UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
July 31, 2018
Date of report (Date of earliest event reported)
Nuvera Communications, Inc.
(Exact name of registrant as specified in its charter)
Minnesota | 0-3024 | 41-0440990 |
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
27 North Minnesota Street
New Ulm, Minnesota 56073
(Address of principal executive offices, including zip code)
(507) 354-4111
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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This Form 8-K/A amends the Current Report on Form 8-K filed by Nuvera Communications, Inc. (Nuvera or the Company) on July 31, 2018 in connection with the acquisition described in Item 2.01 below that was completed on July 31, 2018. This amended Form 8-K/A is being filed to include the financial information required by Item 9.01.
Item 2.01 Completion of Acquisition or Deposition of Assets
Completion of the Nuvera acquisition of Scott-Rice Telephone Company (Scott-Rice)
On July 31, 2018, the Company announced that it had completed its acquisition of Scott-Rice Telephone Company (Scott-Rice) from Allstream Business U.S., LLC, an affiliate of Zayo Group Holdings, Inc. (Zayo) for $42 million in cash. Scott-Rice provides phone, video and internet services with over 18,000 connections, serving the communities of Prior Lake, Savage, Elko and New Market, Minnesota. The combined Nuvera-Scott-Rice company will have approximately 66,000 connections. Concurrent with the acquisition of Scott-Rice, Nuvera entered into an amended credit facility with its principal lender, CoBank.
ITEM 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following audited financial statements of Scott-Rice are filed with this Report as Exhibit 99.1:
· Independent Registered Public Accounting Firms Report for the period as of December 31, 2017.
· Balance Sheets as of December 31, 2017.
· Statement of Operations for the Period March 1, 2017 to December 31, 2017.
· Statement of Invested Equity for the Period March 1, 2017 to December 31, 2017.
· Statement of Cash Flows for the Period March 1, 2017 to December 31, 2017.
· Notes to Financial Statements.
The following unaudited financial statements of Scott-Rice are filed with this Report as Exhibit 99.2:
· Balance Sheets as of March 31, 2018 and December 31, 2017.
· Statement of Operations for the Three Months Ended March 31, 2018 and the One Month Ended March 31, 2017.
· Statements of Invested Equity for the Three Months Ended March 31, 2018 and the One Month Ended March 31, 2017.
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· Statement of Cash Flows for the Three Months Ended March 31, 2018 and the One Month Ended March 31, 2017.
· Notes to Financial Statements.
(b) Pro Forma Financial Information
The following unaudited pro forma combined condensed financial statements of Nuvera and Scott-Rice are filed with this Report as Exhibit 99.3:
· Introduction to Pro Forma Combined Condensed Financial Information
· Pro Forma Combined Condensed Balance Sheet as of December 31, 2017
· Pro Forma Combined Condensed Statement of Income for the year ended December 31, 2017
· Notes to Pro Forma Combined Condensed Financial Statements
The following unaudited pro forma combined condensed financial statements of Nuvera and Scott-Rice are filed with this Report as Exhibit 99.4:
· Introduction to Pro Forma Combined Condensed Financial Information
· Pro Forma Combined Condensed Balance Sheet as of March 31, 2018
· Pro Forma Combined Condensed Statement of Income for the three months ended March 31, 2018
· Notes to Pro Forma Combined Condensed Financial Statements
(c) Exhibits
23.1 Consent of Independent Registered Public Accounting Firm.
99.1 Financial Statements of Scott-Rice, for the Period as of Ended December 31, 2017.
99.2 Financial Statements of Scott-Rice, for the Three Months Ended March 31, 2018 and the One Month Ended March 31, 2017.
99.3 Nuvera Unaudited Pro Forma Combined Condensed Financial Statements for the Year Ended December 31, 2017.
99.4 Nuvera Unaudited Pro Forma Combined Condensed Financial Statements for the Three Month Ended March 31, 2018.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Nuvera Communications, Inc. | ||
Date: August 13, 2018 | By: | /s/Curtis O. Kawlewski |
Curtis O. Kawlewski | ||
Its: Chief Financial Officer |
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the inclusion in this Form 8K/A of Nuvera Communications, Inc. of our auditors report dated June 11, 2018 related to our audit of the financial statements of Scott-Rice Telephone Company for the year ended December 31, 2017.
/s/ Olsen Thielen & Co., Ltd.
Roseville, Minnesota
August 13, 2018
EXHIBIT 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Scott-Rice Telephone Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Scott-Rice Telephone Company (a Minnesota corporation) (the Company) as of December 31, 2017, and the related statements of income, comprehensive income, invested equity and cash flows for the ten months then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements, present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of their operations and their cash flows for the ten months then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/Olsen Thielen & Co., Ltd. |
We have served as the Companys auditor since 2017. |
Roseville, Minnesota |
June 11, 2018 |
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SCOTT-RICE TELEPHONE CO.
BALANCE SHEET
AS OF DECEMBER 31, 2017
|
|
|
Assets |
|
|
Current assets |
|
|
Cash | $ | 4,513 |
Trade receivables |
| 340,975 |
Supplies |
| 331,520 |
Other assets |
| 62,056 |
Total current assets |
| 739,064 |
Property and equipment, net |
| 11,286,108 |
Deferred income taxes, net |
| 2,709,208 |
Total assets | $ | 14,734,380 |
|
|
|
Liabilities and invested equity |
|
|
Current liabilities |
|
|
Accounts payable | $ | 69,812 |
Accrued liabilities |
| 898,860 |
Deferred revenue, current |
| 141,312 |
Total current liabilities |
| 1,109,984 |
Deferred revenue, non-current |
| 83,985 |
Total liabilities |
| 1,193,969 |
Commitments and contingencies (Note 10) |
|
|
Invested equity |
|
|
Zayos net investment |
| 13,540,411 |
Total invested equity |
| 13,540,411 |
Total liabilities and invested equity | $ | 14,734,380 |
The accompanying notes are an integral part of these financial statements.
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SCOTT-RICE TELEPHONE CO.
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 1, 2017 TO DECEMBER 31, 2017
|
|
|
| |
Revenue | $ | 12,823,614 | ||
Operating costs and expenses |
|
| ||
Operating costs (excluding depreciation and amortization) |
| 2,222,818 | ||
Selling, general and administrative expenses |
| 2,959,274 | ||
Depreciation and amortization |
| 4,484,491 | ||
Total operating costs and expenses |
| 9,666,583 | ||
Operating income |
| 3,157,031 | ||
Other income, net |
|
| ||
Interest expense |
| (120) | ||
Other income |
| 20,155 | ||
Total other income, net |
| 20,035 | ||
Income from operations before income taxes |
| 3,177,066 | ||
Provision for income taxes |
| 2,183,061 | ||
Net income | $ | 994,005 | ||
The accompanying notes are an integral part of these financial statements.
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SCOTT-RICE TELEPHONE CO.
STATEMENT OF INVESTED EQUITY
FOR THE PERIOD MARCH 1, 2017 TO DECEMBER 31, 2017
Zayos Net | ||
Balance at March 1, 2017 | $ | |
Net transfer from Zayo |
| 12,546,406 |
Net income |
| 994,005 |
Balance at December 31, 2017 | $ | 13,540,411 |
The accompanying notes are an integral part of these financial statements.
