
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Incremental value of covenant not to compete of $50,000.
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E.
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Incremental value of goodwill of $32,900 related to assembled workforce.
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F.
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Offsetting adjustment to goodwill of $3,421,760 for items as indicated above.
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G.
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Recognition of deferred taxes of $1,321,655.
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2.
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To record the activity for the acquisition. This activity consists of transaction payments totaling $5,439,043 including payments to selling shareholders of $5,282,815 and acquisition costs of $156,228, incurred after September 30, 2011.
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3.
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Shoreham Telephone shareowners payoff of Yankee Farm Credit loan at closing, including using bank investment of $1,000. The payoff involved the following accounts:
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Current portion long term debt
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$ | 410,928 | ||
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Accrued interest
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1,425 | |||
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Total
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$ | 412,353 |
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4.
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Record receivable for true-up of working capital adjustment of $34,681.
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5.
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Reclassification of stockholders’ equity to goodwill.
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6.
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Record deferred tax liabilities of $1,283,720 for pre-acquisition liability.
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7.
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Purchase Price Allocation
The following table reflects the allocation of the purchase price to the assets acquired and the liabilities assumed:
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- 4 -
OTELCO INC.
Notes to the Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 2011
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Cash Paid
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$ | 5,282,815 | ||
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Preliminary purchase price allocation:
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||||
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Cash
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$ | 401,461 | ||
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Other current assets
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546,769 | |||
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Property and equipment
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4,542,767 | |||
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Goodwill
|
60,502 | |||
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Intangible assets
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2,740,100 | |||
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Other assets
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34,681 | |||
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Current liabilities
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(438,090 | ) | ||
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Deferred Income tax liability
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(2,605,375 | ) | ||
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Net assets acquired
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$ | 5,282,815 |
- 5 -
OTELCO INC.
Pro Forma Consolidated Statements of Income
For the Year Ended December 31, 2010
(unaudited)
|
Historical
|
||||||||||||||||
|
Otelco Inc.
|
Shoreham
Telephone
|
Pro Forma
Adjustments
|
Pro Forma
Consolidated
|
|||||||||||||
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Telecommunications revenue
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$ | 104,400,219 | $ | 2,411,805 | - | $ | 106,812,024 | |||||||||
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Operating expenses
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||||||||||||||||
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Cost of services and products
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41,286,418 | 786,614 | 42,073,032 | |||||||||||||
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Selling, general and administrative expenses
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13,074,794 | 763,911 | 13,838,705 | |||||||||||||
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Depreciation and amortization
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23,670,243 | 398,139 | 186,501 | 1 | 24,766,323 | |||||||||||
| 25,000 | 5 | |||||||||||||||
| 484,892 | 3 | |||||||||||||||
| 1,548 | 4 | |||||||||||||||
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Total operating expenses
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78,031,455 | 1,948,664 | 697,941 | 80,678,060 | ||||||||||||
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Income from operations
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26,368,764 | 463,141 | (697,941 | ) | 26,133,964 | |||||||||||
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Other income (expense)
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||||||||||||||||
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Interest expense
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(24,746,542 | ) | (10,197 | ) | 10,197 | 2 | (24,746,542 | ) | ||||||||
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Change in fair value of derivatives
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(878,518 | ) | - | (878,518 | ) | |||||||||||
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Other income
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556,820 | (149,242 | ) | (16,599 | ) 2 | 390,979 | ||||||||||
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Total other expense
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(25,068,240 | ) | (159,439 | ) | (6,402 | ) | (25,234,081 | ) | ||||||||
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Income before income tax expense
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1,300,524 | 303,702 | (704,343 | ) | 899,883 | |||||||||||
| (118,444 | ) 6 | |||||||||||||||
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Income tax expense
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(609,809 | ) | 274,694 | 6 | (453,559 | ) | ||||||||||
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Net income available to common stockholders
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$ | 690,715 | $ | 303,702 | $ | (548,093 | ) | $ | 446,324 | |||||||
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Weighted average shares outstanding:
|
||||||||||||||||
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Basic
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12,985,629 | - | 12,985,629 | |||||||||||||
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Diluted
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13,221,404 | - | 13,221,404 | |||||||||||||
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Net income (loss) per share
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||||||||||||||||
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Basic
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$ | 0.05 | $ | - | $ | - | 7 | $ | 0.03 | |||||||
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Diluted
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$ | 0.05 | $ | - | $ | - | 7 | $ | 0.03 | |||||||
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Dividends declared per share
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$ | 0.71 | $ | - | $ | - | $ | 0.71 | ||||||||
| See accompanying notes to the unaudited pro forma consolidated financial statements. |
- 6 -
OTELCO INC.
Notes to the Unaudited Pro Forma Consolidated Statements of Income
For the Year Ended December 31, 2010
(unaudited)
|
1.
|
To record additional depreciation expense on acquired tangible assets which are adjusted to fair value at the acquisition date.
|
|
2.
|
Eliminate Shoreham Telephone historical interest expense; decrease pro forma interest income due to Otelco’s reduction of cash for Shoreham acquisition.
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3.
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Increase amortization expense related to customer relationships intangible asset with assigned life of 10 years.
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4.
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Increase in amortization expenses related to trade name asset with assigned life of 15 years.
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5.
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Increase in amortization expense of $25,000 related to covenant not to compete that has been assigned a two year life.
