EX-99.3 5 v052827_ex99-3.htm
Exhibit 99.3

Introduction to Unaudited Pro Forma Financial Statements
 
The following unaudited pro forma consolidated balance sheet as of June 30, 2006 and unaudited pro forma consolidated statements of income for the year ended December 31, 2005 and for the six months ended June 30, 2006 are based on the corresponding historical financial statements of Otelco Inc. (“Otelco”) and Mid-Maine Communications, Inc. (“Mid-Maine”), after giving effect to the acquisition of Mid-Maine and the financing transaction related thereto, which occurred on July 3, 2006.
 
The unaudited pro forma consolidated balance sheet gives effect to the acquisition and related financing transaction as if they had occurred on June 30, 2006. The unaudited pro forma consolidated statements of income give effect to the acquisition and related financing transaction as if they had occurred on January 1, 2005.
 
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 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 and related financing transaction 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 will be treated as a purchase business combination for accounting purposes and Mid-Maine’s assets acquired and liabilities assumed will be recorded at fair value with the exception of those assets which are related to the Mid-Maine Telecom, Inc. subsidiary. As a regulated telephone company, the assets of Mid-Maine Telecom, Inc. are recorded at their original purchase price less accumulated depreciation. 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, 2005 and its quarterly reports on Form 10-Q for the fiscal quarters ended March 31, 2006 and June 30, 2006 and the historical financial statements of Mid-Maine included elsewhere in this current report on Form 8-K/A.
 
1
 
OTELCO INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2006
(unaudited)
                       
           
Pro Forma
          
   
Otelco Inc.
  
Mid Maine
  
Adjustments
      
Pro Forma
  
Assets
                      
                       
Current assets
                      
Cash
  
$
9,025,517
  
$
568,460
  
$
(116,053
)
  
2
 
$
9,159,538
  
                 
41,571
   
4
       
                 
(359,957
)
  
7
       
Accounts receivable - customers
    
1,204,558
   
2,332,103
   
(32,149
)
  
4
   
3,504,512
 
Unbilled revenue
    
1,853,499
   
-
         
 
    
1,853,499
 
Other receivables
    
1,763,082
   
-
         
 
    
1,763,082
 
Materials & supplies
    
975,074
   
1,260,198
   
(95,859
)
  
5
   
2,091,562
 
                 
(47,851
)
  
4
       
Prepaid expenses
    
437,326
   
171,423
   
22,500
   
2
   
631,249
 
Income tax receivables
    
749,591
   
314,804
               
1,064,395
 
Deferred income taxes
    
872,675
   
-
               
872,675
 
Total current assets
    
16,881,322
   
4,646,988
   
(587,798
)
        
20,940,512
 
                                 
Property and equipment, net
    
42,661,952
   
17,573,784
   
 
  
 
    
60,235,736
 
                                 
Other assets
                                
Goodwill
    
119,431,993
   
1,918,559
   
(10,241,619
)
  
1
   
136,919,052
 
                 
95,859
   
5
       
                 
38,429
   
4
       
                 
5,543,234
   
6
       
                 
14,599,986
   
2
       
                 
180,431
   
7
       
                 
85,940
   
8
       
                 
5,266,240
   
1
       
Amortizable intangibles
    
1,485,226
   
-
   
10,241,619
   
1
   
11,726,845
 
Investments
    
555,588
   
695,678
   
-
   
 
    
1,251,266
 
 
                
-
    
 
        
Loan cost
    
6,284,735
   
202,311
   
(202,311
)
  
3
   
7,610,529
 
                 
1,146,268
   
2
       
                 
179,526
   
7
       
Interest rate cap
    
6,460,374
   
-
         
 
    
6,460,374
 
Deferred charges
    
85,940
   
91,920
   
(85,940
)
  
2
   
91,920
 
Other noncurrent assets
    
-
   
155,844
         
 
    
155,844
 
Total assets
  
$
193,847,130
  
$
25,285,084
  
$
26,259,864
      
$
245,392,078
  
 
See accompanying notes to the unaudited pro forma consolidated financial statements.
 