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SCOTT-RICE TELEPHONE CO.
STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 1, 2017 TO DECEMBER 31, 2017
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Cash flows from operating activities |
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Net income | $ | 994,005 |
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
Depreciation and amortization |
| 4,484,491 |
Deferred income taxes |
| 652,980 |
Changes in operating assets and liabilities, net of acquisitions |
|
|
Trade receivables |
| (197,748) |
Due from Zayo |
| (5,137,195) |
Accounts payable and accrued liabilities |
| 131,230 |
Additions to deferred revenue |
| (3,422) |
Other assets and liabilities |
| (16,756) |
Net cash provided by operating activities |
| 907,585 |
Cash flows from investing activities |
|
|
Purchases of property and equipment |
| (2,966,129) |
Acquisition of Scott-Rice |
| 5,000 |
Net cash used in investing activities |
| (2,961,129) |
Cash flows from financing activities |
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|
Net transfers from Zayo |
| 2,058,057 |
Net cash provided by financing activities |
| 2,058,057 |
Net cash flows |
| 4,513 |
Cash, beginning of period |
| |
Cash, end of period | $ | 4,513 |
Supplemental disclosure of non-cash investing and financing activities: |
|
|
Increase in accounts payable and accrued expenses for purchases of property and equipment | $ | 47,224 |
Acquisition of Scott-Rice with investment by Zayo | $ | 75,063,476 |
Dividend of intercompany receivable from Zayo | $ | 64,575,127 |
The accompanying notes are an integral part of these financial statements.
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SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND BASIS OF PRESENTATION
Business
Scott-Rice Telephone Co. (Scott-Rice or the Company) is a subsidiary of Allstream Business US, LLC (Allstream). Allstream is part of an operating segment within Zayo Group Holdings, Inc. (Zayo). Scott-Rice provides Voice, IPTV Service and Broadband services using a variety of technologies for residential and business customers in the areas of Scott and Rice counties southwest of Minneapolis, Minnesota.
Scott-Rice was acquired as a part of the acquisition of the voice business of Electric Lightwave, Inc. (ELI) on March 1, 2017.
Basis of Presentation
Scott-Rice has historically operated as an integrated business of Zayo and not as a standalone entity. Financial statements representing historical operations of Scott-Rices bandwidth infrastructure provision and services have been derived from Zayos historical accounting records and are presented on a carve-out basis. All revenues and costs as well as assets and liabilities directly associated with the business activity of Scott-Rice are included in the financial statements. The historical costs and expenses reflected in the Scott-Rice financial statements include an allocation of certain corporate functions historically provided by Zayo, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, and information technology. These expenses have been allocated to Scott-Rice on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of sales, headcount, tangible assets, or other measures considered to be a reasonable reflection of historical utilization levels of these services.
As these financial statements represent the combination of a separate legal entity wholly-owned by Zayo, the net assets of Scott-Rice have been presented as Zayos net investment. Zayos net investment in Scott-Rice is primarily composed of: (i) the initial investment to establish the net assets (and any subsequent adjustments thereto); (ii) the accumulated net earnings; (iii) net transfers to or from Zayo, including those related to cash management functions performed by Zayo; (iv) non-cash changes in financing arrangements, including the conversion of certain related party liabilities into Zayos net investment; and (v) corporate cost allocations
Management believes that the assumptions underlying Scott-Rices financial statements, including the assumptions regarding the allocation of general corporate expenses from Zayo, are reasonable. Nevertheless, Scott-Rices financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented. Actual costs that would have been incurred had Scott-Rice operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Scott-Rice may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in Scott-Rices historical results of operations, financial position, and cash flows.
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SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
Scott-Rice is dependent upon Zayo for all working capital and financing requirements as Zayo uses a centralized approach to cash management and financing of its operations. Financial transactions related to Scott-Rice are accounted for through the Net Zayo investment account. Accordingly, none of Zayos cash or debt at the corporate level has been assigned to Scott-Rice in the financial statements. Net Zayo investment represents Zayos interest in the recorded net assets of Scott-Rice. All significant transactions between Scott-Rice and Zayo have been included in the accompanying financial statements. Transactions with Zayo are reflected in the accompanying Statement of Invested Equity as Net transfers from Zayo and in the accompanying Balance Sheet within Zayos net investment.
Scott-Rice carve-out special purpose financial statements are presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
Cash management
Cash in the balance sheet comprises the cash of Scott-Rices business. None of Zayos cash and cash equivalents has been allocated to Scott-Rice in the financial statements.
Income taxes
Income taxes are calculated as if all of Scott-Rices operations had been separate tax-paying legal entities, each filing a separate tax return in its local jurisdiction. Scott-Rices income tax amounts currently payable or receivable by it are included in Zayos net investment, because the net liabilities (receivables) for the taxes due (refundable) are recorded in the financial statements of Zayos non-group entities that file the tax returns. As a result of the aforementioned structure, substantially all of Scott-Rices tax liabilities (refunds) are also paid (collected) by Zayos various non-group entities. These net changes in income tax amounts currently payable or receivable are included in the net cash transfers (to) from Zayo in the accompanying financial statements. No adjustments have been made in these carve-out financial statements to eliminate a tax structure that was put into place during the period of the historical financial statements, as more fully described in Note 6.
(2) SIGNIFICANT ACCOUNTING POLICIES
a. Use of Estimates
The preparation of Scott-Rices financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization, and accounting for income taxes and related valuation allowances against deferred tax assets. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.
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SCOTT-RICE TELEPHONECO.
NOTES TO FINANCIAL STATEMENTS
b. Cash and Cash Equivalents
Scott-Rice considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
c. Trade Receivables
Trade receivables are recorded at the invoiced amount and do not bear interest. Scott-Rice maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers financial condition, and the age of receivables and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Expected losses on accounts receivable were not significant at December 31, 2017.
d. Property and Equipment
Scott-Rices property and equipment includes assets in service and under construction or development.
Property and equipment is recorded at historical cost or acquisition date fair value. Costs associated directly with network construction, service installations, and development of business support systems, including employee-related costs, is capitalized. Depreciation is calculated on a straight-line basis over the assets estimated useful life from the date placed into service or acquired. Management periodically evaluates the estimates of the useful life of property and equipment by reviewing historical usage, with consideration given to technological changes, trends in the industry, and other economic factors that could impact the network architecture and asset utilization.
Scott-Rice uses the group life method (mass asset accounting) to depreciate the telephone related assets. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. Management periodically reviews data on expected utilization of new equipment, asset retirement activity, and net salvage values to determine adjustments to the depreciation rates. Scott-Rice has not made any significant changes to the lives of these assets during the period March 1, 2017 to December 31, 2017.
Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of its property and equipment may not be recoverable. An impairment loss is recognized when the assets carrying value exceeds both the assets estimated undiscounted future cash flows and the assets estimated fair value. Measurement of the impairment loss is then based on the estimated fair value of the assets. Considerable judgment is required to project such future cash flows and, if required, to estimate the fair value of the property and equipment and the resulting amount of the impairment. No impairment charges were recorded for property and equipment during the period March 1, 2017 to December 31, 2017.