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6.
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Adjustments to reflect the income tax effect of the pro forma adjustments at an effective tax rate of 39.0%. Adjust historical Shoreham results to use effective tax rate of 39.0%.
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7.
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Basic income per common share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Diluted income 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 Class A common share. A reconciliation of the common shares for the Company’s basic and diluted income per common share calculation is as follows:
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For the Year Ended
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||||
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December 31, 2010
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||||
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Weighted average of common shares-basic
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12,985,629 | |||
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Effect of dilutive securities
|
235,775 | |||
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Weighted average common shares and potential common shares-diluted
|
13,221,404 | |||
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Net income available to common shareholders
|
$ | 446,324 | ||
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Net income per basic share
|
$ | 0.03 | ||
|
Net income available to common stockholders
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$ | 446,324 | ||
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Change in fair value of Class B derivative
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- | |||
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Net income available for diluted shares
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$ | 446,324 | ||
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Net income per diluted share
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$ | 0.03 | ||
- 7 -
OTELCO INC.
Pro Forma Consolidated Statements of Income
For the Nine Months Ended September 30, 2011
(unaudited)
|
Historical
|
||||||||||||||||
|
Otelco Inc.
|
Shoreham
Telephone
|
Pro Forma
Adjustments
|
Pro Forma
Consolidated
|
|||||||||||||
|
Telecommunications revenue
|
$ | 76,195,809 | $ | 1,887,218 | - | $ | 78,083,027 | |||||||||
|
Operating expenses
|
||||||||||||||||
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Cost of services and products
|
32,762,538 | 619,567 | 33,382,105 | |||||||||||||
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Selling, general and administrative expenses
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9,485,763 | 571,517 | (105,128 | ) 5 | 9,952,152 | |||||||||||
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Depreciation and amortization
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15,176,030 | 333,032 | 139,876 | 1 | 16,032,517 | |||||||||||
| 18,750 | 6 | |||||||||||||||
| 363,668 | 3 | |||||||||||||||
| 1,161 | 4 | |||||||||||||||
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Total operating expenses
|
57,424,331 | 1,524,116 | 418,327 | 59,366,774 | ||||||||||||
|
Income from operations
|
18,771,478 | 363,102 | (418,327 | ) | 18,716,253 | |||||||||||
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Other income (expense)
|
||||||||||||||||
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Interest expense
|
(18,591,790 | ) | (9,061 | ) | 7,137 | 2 | (18,593,714 | ) | ||||||||
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Change in fair value of derivatives
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1,641,032 | - | 1,641,032 | |||||||||||||
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Other income
|
388,686 | (332,197 | ) | (8,737 | ) 2 | 47,752 | ||||||||||
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Total other expense
|
(16,562,072 | ) | (341,258 | ) | (1,600 | ) | (16,904,930 | ) | ||||||||
|
Income before income tax (expense) benefit
|
2,209,406 | 21,844 | (419,927 | ) | 1,811,323 | |||||||||||
| (8,519 | ) 7 | |||||||||||||||
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Income tax (expense) benefit
|
(36,013 | ) | - | 163,772 | 7 | 119,239 | ||||||||||
|
Net income available to common stockholders
|
$ | 2,173,393 | $ | 21,844 | $ | (264,675 | ) | $ | 1,930,562 | |||||||
|
Weighted average shares outstanding:
|
||||||||||||||||
|
Basic
|
13,221,404 | - | 13,221,404 | |||||||||||||
|
Net income per share
|
||||||||||||||||
|
Basic
|
$ | 0.16 | $ | - | $ | - | 8 | $ | 0.15 | |||||||
|
Dividends declared per share
|
$ | 0.53 | $ | - | $ | - | $ | 0.53 | ||||||||
| See accompanying notes to the unaudited pro forma consolidated financial statements. |
- 8 -
OTELCO INC.
Notes to the Unaudited Pro Forma Consolidated Statements of Income
For the Nine Months Ended September 30, 2011
|
1.
|
Record additional depreciation expense on acquired tangible assets which are adjusted to fair value at the acquisition date.
|
|
2.
|
Eliminate Shoreham Telephone historical interest expense; decrease pro forma interest income due to Otelco’s reduction of cash for Shoreham acquisition.
|
|
3.
|
Increase amortization expense related to customer relationships intangible asset with assigned life of 10 years.
|
|
4.
|
Increase amortization expense related to intangible trade name asset with assigned life of 15 years.
|
|
5.
|
Eliminate Shoreham’s expense related to sale of the Company.
|
|
6.
|
Increase in amortization expense related to covenant not to compete that has been assigned a two year life.
|
|
7.
|
Adjustments for income tax effect of the pro forma adjustments at an effective tax rate of 39.0%. Adjust historical Shoreham results to use effective tax rate of 39.0%.
|
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8.
|
Basic income per common share is computed by dividing net income by the shares outstanding for the period. There were no dilutive shares outstanding during the period and the Company does not have any outstanding stock arrangements that might be potentially dilutive. No shares were issued as part of the acquisition of Shoreham. The Company’s basic income per common share is calculated as follows:
|
|
Nine Months Ended
|
||||
|
September 30, 2011
|
||||
|
Common shares outstanding
|
13,221,404 | |||
|
Net income available to common stockholders
|
$ | 1,930,562 | ||
|
Net income per share
|
$ | 0.15 | ||
- 9 -