Business Acquisition

9 Months Ended

Sep. 30, 2011

Business Acquisition [Abstract]

Business Acquisition

NOTE 2: BUSINESS ACQUISITION

On August 5, 2011, Warwick Valley Networks, Inc. ("WVN"), a wholly-owned subsidiary of the Company, purchased substantially all of the assets and assumed certain of the liabilities of Alteva, LLC ("Alteva"), a cloud-based Unified Communications solutions provider and enterprise hosted VoIP provider, in exchange for cash and stock with an estimated value of approximately $17,590 pursuant to the terms of the asset purchase agreement between the Company and Alteva (the "Alteva Agreement"). The issuance of the Company's common stock contemplated under the Alteva Agreement was subject to regulatory approval by the New York State Public Service Commission ("PSC") and the New Jersey Board of Public Utilities ("BPU"), both of which have approved the transaction (see Note 19). The assets acquired included Alteva's VoIP line of business, which provides communication services for commercial customers and unified communication lines of business. This acquisition extends the Company's VoIP services to New Jersey, Pennsylvania and various other states and continues the Company's corporate strategy to expand its business beyond its regulated franchise area.

Pursuant to the Alteva Agreement, WVN purchased substantially all of the assets of Alteva.  WVN assumed only certain of Alteva's liabilities, including certain of its contracts, debt owed under specified capital leases and certain accounts payable.

In exchange for the assets purchased and the liabilities assumed from Alteva, WVN made the following payments:

·$10,250 in cash was paid to Alteva; and

·$4,000 in cash was placed in escrow, which amount is to be (i) returned to the WVN upon the issuance of unregistered shares of the Company's common stock, having a value of approximately $4,000, upon receipt of the PSC and the BPU approvals, or (ii) be released to Alteva in the event that the PSC and BPU approvals were not received prior to December 3, 2011, in which case WVN was to pay Alteva $4,000 cash in lieu of the Company's common stock.

As of October 21, 2011, the Company has obtained the necessary approvals from the PSC and BPU. As a result, the Company issued 272,479 shares of common stock to the members of Alteva as of October 21, 2011 and $3,351 of the remaining amount placed in escrow will be returned to WVN. (See Note 19).

The results of Alteva's operations have been included in the Company's consolidated financial statements since August 5, 2011.

The Company's use of funds to acquire certain assets of Alteva consisted of the following:

Cash (1)	$	10,250
Cash in escrow (2)		4,000
Contingent consideration (3)		2,000
Hold-back payable (4)		750
Working capital payable adjustment (5)		590
Total consideration	$	17,590

1)$ 5,000 of this amount was borrowed from CoBank, ACB (see Note 7).

2)Cash placed in escrow, pending issuance of 272,479 shares of the Company's common stock. This amount was borrowed from Provident Bank (see Note 7).

3)Up to a total of $2,000 in cash is payable to Alteva on August 5, 2012 and 2013 (or prior to January 1, 2013 depending on certain tax law changes), if certain performance-based conditions are satisfied.   

4)This hold-back amount, withheld at closing, is payable on August 5, 2012, less any amounts offset against such amount pursuant to the terms of the Alteva Agreement.

5)This is the estimated additional working capital adjustment payable to Alteva based on preliminary calculations.

The preliminary estimated purchase price has been allocated as follows:

Accounts receivable, net	$	818
Other receivables - cash		41
Inventory		235
Prepaid expenses		63
Other assets		12
Property, plant and equipment		865
Intangible assets		8,367
Goodwill		8,299
Total assets acquired		18,700
Capital leases		(671)
Accounts payable		(185)
Accrued expenses		(137)
Customer deposits		(67)
Deferred revenue, net		(50)
Total liabilities assumed		(1,110)
Total	$	17,590

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. The preliminary purchase price allocation may be adjusted after obtaining more information regarding, among other things, valuations of assets acquired, liabilities assumed, and revisions of preliminary estimates and finalization of the working capital adjustment. The preliminary purchase price may also be adjusted for the valuation of the put option the members of Alteva have under the Lock-up and Put Agreement (as defined below).