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SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
e. Revenue Recognition
Scott-Rice recognizes revenues derived from switched local and long distance voice service, broadband and IPTV services in which the fees are tariffed when the service has been provided and there is persuasive evidence of an arrangement the fee is fixed or determinable, customer acceptance has been obtained with relevant contract terms, and the collection of the receivable is reasonably assured. Taxes collected from customers and remitted to a governmental authority are reported on a net basis and are excluded from revenue.
Most revenue is billed in advance on a fixed-rate basis and the remainder is billed in arrears on a transactional basis determined by customer usage. Scott-Rice often bills customers for upfront charges, which are non-refundable. These charges relate to activation fees, installation charges or service order charges for future services.
In determining the appropriate amount of revenue and related reserves to reflect in its financial statements, management evaluates payment history, credit ratings, customer financial performance, and historical or potential billing disputes and related estimates are based on these factors and assumptions.
f. Operating Costs and Expenses
Scott-Rices operating costs and expenses consist primarily of Operating costs and Selling, general and administrative expenses, and depreciation and amortization.
Operating costs consist of third-party network service costs resulting from the leasing of certain network facilities, primarily leases of circuits and dark fiber, from carriers to augment Scott-Rices owned infrastructure, for which it is generally billed a fixed monthly fee. Operating costs sold also includes IPTV programming fees, carrier access billing, and long distance costs.
Selling, general and administrative expenses include salaries and wages, and operating expenses.
Salaries and wages include salaries, wages, incentive compensation, and benefits. Employee-related costs that are directly associated with network construction, service installations, and development of business support systems are capitalized and amortized to operating costs over the customer life.
Operating expenses include all of the non-personnel-related expenses of operating and maintaining the network infrastructure. In addition, travel, training, advertising, professional fees, taxes, office supplies, and corporate allocation are included within operating expenses.
Depreciation and amortization include the expense of long-term assets over the assets estimated useful life from the date placed into service or acquired.
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SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
g. Legal Costs
Costs incurred to hire and retain external legal counsel to advise us on regulatory, litigation, and other matters are expensed as the related services are received.
h. Advertising
Advertising expenses are expensed as incurred. Scott-Rice expensed advertising costs of $27,322.
i. Income Taxes
Scott-Rice recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
Estimating the future tax benefit associated with deferred tax assets requires significant judgment. Deferred tax assets arise from a variety of sources, the most significant being: tax losses that can be carried forward to be utilized against taxable income in future years, deferred revenue, and expenses recognized in Scott-Rices financial statements but disallowed in Scott-Rices tax return until the associated cash flow occurs.
Scott-Rice records a valuation allowance to reduce its deferred tax assets to the amount that is expected to be recognized. The valuation allowance is established if, based on available evidence, it is more-likely-than-not that all or some portion of the asset will not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset. When evaluating whether it is more-likely-than-not that all or some portion of the deferred tax asset will not be realized, all available evidence, both positive and negative, that may affect the realizability of deferred tax assets is identified and considered in determining the appropriate amount of the valuation allowance. Scott-Rice continues to monitor its financial performance and other evidence each quarter to determine the appropriateness of Scott-Rices valuation allowance. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. At December 31, 2017, there was no valuation allowance.
The analysis of Scott-Rices ability to utilize its net operating loss carryforward (NOL) balance is based on Scott-Rices forecasted taxable income. The forecasted assumptions approximate Scott-Rices best estimates, including market growth rates, future pricing, market acceptance of Scott-Rices products and services, future expected capital investments, and discount rates. If Scott-Rice is unable to meet its taxable income forecasts in future periods Scott-Rice may change its conclusion about the appropriateness of the valuation allowance which could create a substantial income tax expense in Scott-Rices statement of operations in the period such change occurs.
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SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
Scott-Rice records interest related to unrecognized tax benefits and penalties in the provision for income taxes.
j. Fair Value of Financial Instruments
Relevant accounting literature defines and establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques that may be used include the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost), which are each based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Scott-Rices market assumptions.
Scott-Rices financial instruments consist of cash, trade receivables, and accounts payable. The carrying values of cash, trade receivables, and accounts payable approximated their fair values at December 31, 2017 due to the short maturity of these instruments.
Fair Value Hierarchy
A fair value hierarchy is established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that are used to measure fair value are:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2
Inputs to the valuation methodology include:
· quoted prices for similar assets or liabilities in active markets;
· quoted prices for identical or similar assets or liabilities in inactive markets;
· inputs other than quoted prices that are observable for the asset or liability; and
· inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 inputs.
Scott-Rice views fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
k. Concentration of Credit Risk
Financial instruments that potentially subject Scott-Rice to concentration of credit risk consist principally of accounts receivable. Scott-Rices cash is primarily held in commercial bank accounts in the United States.
During the period March 1, 2017 to December 31, 2017, Scott-Rice had no single customer that exceeded 10% of total revenue. Scott-Rices trade receivables, which are unsecured, are geographically dispersed. As of December 31, 2017, Scott-Rice had no customers with a trade receivable balance that exceeded 10% of total receivables.
l. Recently Issued Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify the income tax effects resulting from tax bill, H.R.1, from accumulated other comprehensive income to retained earnings. The standard also requires certain new disclosures regardless of the election. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. ASU 2018-02 will not have an impact on Scott-Rices financial statements and related disclosures.
12
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments. The new standard provides guidance for eight changes with respect to how cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017, with early adoption permitted. Scott-Rice does not plan to early adopt, nor does it expect the adoption of this new standard to have a material impact on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. Scott-Rice does not plan to early adopt and is evaluating the impact of the adoption of this new standard on its financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date or annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method.
Although Scott-Rice is still assessing the impact of this standard on its financial statements, it has preliminarily determined that due to changes in the timing of recognition of certain installation services, discounts, and promotional credits given to customers, there may be additional contract assets and liabilities recorded in the balance sheet upon adoption. Additionally, the requirement to defer incremental costs incurred to acquire a contract including sales commissions, and recognize such costs over the contract period or expected customer life may result in additional deferred charges recognized in the balance sheets and could have the impact of deferring operating expenses. Scott-Rice plans to adopt this new standard as of July 1, 2018 and, based on its initial assessment, expects to apply the modified retrospective method, which may result in a cumulative effect adjustment as of the date of adoption. Until Scott-Rice is further along in its assessment, it does not anticipate being able to provide reasonably accurate estimates of the impact of ASU 2014-09.
13
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(3) ACQUISITIONS
Electric Lightwave Parent, Inc.
On March 1, 2017, Zayo acquired ELI, an infrastructure and telecom services provider serving 35 markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash acquired, subject to certain post-closing adjustments. The operations of ELI were allocated to multiple Zayo segments, with $75.1 million being allocated to Scott-Rice. The acquisition was funded through Zayos debt and Zayos cash on hand. The acquisition was considered a stock purchase for tax purposes.
Although Scott-Rice continued as the same legal entity after the acquisition of ELI, push-down accounting was not applied. Scott-Rices net assets were not adjusted for the fair value of goodwill, customer lists, and other intangible assets.