2
 

OTELCO INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2006
(unaudited)
                       
           
Pro Forma
          
   
Otelco Inc.
  
Mid Maine
  
Adjustments
      
Pro Forma
  
Liabilities and Stockholders' Equity
  
 
 
    
 
 
  
 
  
 
  
                       
Current liabilities
                      
Accounts payable
  
$
961,175
  
$
775,831
  
$
          
$
1,737,006
  
Accrued liabilities
    
3,299,229
   
1,997,760
   
(274,450
)
  
2
   
5,022,539
 
Advanced billing & payments
    
1,184,739
   
1,114,927
               
2,299,666
 
Customer deposits
    
224,827
   
-
               
224,827
 
Current portion of debt
    
-
   
1,214,000
   
(1,214,000
)
  
2
   
-
 
Total current liabilities
    
5,669,970
   
5,102,518
   
(1,488,450
)
        
9,284,038
 
                                 
Deferred income tax
    
15,345,890
   
2,664,640
   
5,266,240
   
1
   
23,276,770
 
Other liabilities
    
176,308
   
-
               
176,308
 
Total other liabilities & deferred
    
15,522,198
   
2,664,640
   
5,266,240
         
23,453,078
 
                                 
Total long-term notes payable
    
161,075,498
   
22,858,849
   
40,000,000
   
2
   
201,075,498
 
                 
(22,858,849
)
  
2
       
                                 
Derivative liability
    
1,519,632
   
-
               
1,519,632
 
                                 
Class B Common Conv Sen Sub Notes
    
3,876,917
   
-
               
3,876,917
 
                                 
Stockholder's equity
                                
Class A stock - Mid Maine
    
-
   
35
   
(35
)
  
6
   
-
 
Class A stock $.01 par value - Otelco
    
96,767
   
-
         
 
    
96,767
 
Class B stock $.01 par value - Otelco
    
5,447
   
-
               
5,447
 
Additional paid in capital
    
3,695,090
   
2,570,569
   
(2,570,569
)
  
6
   
3,695,090
 
Retained earnings (deficit)
    
-
   
(7,911,527
)
  
(202,311
)
  
3
   
-
 
                 
8,113,838
   
6
       
                                 
Accumulated other comprehensive income
    
2,385,611
   
-
               
2,385,611
 
Total stockholders' equity
    
6,182,915
   
(5,340,923
)
  
5,340,923
         
6,182,915
 
                                 
                               
Total liabilities and stockholders' equity
  
$
193,847,130
  
$
25,285,084
  
$
26,259,864
        
$
245,392,078
  
 
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 June 30, 2006

1.
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 third party valuation specialist. Our preliminary allocation consists of:
A.
Incremental value of intangible assets of $8,401,529 related to customer relationships.
B.
Incremental value of intangible assets of $1,840,090 related to non-competition agreement.
C.
Offsetting adjustment to goodwill of ($10,241,619) for items A. and B. as indicated above.
D.
Recognition of deferred taxes of $5,266,240.
 
2.
To record the activity for the acquisition. This activity consists of the following:
A.
GE loan proceeds of $40,000,000.
B.
Elimination of Mid-Maine old loan consisting of long-term notes payable of $22,858,849, current portion of debt $1,214,000, and accrued interest liability of $274,450.
C.
GE annual administrative fee of $22,500.
D.
Loan cost of $1,146,268.
E.
Transaction payments totaling $14,599,986 including payments to selling shareholders.
F.
Record the net-effect of the acquistion on cash totaling ($116,053).
 
3.
Elimination of Mid-Maine's old loan cost of $202,311.
 
4.
To record the final working capital adjustment of $41,571 per the plan merger agreement section # 2.5.4.
 
5.
To record adjustment of $95,859 related to the internet inventory to reflect current replacement cost.
 
6.
Reclassification of stockholder's equity of $5,543,234 to goodwill which consists of class A stock of $35, additional paid in capital of $2,570,569, and retained (deficit) of ($8,113,838).
 