The Company entered into a Lock-up and Put Agreement, effective October 21, 2011, with the members of Alteva (the "Lock-up and Put Agreement)" pursuant to which each of the members agreed to certain restrictions on their ability to sell shares of the Company's common stock they will be issued in connection with the Alteva Agreement (the "Alteva Shares"). Under the Lock-up and Put Agreement, each member of Alteva may transfer to any of the permitted transferees up to 50% of their Alteva Shares between October 21, 2012 and December 14, 2012. The members of Alteva may sell their remaining Alteva Shares without restriction beginning on December 15, 2012. In addition, the Lock-up and Put Agreement gives each member of Alteva the option to sell their Alteva Shares to the Company within a certain prescribed time period at a predetermined price (the "Put"). The Alteva members may exercise their Put with respect to half of their Alteva Shares within a 60-day period commencing on October 21, 2012 and the other half within a 60-day period commencing on December 15, 2012. The purchase price of the Put will be the greater of (i) the closing price of the Company's common stock on the date of exercise of the Put or (ii) $11.74. The Lock-up and Put Agreement also includes a purchase price protection for the Alteva selling shareholders. The purchase price protection provides that if the price of the Company's common stock for the 30 trading days immediately prior to October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) (the "Release Date Price") is less than $11.74, then the Company will issue to the Alteva

members the aggregate number of shares of the Company's common stock equal to the difference between $1,600 and the market value of 50% of the aggregate Alteva Shares on October 21, 2012 or December 15, 2012, or 100% of the aggregate Alteva Shares if the Release Date Price is less than $11.74 on both dates.

The Company will record the valuation as an estimated contingent liability using a binomial method based on significant inputs not observed in the market and thus will represent a Level 3 instrument. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company's own assumptions in measuring fair value. The final purchase price allocation and its effect on results of operations may differ significantly from the amounts included herein. The Company is in the process of obtaining third-party valuations of the assets acquired, liabilities assumed and the Lock-up and Put Agreement; thus, the allocation of the purchase price is subject to adjustment.

The $8,367 of acquired intangible assets assigned to customer lists has a weighted-average useful life of approximately seven years. The Company recorded $8,250 in goodwill and for tax purposes intangibles will be amortized over 15 years.

The Company incurred $669 of acquisition-related costs as general and administrative expenses in the Consolidated Statements of Operations in the three and nine-month periods ended September 30, 2011. The revenue from Alteva included in the Company's statement of operations for the three months and nine months ended September 30, 2011 was $1,117 and net loss before income taxes was $273.

The following unaudited pro forma condensed consolidated results of operations for the Company for the three and nine months ended September 30, 2011 and 2010, respectively, assume that the purchase of certain assets and the assumption of certain liabilities of Alteva occurred January 1, 2011 and 2010. The unaudited pro forma information presents the combined operating results of the acquired Alteva business and the Company, with the results prior to the date of the Alteva Agreement adjusted for amortization of intangibles and depreciation of fixed assets, based on the preliminary purchase price allocation and the elimination of acquisition related costs.

The unaudited pro forma results shown in the table below do not purport to be indicative of the results that would have been obtained if the Alteva Agreement did not occur as of January 1, 2011 nor does the unaudited pro forma data intend to be a projection of results that may be obtained in the future.

		Three Months Ended September 30,				Nine Months Ended September 30,
			2011		2010		2011		2010
Operating revenues		$	7,471	$	7,752	$	22,879	$	22,630
Operating expenses
	Cost of services and products (exclusive of
	depreciation and amortization expense)		4,083		3,547		11,707		10,546
	Selling, general and administrative expenses		4,856		4,402		14,765		12,318
	Depreciation and amortization		1,762		1,749		5,242		5,350
	Total operating expenses		10,701		9,698		31,714		28,214
	Operating loss		(3,230)		(1,946)		(8,835)		(5,584)
	Other income (expense)		725		3,426		6,040		9,175
	Income (loss) before income taxes	$	(2,505)	$	1,480	$	(2,795)	$	3,591
	Basic earnings (loss) per share	$	(0.36)	$	0.16	$	(0.47)	$	0.35
	Dilluted earnings (loss) per share	$	(0.36)	$	0.16	$	(0.47)	$	0.35