The table below reflects the acquisition date fair values of the assets and liabilities assumed allocated to Scott-Rice from Zayos Fiscal 2017 acquisition of ELI:
Cash | $ | 5,000 |
Other current assets |
| 59,957,979 |
Property and equipment | 12,757,245 | |
Deferred tax assets, net | 3,362,188 | |
Total assets acquired |
| 76,082,412 |
Current liabilities |
| 790,217 |
Deferred revenue |
| 228,719 |
Total liabilities assumed | 1,018,936 | |
Net assets acquired |
| 75,063,476 |
Less cash acquired |
| (5,000) |
Total consideration paid/payable | $ | 75,058,476 |
|
|
|
(4) PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following as of December 31, 2017:
|
Estimated useful lives |
|
| |
|
|
| ||
|
|
| ||
|
|
|
|
|
Land | N/A |
| $ | 218,421 |
Buildings and leasehold improvements | 30 |
|
| 901,143 |
Automobiles | 5 to 6 |
|
| 47,171 |
Furniture, fixtures and equipment | 5 to 10 |
|
| 9,189 |
Computer hardware | 5 |
|
| 564,527 |
Software | 5 |
|
| 31,126 |
Machinery and equipment | 5 to 10 |
|
| 115,370 |
Telecommunication equipment | 5 to 13 |
|
| 8,360,697 |
Underground cable | 15 to 20 |
|
| 5,469,748 |
Total |
|
|
| 15,717,392 |
Less accumulated depreciation |
|
|
| (4,431,284) |
Property and equipment, net |
|
| $ | 11,286,108 |
Depreciation is computed using the straight-line method based on the estimated service or remaining useful lives of the various classes of depreciable assets. Total depreciation expense during the period March 1, 2017 to December 31, 2017 was $4,484,491.
14
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
During the period March 1, 2017 to December 31, 2017, the Company capitalized $1,364,125 of direct labor costs to property and equipment accounts.
(5) LONG-TERM DEBT
Guarantees
As of December 31, 2017, Zayo had $5.6 billion of long-term debt, including Notes Payable, Term Loan Facility, and Revolver. The long-term debt was payable through January 2027. As of December 31, 2017, no amounts were outstanding under the $500 million Revolver.
Zayos Notes Payable, Term Loan Facility, and Revolver are fully and unconditionally guaranteed, jointly and severally, by all of Zayos current and future domestic restricted subsidiaries.
Upon the closing of the sale of Scott-Rice to New Ulm Telecom, Inc., Scott-Rice will no longer be a guarantor of Zayos Notes Payable, Term Loan Facility, or Revolver.
Debt covenants
Zayos Notes Payable contain covenants that, among other things, restrict the ability of Zayo and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends, or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of Zayos restricted subsidiaries to pay dividends or make other payments to Zayo, consolidate, or merge with or into other companies, or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions. The terms of the Notes Payable include customary events of default.
Zayos Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a covenant, applicable only to the Revolver, that the Zayo maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires that Zayo and its subsidiaries comply with customary affirmative and negative covenants.
15
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
The Notes Payable indentures limit any increase in Zayos secured indebtedness to a pro forma secured debt ratio of 4.50 times Zayos previous quarters annualized modified EBITDA (as defined in the Notes Payable indentures), and limit Zayos incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarters annualized modified EBITDA.
Zayo was in compliance with all covenants associated with its debt agreements as of December 31, 2017.
(6) INCOME TAXES
The Companys provision for income taxes from operations during the period March 1, 2017 to December 31, 2017 is summarized as follows:
|
|
|
|
|
|
Current Income Taxes |
|
| |||
Federal | $ | 1,505,844 | |||
State |
| 24,237 | |||
Total | 1,530,081 | ||||
Deferred Income Taxes |
|
| |||
Federal | 474,398 | ||||
State |
| 178,582 | |||
Total |
| 652,980 | |||
Total provision for income taxes | $ | 2,183,061 |
On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform). U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%, created a territorial tax system with a one-time mandatory repatriation tax on previously deferred foreign earnings, and changed business-related deductions and credits.
ASC 740, Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. The SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which will allow registrants to record provisional amounts during a measurement period. The measurement period is similar to the measurement period used when accounting for business combinations under ASC 805, Business Combinations. SAB 118 allows a registrant to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The measurement period ends when a registrant has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
16
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
In accordance with SAB 118, Scott-Rice has recorded a provisional tax expense for the period March 1, 2017 to December 31, 2017 of $852,736 to record the impact of U.S. Tax Reform. The provisional amounts will be known when the actual US and state tax returns are filed.
The Companys effective income tax rate differs from what would be expected if the federal statutory rate were applied to earnings before income taxes primarily because of certain expenses that represent permanent differences between book and tax expenses and deductions.
A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate to the earnings before income taxes during the period March 1, 2017 to December 31, 2017 is as follows:
|
|
|
Expected provision at the statutory rate | $ | 1,111,973 |
Increase/(decrease) due to: |
|
|
State income taxes benefit, net of federal benefit |
| 202,379 |
Change in statutory tax rate, deferred |
| 852,736 |
Change in statutory rate, current |
| 15,788 |
Other, net |
| 185 |
Provision for income taxes | $ | 2,183,061 |
Scott-Rice files income tax returns in United States and the state of Minnesota. In the normal course of business, Scott-Rice is subject to examination by taxing authorities.
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2017 are as follows:
Deferred income tax assets |
|
|
Property and equipment | $ | 2,117,565 |
Net operating loss carry forwards |
| 526,887 |
Deferred revenue |
| 64,755 |
Total deferred income tax assets |
| 2,709,208 |
Valuation allowance |
| () |
Deferred income tax assets, net | $ | 2,709,208 |
As of December 31, 2017, the Company had no U.S. federal net operating loss ("NOL") carry forwards. As of December 31, 2017, the Company had tax-effected state net operating loss carry forwards of $526,887, which are not subject to limitations on their utilization and have various expiration dates 2021 through 2030.
17
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
Management believes it is more likely than not that it will utilize its net deferred tax assets to reduce or eliminate tax payments in future periods and has not recorded a valuation allowance.
(7) ACCRUED LIABILITIES
Accrued liabilities included in current liabilities as of December 31, 2017 consisted of the following:
Accrued compensation and benefits | $ | 277,934 |
Network expense accruals |
| 176,796 |
Other accrued taxes |
| 112,487 |
Other accruals |
| 331,643 |
Total | $ | 898,860 |
(8) INVESTMENT EQUITY
Overview
All of Scott-Rices related party transactions with subsidiaries, divisions, and entities of Zayo (herein individually and collectively referred to as Zayo) were agreed to by Scott-Rice and Zayo. The costs for such services transferred to Scott-Rice are reflected in appropriate categories in the accompanying statement of operations during the period March 1, 2017 to December 31, 2017.
Net Contributions from Zayo
The significant components of net contributions from Zayo during the period March 1, 2017 to December 31, 2017, were as follows:
Investment in Scott-Rice | $ | 75,063,476 |
Allocation of expenses |
| 527,976 |
Income taxes held by Zayo | 1,530,081 | |
Dividend from parent | (64,575,127) | |
Net Contributions from Zayo | $ | 12,546,406 |
18
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
The net contributions from Zayo are generally recorded based on actual costs incurred, without a markup. The basis of allocation for items described above is as follows:
· Investment in Scott-Rice: Amount represents Zayos initial investment in Scott-Rice.