7.
Record legal fees totaling $359,957 related to Mid-Maine acquisition. These have been allocated to goodwill and loan cost in the amounts of $180,431 and $179,526, respectively.
 
8.
Reclassify transaction cost of $85,940 to goodwill.

4
 
OTELCO INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2005
(unaudited)
                           
           
Pro Forma
              
   
Otelco Inc.
  
Mid Maine
  
Adjustments
      
Pro Forma
      
                           
Telecommunications revenue
  
$
46,972,222
 
$
22,156,992
 
$
          
$
69,129,214
       
                                       
Operating expenses
                                      
Cost of services and products
    
12,611,499
   
12,284,460
               
24,895,959
       
Selling, general and administrative expenses
    
6,710,542
   
4,131,327
   
(81,000
)
  
1
   
10,760,869
       
Depreciation and amortization
    
9,585,299
   
3,487,145
   
22,500
   
2
   
14,546,938
       
                 
(71,783
)
  
3
             
                 
265,159
   
3
             
                 
338,573
   
4
             
                 
920,045
 
  
5
             
Total operating expenses
    
28,907,340
   
19,902,932
   
1,393,494
         
50,203,766
       
                                       
Income from operations
    
18,064,882
   
2,254,060
   
(1,393,494
)
        
18,925,448
       
                                       
Other income (expense)
                                      
Interest expense
    
(16,355,087
)
  
(1,255,296
)
  
1,255,296
   
6
   
(18,395,280
)
      
                 
(2,648,526
)
  
6
             
                 
608,333
   
7
             
Change in fair value of derivative
    
958,621
   
-
               
958,621
       
Other income
    
577,769
   
99,067
               
676,836
       
Total other expense
    
(14,818,697
)
  
(1,156,229
)
  
(784,897
)
        
(16,759,823
)
      
                                       
Income before income tax and accretion expense
    
3,246,185
   
1,097,831
   
(2,178,391
)
        
2,165,625
       
                                       
Income tax expense
    
(1,011,675
)
  
(439,991
)
  
830,459
   
8
   
(621,207
)
      
                                       
Income before accretion expense
    
2,234,510
   
657,840
   
(1,347,932
)
        
1,544,418
       
                                       
Accretion of Class B common convertible to senior subordinated notes
    
(442,926
)
  
-
               
(442,926
)
      
                                       
Net income available to common stockholders
  
$
1,791,584
  
$
657,840
  
$
(1,347,932
)
      
$
1,101,492
        
                                       
Weighted average shares outstanding:
                                      
Basic
    
9,676,733
   
 
                
9,676,733
       
Diluted
    
10,221,404
   
 
                
10,221,404
       
                                       
Net income per share
                                      
Basic
  
$
0.19
                    
$
0.11
    
9
 
Diluted
  
$
0.12
                    
$
0.06
    
9
 
                                       
Dividends declared per share
  
$
0.71
  
 
 
              
$
0.71
        
 
See accompanying notes to the unaudited pro forma consolidated financial statements.
 
5
 
OTELCO INC.
Notes to the Unaudited Pro Forma Consolidated Statements of Income
For the Year Ended December 31, 2005

1.
Net impact of $81,000 reflects senior management changes at closing of acquisition. 
 
2.
To record amortization of $22,500 related to GE Administrative fee (annual). 
 
3.
Adjustment to eliminate Mid-Maine historical loan cost amortization expense of $71,783 and to reflect the pro forma loan cost amortization expense of $265,159 associated with the incremental $40 million loan included in the amended and restated credit facility. 
 
4.
Increase in amortization expense of $338,573 related to customer relationships that have been assigned lives of between 15 and 25 years. 
 
5.
Increase in amortization expense of $920,045 is related to non-competition agreement that has been assigned a life of 2 years. 
 