· Allocation of expenses: Zayo provides certain management and administrative services to each of its business units. See Note 11 for further discussion.
· Income taxes Zayo holds the income tax liabilities and deferred income taxes
· Dividend from parent: Scott-Rice transferred the amount due from Zayo via a dividend.
(9) EMPLOYEE SAVINGS PLAN
The Company maintains a defined contribution plan for eligible employees under Section 401(k) of the Internal Revenue Service (IRS) Code. All employees who meet the plan eligibility requirements may elect to participate in the plan by making contributions up to the maximum permissible IRS limit. The Company makes matching contributions limited to 50% of the participants contributions up to 2% of compensation. Savings plan expense was approximately $38,719 for the period March 1, 2017 to December 31, 2017.
(10) COMMITMENTS AND CONTINGENCIES
In the normal course of business, Scott-Rice is party to various outstanding legal proceedings, asserted and unasserted claims, and carrier disputes. In the opinion of management, the ultimate disposition of these matters, both asserted and unasserted, will not have a material adverse effect on Scott-Rices financial condition, results of operations, or cash flows.
(11) RELATED PARTY TRANSACTIONS
Zayo provides certain management and administrative services to Scott-Rice. The costs for such services transferred to Scott-Rice are reflected in appropriate categories in the accompanying statements of operations during the period March 1, 2017 to December 31, 2017. Additionally, Zayo performs cash management functions on behalf of Scott-Rice. Scott-Rices cash needs are managed by Zayo on a daily basis. As a result, all of the charges and cost allocations to Scott-Rice covered by the centralized cash management functions were treated as a payable to Zayo. In addition, all of the cash receipts on behalf of Scott-Rice were deemed to be receivable from Zayo, as they were received.
The transactions to/from Zayo are generally recorded based on actual costs incurred, without a markup. The basis of allocation for items described above is as follows:
· Customer payments and other cash receipts: As indicated above, to the extent payments for other units are received by Scott-Rice, such amounts are applied to the corresponding customer accounts receivable and are reflected as cash contribution from Zayo.
· Allocation of expenses: Zayo provides certain management and administrative services to each of its business units. These costs include, but are not limited to, items such as general management and executive oversight, costs to support Scott-Rices information technology infrastructure, facilities, compliance, human resources, marketing, legal and finance functions, benefit plan administration, and risk management. These corporate allocations are based on one of two utilization measures: 1) full time equivalents and 2) revenue.
· Accounts payable and other payments: A portion of Scott-Rices cash disbursements for trade and other accounts payable and accrued expenses, are funded centrally by Zayo. Such transactions processed for trade and other accounts payable and accrued expenses associated with Scott-Rice are reflected as cash contribution from Zayo.
19
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
The significant components of the transactions with Zayos subsidiaries during the period March 1, 2017 to December 31, 2017 were as follows:
Receivable from ELI acquired March 1, 2017 | $ | 59,437,932 |
Customer payments and other cash receipts | 13,177,975 | |
Allocation of expenses |
| (358,820) |
Accounts payable and other payments |
| (7,681,960) |
Dividend to ELI | (64,575,127) | |
Due to/from related parties | $ | |
(12) SUBSEQUENT EVENTS
On February 23, 2018, Zayo entered into an agreement to sell Scott-Rice Telephone Co., a Minnesota Incumbent local exchange carrier, to New Ulm Telecom, Inc. (now known as Nuvera Communications, Inc. as a result of their name change on June 4, 2018) for $42 million.
Subsequent events were evaluated through June 11, 2018, the date that the financial statements were issued.
20
EXHIBIT 99.2
SCOTT-RICE TELEPHONE CO.
BALANCE SHEET
AS OF MARCH 31, 2018 AND DECEMBER 31, 2017
(UNAUDITED)
| March 31, 2018 |
| December 31, 2017 | ||
|
|
|
|
|
|
Assets |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash | $ | 3,004 |
| $ | 4,513 |
Trade receivables |
| 180,423 |
|
| 340,975 |
Supplies |
| 376,798 |
|
| 331,520 |
Other assets |
| 34,153 |
|
| 62,056 |
Total current assets |
| 594,378 |
|
| 739,064 |
Property and equipment, net |
| 10,916,839 |
|
| 11,286,108 |
Deferred income taxes, net |
| 2,398,352 |
|
| 2,709,208 |
Total assets | $ | 13,909,569 |
| $ | 14,734,380 |
Liabilities and invested equity |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Accounts payable | $ | 105,292 |
| $ | 69,812 |
Accrued liabilities |
| 953,316 |
|
| 898,860 |
Deferred revenue, current |
| 142,014 |
|
| 141,312 |
Total current liabilities |
| 1,200,622 |
|
| 1,109,984 |
Deferred revenue, non-current |
| 81,860 |
|
| 83,985 |
Total liabilities |
| 1,282,482 |
|
| 1,193,969 |
Commitments and contingencies (Note 10) |
|
|
|
|
|
Invested equity |
|
|
|
|
|
Zayos net investment |
| 12,627,087 |
|
| 13,540,411 |
Total invested equity |
| 12,627,087 |
|
| 13,540,411 |
Total liabilities and invested equity | $ | 13,909,569 |
| $ | 14,734,380 |
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
1
SCOTT-RICE TELEPHONE CO.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND THE ONE MONTH ENDED MARCH 31, 2017
(UNAUDITED)
| Three Months Ended March 31, 2018 |
| One Month Ended March 31, 2017 | ||
|
| ||||
|
|
|
|
|
|
Revenue | $ | 3,725,396 |
| $ | 1,261,758 |
Operating costs and expenses |
|
|
|
|
|
Operating costs (excluding depreciation and amortization) |
| 624,775 |
|
| 197,762 |
Selling, general and administrative expenses |
| 917,814 |
|
| 289,824 |
Depreciation and amortization |
| 823,890 |
|
| 448,449 |
Total operating costs and expenses |
| 2,366,479 |
|
| 936,035 |
Operating income |
| 1,358,917 |
|
| 325,723 |
Other income, net |
|
|
|
|
|
Interest expense |
| (66) |
|
| (13) |
Other income |
| 482 |
|
| 157 |
Total other income, net |
| 416 |
|
| 144 |
Income from operations before income taxes |
| 1,359,333 |
|
| 325,867 |
Provision for income taxes |
| 663,449 |
|
| 174,573 |
Net income | $ | 695,884 |
| $ | 151,294 |
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
2
SCOTT-RICE TELEPHONE CO.
STATEMENT OF INVESTED EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND THE ONE MONTH ENDED MARCH 31, 2017
(UNAUDITED)
| Three Months Ended March 31, 2018 |
| One Month Ended March 31, 2017 | ||
|
|
|
|
|
|
Balance, beginning of period | $ | 13,540,411 |
| $ | |
Net transfer from Zayo | (1,609,208) |
|
| 14,879,864 | |
Net income |
| 695,884 |
| 151,294 | |
Balance, end of period | $ | 12,627,087 |
| $ | 15,031,158 |
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
SCOTT-RICE TELEPHONE CO.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
AND THE ONE MONTH ENDED MARCH 31, 2017
(UNAUDITED)
| Three Months Ended | One Month Ended | |||
| March 31, 2018 |
| March 31, 2017 | ||
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
Net income | $ | 695,884 |
| $ | 151,294 |
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
Depreciation and amortization |
| 823,890 |
|
| 448,449 |
Deferred income taxes |
| 310,856 |
|
| 39,762 |
Changes in operating assets and liabilities, net of acquisitions |
|
|
|
|
|
Trade receivables |
| 160,551 |
|
| 39,682 |
Due from to affiliates |
| (2,111,322) |
|
| (933,290) |
Accounts payable and accrued liabilities |
| 33,886 |
|
| 416,309 |
Additions to deferred revenue |
| (1,424) |
|
| (339) |
Other assets and liabilities |
| (17,372) |
|
| (132,026) |
Net cash (used in) provided by operating activities |
| (105,051) |
|
| 29,841 |
Cash flows from investing activities |
|
|
|
|
|
Purchases of property and equipment |
| (398,572) |
|
| (217,450) |
Acquisition of Scott-Rice |
| |
|
| 5,000 |
Net cash used in investing activities |
| (398,572) |
|
| (212,450) |
Cash flows from financing activities |
|
|
|
|
|
Net transfers to Zayo |
| 502,114 |
|
| 187,609 |
Net cash provided by financing activities |
| 502,114 |
|
| 187,609 |
Net increase in cash and cash equivalents |
| (1,509) |
|
| 5,000 |
Cash and cash equivalents, beginning of period |
| 4,513 |
|
| |
Cash and cash equivalents, end of period | $ | 3,004 |
| $ | 5,000 |
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
Increase (decrease) in accounts payable and accrued expenses for purchases of property and equipment |
$ |
56,049 |
|
$ | |
Acquisition of Scott-Rice with investment by Zayo | $ | |
| $ | 75,063,476 |
Dividend of intercompany receivable from Zayo | $ | 2,111,321 |
| $ | 60,371,222 |
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND BASIS OF PRESENTATION
Business
Scott-Rice Telephone Co. (Scott-Rice or the Company) is a subsidiary of Allstream Business US, LLC (Allstream). Allstream is part of an operating segment within Zayo Group Holdings, Inc. (Zayo). Scott-Rice provides Voice, IPTV Service and Broadband services using a variety of technologies for residential and business customers in the areas of Scott and Rice counties southwest of Minneapolis, Minnesota.
Scott-Rice was acquired as a part of the acquisition of the voice business of Electric Lightwave, Inc. (ELI) on March 1, 2017.
Basis of Presentation
Scott-Rice has historically operated as an integrated business of Zayo and not as a standalone entity. Financial statements representing historical operations of Scott-Rices bandwidth infrastructure provision and services have been derived from Zayos historical accounting records and are presented on a carve-out basis. All revenues and costs as well as assets and liabilities directly associated with the business activity of Scott-Rice are included in the financial statements. The historical costs and expenses reflected in the Scott-Rice financial statements include an allocation of certain corporate functions historically provided by Zayo, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, and information technology. These expenses have been allocated to Scott-Rice on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of sales, headcount, tangible assets, or other measures considered to be a reasonable reflection of historical utilization levels of these services.
As these financial statements represent the combination of a separate legal entity wholly-owned by Zayo, the net assets of Scott-Rice have been presented as Zayos net investment. Zayos net investment in Scott-Rice is primarily composed of: (i) the initial investment to establish the net assets (and any subsequent adjustments thereto); (ii) the accumulated net earnings; (iii) net transfers to or from Zayo, including those related to cash management functions performed by Zayo; (iv) non-cash changes in financing arrangements, including the conversion of certain related party liabilities into Zayos net investment; and (v) corporate cost allocations
Management believes that the assumptions underlying Scott-Rices financial statements, including the assumptions regarding the allocation of general corporate expenses from Zayo, are reasonable. Nevertheless, Scott-Rices financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented. Actual costs that would have been incurred had Scott-Rice operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Scott-Rice may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in Scott-Rices historical results of operations, financial position, and cash flows.
5
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
Scott-Rice is dependent upon Zayo for all working capital and financing requirements as Zayo uses a centralized approach to cash management and financing of its operations. Financial transactions related to Scott-Rice are accounted for through the Net Zayo investment account. Accordingly, none of Zayos cash or debt at the corporate level has been assigned to Scott-Rice in the financial statements. Net Zayo investment represents Zayos interest in the recorded net assets of Scott-Rice. All significant transactions between Scott-Rice and Zayo have been included in the accompanying financial statements. Transactions with Zayo are reflected in the accompanying Statement of Invested Equity as Net transfers from Zayo and in the accompanying Balance Sheet within Zayos net investment.
Scott-Rice carve-out special purpose financial statements are presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
Cash management
Cash in the balance sheet comprises the cash of Scott-Rices business. None of Zayos cash and cash equivalents has been allocated to Scott-Rice in the financial statements.
Income taxes
Income taxes are calculated as if all of Scott-Rices operations had been separate tax-paying legal entities, each filing a separate tax return in its local jurisdiction. Scott-Rices income tax amounts currently payable or receivable by it are included in Zayos net investment, because the net liabilities (receivables) for the taxes due (refundable) are recorded in the financial statements of Zayos non-group entities that file the tax returns. As a result of the aforementioned structure, substantially all of Scott-Rices tax liabilities (refunds) are also paid (collected) by Zayos various non-group entities. These net changes in income tax amounts currently payable or receivable are included in the net cash transfers (to) from Zayo in the accompanying financial statements. No adjustments have been made in these carve-out financial statements to eliminate a tax structure that was put into place during the period of the historical financial statements, as more fully described in Note 6.
(2) SIGNIFICANT ACCOUNTING POLICIES
a. Use of Estimates
The preparation of Scott-Rices financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization, and accounting for income taxes and related valuation allowances against deferred tax assets. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.
6
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
b. Cash and Cash Equivalents
Scott-Rice considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
c. Trade Receivables
Trade receivables are recorded at the invoiced amount and do not bear interest. Scott-Rice maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers financial condition, and the age of receivables and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Expected losses on accounts receivable were not significant at March 31, 2018 and December 31, 2017.
d. Property and Equipment
Scott-Rices property and equipment includes assets in service and under construction or development.
Property and equipment is recorded at historical cost or acquisition date fair value. Costs associated directly with network construction, service installations, and development of business support systems, including employee-related costs, is capitalized. Depreciation is calculated on a straight-line basis over the assets estimated useful life from the date placed into service or acquired. Management periodically evaluates the estimates of the useful life of property and equipment by reviewing historical usage, with consideration given to technological changes, trends in the industry, and other economic factors that could impact the network architecture and asset utilization.
Scott-Rice uses the group life method (mass asset accounting) to depreciate the telephone related assets. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. Management periodically reviews data on expected utilization of new equipment, asset retirement activity, and net salvage values to determine adjustments to the depreciation rates. Scott-Rice has not made any significant changes to the lives of these assets during the period March 1, 2017 to March 31, 2018.
Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of its property and equipment may not be recoverable. An impairment loss is recognized when the assets carrying value exceeds both the assets estimated undiscounted future cash flows and the assets estimated fair value. Measurement of the impairment loss is then based on the estimated fair value of the assets. Considerable judgment is required to project such future cash flows and, if required, to estimate the fair value of the property and equipment and the resulting amount of the impairment. No impairment charges were recorded for property and equipment during the period March 1, 2017 to March 31, 2018.