6.
Adjustment to eliminate Mid-Maine historical interest expense of $1,255,296 and to reflect the pro forma interest expense of $2,648,526 associated with the incremental $40 million loan included in the amended and restated credit facility. 
 
7.
To record reduction in interest expense of $608,333 related to existing Otelco loan of $80M due to entering an amended and restated credit agreement. 
 
8.
Adjustments to reflect the income tax effect of $830,459 related to the pro forma adjustments. 
 
6
 
9.
Income per Common Share and Potential Common Share

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 could occur if the Class B common stock were exercised into IDSs with Class A common shares. Class B common stock is convertible on a one-for-one basis into IDSs each of which includes a Class A common share. For periods prior to our conversion, membership units were treated on an as if converted basis into Class A and Class B common shares. For 2004, the shares associated with the purchase of Mid-Missouri Holding Corp., the sale of common shares by the Company, and the buy-back of common shares by the Company, were prorated from December 21, 2004 until the end of the year.
  
A reconciliation of the common shares for the Company's basic and diluted income per common share calculation is provided for historical and pro forma earnings as follows: 
 
 
  
For the Year Ended December 31, 2005
  
 
 
          
     
Historical
  
Pro Forma
  
             
 
Weighted average common shares
    
9,676,733
   
9,676,733
 
                 
 
Weighted average common shares and potential common sharess
    
10,221,404
   
10,221,404
 
                 
                 
 
Net income available to common shareholders
  
$
1,791,584
  
$
1,101,492
  
                 
 
Net income per basic share
  
$
0.19
  
$
0.11
  
                 
                 
 
Net income available to common shareholders
  
$
1,791,584
  
$
1,101,492
  
 
Plus: Accretion expense of Class B common convertible to senion subordinated notes
    
442,926
   
442,926
 
 
Less: Change in fair value of derivative
    
958,621
   
958,621
 
                 
 
Net Income available for diluted shares
  
$
1,275,889
  
$
585,797
  
                 
 
Net income per diluted share
  
$
0.12
  
$
0.06
  
              
7
 
OTELCO INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(unaudited)
                               
               
Pro Forma
              
   
Otelco Inc.
  
Mid Maine
      
Adjustments
      
Pro Forma
      
                               
Telecommunications revenue
  
$
23,071,211
 
$
11,382,545
   
A
  
$
          
$
34,453,756
       
                                             
Operating expenses
                                            
Cost of services and products
    
6,361,801
   
6,289,514
                     
12,651,315
       
Selling, general and administrative expenses
    
3,152,664
   
2,948,884
   
B
    
(40,500
)
  
1
   
5,430,810
       
                       
(630,238
)
  
2
             
Depreciation and amortization
    
4,664,374
   
2,567,478
         
11,250
   
3
   
7,539,223
       
                       
(465,768
)
  
4
             
                       
132,579
   
4
             
                       
169,287
   
5
             
                       
460,023
 
  
6
              
Total operating expenses
    
14,178,839
   
11,805,876
         
(363,367
)
  
 
    
25,621,348
       
                                             
Income from operations (loss)
    
8,892,372
   
(423,331
)
        
363,367
         
8,832,408
       
                                             
Other income (expense)
                                            
Interest expense
    
(8,447,105
)
  
(808,171
)
        
808,171
   
7
   
(9,755,700
)
      
                       
(1,612,762
)
  
7
             
                       
304,167
   
8
             
Change in fair value of derivative
    
310,462
   
-
               
 
    
310,462
       
Other income
    
2,996,509
   
511,695
         
(200,333
)
  
2
   
3,307,871
       
Total other expense
    
(5,140,134
)
  
(296,476
)
        
(700,757
)
  
 
    
(6,137,367
)
      
                                             
Income before income tax and accretion expense
    
3,752,238
   
(719,807
)
        
(337,390
)
        
2,695,041
       
                                             
Income tax expense
    
(1,232,610
)
  
289,909
         
128,622
    
9
   
(814,079
)
      
                             
 
              
Income before accretion expense
    
2,519,628
   
(429,898
)
        