7
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
e. Revenue Recognition
Scott-Rice recognizes revenues derived from switched local and long distance voice service, broadband and IPTV services in which the fees are tariffed when the service has been provided and there is persuasive evidence of an arrangement the fee is fixed or determinable, customer acceptance has been obtained with relevant contract terms, and the collection of the receivable is reasonably assured. Taxes collected from customers and remitted to a governmental authority are reported on a net basis and are excluded from revenue.
Most revenue is billed in advance on a fixed-rate basis and the remainder is billed in arrears on a transactional basis determined by customer usage. Scott-Rice often bills customers for upfront charges, which are non-refundable. These charges relate to activation fees, installation charges or service order charges for future services.
In determining the appropriate amount of revenue and related reserves to reflect in its financial statements, management evaluates payment history, credit ratings, customer financial performance, and historical or potential billing disputes and related estimates are based on these factors and assumptions.
f. Operating Costs and Expenses
Scott-Rices operating costs and expenses consist primarily of Operating costs and Selling, general and administrative expenses, and depreciation and amortization.
Operating costs consist of third-party network service costs resulting from the leasing of certain network facilities, primarily leases of circuits and dark fiber, from carriers to augment Scott-Rices owned infrastructure, for which it is generally billed a fixed monthly fee. Operating costs sold also includes IPTV programming fees, carrier access billing, and long distance costs.
Selling, general and administrative expenses includes salaries and wages, and operating expenses.
Salaries and wages include salaries, wages, incentive compensation, and benefits. Employee-related costs that are directly associated with network construction, service installations, and development of business support systems are capitalized and amortized to operating costs over the customer life.
Operating expenses include all of the non-personnel-related expenses of operating and maintaining the network infrastructure. In addition, travel, training, advertising, professional fees, taxes, office supplies, and corporate allocation are included within operating expenses.
Depreciation and amortization include the expense of long-term assets over the assets estimated useful life from the date placed into service or acquired.
g. Legal Costs
Costs incurred to hire and retain external legal counsel to advise us on regulatory, litigation, and other matters is expensed as the related services are received.
8
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
h. Advertising
Advertising expenses are expensed as incurred. Scott-Rice expensed advertising costs of $2,521 during the three months ended March 31, 2018 and $2,412 during the one month ended March 31, 2017.
i. Income Taxes
Scott-Rice recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
Estimating the future tax benefit associated with deferred tax assets requires significant judgment. Deferred tax assets arise from a variety of sources, the most significant being: tax losses that can be carried forward to be utilized against taxable income in future years, deferred revenue, and expenses recognized in Scott-Rices financial statements but disallowed in Scott-Rices tax return until the associated cash flow occurs.
Scott-Rice records a valuation allowance to reduce its deferred tax assets to the amount that is expected to be recognized. The valuation allowance is established if, based on available evidence, it is more-likely-than-not that all or some portion of the asset will not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset. When evaluating whether it is more-likely-than-not that all or some portion of the deferred tax asset will not be realized, all available evidence, both positive and negative, that may affect the realizability of deferred tax assets is identified and considered in determining the appropriate amount of the valuation allowance. Scott-Rice continues to monitor its financial performance and other evidence each quarter to determine the appropriateness of Scott-Rices valuation allowance. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. At Marchr 31, 2018, there was no valuation allowance.
The analysis of Scott-Rices ability to utilize its net operating loss carryforward (NOL) balance is based on Scott-Rices forecasted taxable income. The forecasted assumptions approximate Scott-Rices best estimates, including market growth rates, future pricing, market acceptance of Scott-Rices products and services, future expected capital investments, and discount rates. If Scott-Rice is unable to meet its taxable income forecasts in future periods Scott-Rice may change its conclusion about the appropriateness of the valuation allowance which could create a substantial income tax expense in Scott-Rices statement of operations in the period such change occurs.
Scott-Rice records interest related to unrecognized tax benefits and penalties in the provision for income taxes.
9
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
j. Fair Value of Financial Instruments
Relevant accounting literature defines and establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques that may be used include the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost), which are each based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Scott-Rices market assumptions.
Scott-Rices financial instruments consist of cash, trade receivables, and accounts payable. The carrying values of cash, trade receivables, and accounts payable approximated their fair values at March 31, 2018 and December 31, 2017 due to the short maturity of these instruments.
Fair Value Hierarchy
A fair value hierarchy is established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that are used to measure fair value are:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2
Inputs to the valuation methodology include:
· quoted prices for similar assets or liabilities in active markets;
· quoted prices for identical or similar assets or liabilities in inactive markets;
· inputs other than quoted prices that are observable for the asset or liability; and
· inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 inputs.
Scott-Rice views fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
10
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
k. Concentration of Credit Risk
Financial instruments that potentially subject Scott-Rice to concentration of credit risk consist principally of accounts receivable. Scott-Rices cash is primarily held in commercial bank accounts in the United States.
During the three months ended March 31, 2018 and the one month ended March 31, 2017, Scott-Rice had no single customer that exceeded 10% of total revenue. Scott-Rices trade receivables, which are unsecured, are geographically dispersed. As of March 31, 2108 and December 31, 2017, Scott-Rice had no customers with a trade receivable balance that exceeded 10% of total receivables.
l. Recently Issued Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify the income tax effects resulting from tax bill, H.R.1, from accumulated other comprehensive income to retained earnings. The standard also requires certain new disclosures regardless of the election. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. ASU 2018-02 will not have an impact on Scott-Rices financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments. The new standard provides guidance for eight changes with respect to how cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017, with early adoption permitted. Scott-Rice will adopt the standard on July 1, 2018, in coordination with the adoption by Zayo. Scott-Rice does not plan to early adopt, nor does it expect the adoption of this new standard to have a material impact on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. Scott-Rice does not plan to early adopt and is evaluating the impact of the adoption of this new standard on its financial statements.
11
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date or annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method.
Although Scott-Rice is still assessing the impact of this standard on its financial statements, it has preliminarily determined that due to changes in the timing of recognition of certain installation services, discounts, and promotional credits given to customers, there may be additional contract assets and liabilities recorded in the balance sheet upon adoption. Additionally, the requirement to defer incremental costs incurred to acquire a contract including sales commissions, and recognize such costs over the contract period or expected customer life may result in additional deferred charges recognized in the balance sheets and could have the impact of deferring operating expenses. Scott-Rice plans to adopt this new standard as of July 1, 2018, in coordination with the adoption by Zayo.and, based on its initial assessment, expects to apply the modified retrospective method, which may result in a cumulative effect adjustment as of the date of adoption. Until Scott-Rice is further along in its assessment, it does not anticipate being able to provide reasonably accurate estimates of the impact of ASU 2014-09.
(3) ACQUISITIONS
Electric Lightwave Parent, Inc.
On March 1, 2017, Zayo acquired ELI, an infrastructure and telecom services provider serving 35 markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash acquired, subject to certain post-closing adjustments. The operations of ELI were allocated to multiple Zayo segments, with $75.1 million being allocated to Scott-Rice. The acquisition was funded through Zayos debt and Zayos cash on hand. The acquisition was considered a stock purchase for tax purposes.