(208,768
)
        
1,880,962
       
                                             
Accretion of Class B common convertible to senior subordinated notes
    
(221,463
)
  
-
                     
(221,463
)
      
                                             
Net income available to common stockholders
  
$
2,298,165
  
$
(429,898
)
      
$
(208,768
)
      
$
1,659,499
        
                                             
Weighted average shares outstanding:
                                            
Basic
    
9,676,733
   
 
                      
9,676,733
       
Diluted
    
10,221,404
   
 
                      
10,221,404
       
                                             
Net income per share
                                            
Basic
  
$
0.24
                          
$
0.17
    
10
 
Diluted
  
$
0.22
                          
$
0.15
    
10
 
                                             
Dividends declared per share
  
$
0.35
  
 
 
                    
$
0.35
        
 
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 Six Months Ended June 30, 2006

A
Reflects reclassification of bad debt expense to selling, general and administrative expenses.
   
B
Includes $630,238 of one-time expenses. These expenses consist of senior bonus payments of $466,782 and transaction costs of $163,456 related to the sale of Mid-Maine. 
          
1.
Net impact of $40,500 reflects senior management changes at closing of acquisition. 
 
2.
Eliminates three one-time non-operational items: gain of $200,333 on sale of Rural Telephone Bank stock; senior management bonus payment of $466,782 related to the sale of Mid-Maine; and transaction costs of $163,456 related to the sale of Mid-Maine. 
 
3.
To record amortization of $11,250 related to GE Administrative fee (annual fee prorated).
 
4.
Adjustment to eliminate Mid-Maine historical loan cost amortization expense of $465,768 and to reflect the pro forma loan cost amortization expense of $132,579 associated with the incremental $40 million loan included in the amended and restated credit facility. 
 
5.
Represents an increase in amortization expense of $169,287 related to customer relationships that have been assigned lives of between 15 and 25 years. 
 
6.
Represents an increase in amortization expense of $460,023 related to non-competition agreement that has been assigned a life of 2 years. 
 
7.
Adjustment to eliminate Mid-Maine historical interest expense of $808,171 and to reflect the pro forma interest expense of $1,612,762 associated with the incremental $40 million loan included in the amended and restated credit facility. 
 
8.
To record reduction in interest expense of $304,167 related to original loan of $80M due to entering an amended and restated credit agreement. 
 
9.
Adjustments to reflect the income tax effect of $128,622 related to the pro forma adjustments. 
 
9

10.
Income per Common Share and Potential Common Share

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 could occur if the Class B common stock were exercised into IDSs with Class A common shares. Class B common stock is convertible on a one-for-one basis into IDSs each of which includes a Class A common share. For periods prior to our conversion, membership units were treated on an as if converted basis into Class A and Class B commonshares. For 2004, the shares associated with the purchase of Mid-Missouri Holding Corp., thesale of common shares by the Company, and the buy-back of common shares by the Company,were prorated from December 21, 2004 until the end of the year.
 
A reconciliation of the common shares for the Company's basic and diluted income per common share calculation is provided for historical and pro forma earnings as follows:  

   
For the Six Months Ended June 30, 2006
  
           
   
Historical
  
Pro Forma
  
           
Weighted average common shares
    
9,676,733
   
9,676,733
 
               
 
              
Weighted average common shares and potential common shares
    
10,221,404
   
10,221,404
 
               
Net income available to common shareholders
  
$
2,298,165
  
$
1,659,499
  
               
Net income per basic share
  
$
0.24
  
$
0.17
  
               
               
Net income available to common shareholders
  
$
2,298,165
  
$
1,659,499
  
Plus: Accretion expense of Class B common convertible to senior subordinated notes
    
221,463
   
221,463
 
Less: Change in fair value of derivative
    
310,462
   
310,462
 
               
Net Income available for diluted shares
  
$
2,209,166
  
$
1,570,500
  
               
Net income per diluted share
  
$
0.22
  
$
0.15
  
 
10