Although Scott-Rice continued as the same legal entity after the acquisition of ELI, push-down accounting was not applied. Scott-Rices net assets were not adjusted for the fair value of goodwill, customer lists, and other intangible assets.
The table below reflects the acquisition date fair values of the assets and liabilities assumed allocated to Scott-Rice from Zayos Fiscal 2017 acquisition of ELI:
Cash | $ | 5,000 |
Other current assets |
| 59,957,979 |
Property and equipment | 12,757,245 | |
Deferred tax assets, net | 3,362,188 | |
Total assets acquired |
| 76,082,412 |
Current liabilities |
| 790,217 |
Deferred revenue |
| 228,719 |
Total liabilities assumed | 1,018,936 | |
Net assets acquired |
| 75,063,476 |
Less cash acquired |
| (5,000) |
Total consideration paid/payable | $ | 75,058,476 |
|
|
|
12
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(4) PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following as of March 31, 2108 and December 31, 2017:
| Estimated useful lives (years) |
|
March 31, 2018 |
|
December 31, 2017 |
| |||||
|
|
|
|
|
|
|
|
| |||
Land | N/A |
|
| $ | 218,421 |
| $ | 218,421 | |||
Building and leasehold improvements | 30 |
|
|
| 901,143 |
|
| 901,143 | |||
Automobiles | 5 to 6 |
|
|
| 47,171 |
|
| 47,171 | |||
Furniture, fixtures and equipment | 5 to 10 |
|
|
| 13,489 |
|
| 9,189 | |||
Computer hardware | 5 |
|
|
| 589,062 |
|
| 564,527 | |||
Software | 5 |
|
|
| 31,126 |
|
| 31,126 | |||
Machinery and equipment | 5 to 10 |
|
|
| 115,370 |
|
| 115,370 | |||
Telecommunication equipment | 5 to 13 |
|
|
| 8,567,715 |
|
| 8,360,697 | |||
Underground cable | 15 to 20 |
|
|
| 5,681,861 |
|
| 5,469,748 | |||
Construction in process | N/A |
|
|
| 6,632 |
|
| | |||
Total |
|
|
|
| 16,171,990 |
|
| 15,717,392 | |||
Less accumulated depreciation |
|
|
|
| (5,255,151) |
|
| (4,431,284) | |||
Property and equipment, net |
|
|
| $ | 10,916,839 |
| $ | 11,286,108 | |||
|
|
|
|
|
|
|
|
| |||
Depreciation is computed using the straight-line method based on the estimated service or remaining useful lives of the various classes of depreciable assets. Depreciation expense during the three months ended March 31, 2018 and during the one month ended March 31, 2017 totaled $823,890 and $448,449, respectively.
During the three months ended March 31, 2018, the Company capitalized $388,263 of direct labor costs to property and equipment accounts. During the one month ended March 31, 2017, the Company capitalized $135,258 of direct labor costs to property and equipment accounts.
(5) LONG-TERM DEBT
Guarantees
As of March 31, 2018, Zayo had $5.7 billion of long-term debt, including Notes Payable, Term Loan Facility, and Revolver. The long-term debt was payable through January 2027. As of March 31, 2018, no amounts were outstanding under the $500 million Revolver.
Zayos Notes Payable, Term Loan Facility, and Revolver are fully and unconditionally guaranteed, jointly and severally, by all of Zayos current and future domestic restricted subsidiaries.
13
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
Upon the closing of the sale of Scott-Rice to New Ulm Telecom, Inc., Scott-Rice will no longer be a guarantor of Zayos Notes Payable, Term Loan Facility, or Revolver.
Debt covenants
Zayos Notes Payable contain covenants that, among other things, restrict the ability of Zayo and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends, or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of Zayos restricted subsidiaries to pay dividends or make other payments to Zayo, consolidate, or merge with or into other companies, or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions. The terms of the Notes Payable include customary events of default.
Zayos Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a covenant, applicable only to the Revolver, that the Zayo maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires that Zayo and its subsidiaries comply with customary affirmative and negative covenants.
The Notes Payable indentures limit any increase in Zayos secured indebtedness to a pro forma secured debt ratio of 4.50 times Zayos previous quarters annualized modified EBITDA (as defined in the Notes Payable indentures), and limit Zayos incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarters annualized modified EBITDA.
Zayo was in compliance with all covenants associated with its debt agreements as of March 31, 2018.
14
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(6) INCOME TAXES
The Companys provision for income taxes from operations during the three months ended March 31, 2018 and the one month ended March 31, 2017 is summarized as follows:
| Three Months Ended March 31, 2018 |
| One Month Ended March 31, 2017 | ||||
|
|
|
|
|
|
| |
Current Income Taxes |
|
|
|
|
|
| |
Federal | $ | 343,228 |
|
| $ | 102,876 | |
State |
| 9,365 |
|
|
| 31,935 | |
Total |
| 352,593 |
|
|
| 134,811 | |
Deferred Income Taxes |
|
|
|
|
|
| |
Federal |
| 84,618 |
|
|
| 30,949 | |
State |
| 226,238 |
|
|
| 8,813 | |
Total |
| 310,856 |
|
|
| 39,762 | |
Total provision for income taxes | $ | 663,449 |
|
| $ | 174,573 | |
|
|
|
|
|
|
| |
On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform). U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%, created a territorial tax system with a one-time mandatory repatriation tax on previously deferred foreign earnings, and changed business-related deductions and credits.
Deferred income taxes were adjusted to reflect the new tax rates as of December 31, 2017. The final measurement of deferred income taxes will not be completed until the tax returns are actually filed.
(7) ACCRUED LIABILITIES
Accrued liabilities included in current liabilities as of March 31, 2018 and December 31, 2017 consisted of the following:
| March 31, 2018 |
| December 31, 2017 | ||
|
|
|
|
|
|
Accrued compensation and benefits | $ | 355,941 |
| $ | 277,934 |
Network expense accruals |
| 191,759 |
|
| 176,796 |
Other accrued taxes |
| 137,233 |
|
| 112,487 |
Other accruals |
| 268,383 |
|
| 331,643 |
Total accrued liabilities | $ | 953,316 |
| $ | 898,860 |
|
|
|
|
|
|
15
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(8) INVESTMENT EQUITY
Overview
All of Scott-Rices related party transactions with subsidiaries, divisions, and entities of Zayo (herein individually and collectively referred to as Zayo) were agreed to by Scott-Rice and Zayo. The costs for such services transferred to Scott-Rice are reflected in appropriate categories in the accompanying statement of during the three months ended March 31, 2018 and the one month ended March 31, 2017.
Net Contributions from Zayo
The significant components of net contributions from Zayo during the three months ended March 31, 2018 and the one month ended March 31, 2017 were as follows:
| Three Months Ended March 31, 2018 |
| One Month Ended March 31, 2017 | ||||||||
Investment in Scott-Rice | $ | |
| $ | 75,063,476 | ||||||
Allocation of expenses | 149,521 |
| 52,798 | ||||||||
Income taxes held by Zayo | 352,593 |
|
| 134,811 | |||||||
Dividend to Zayo |
| (2,111,322) |
| (60,371,222) | |||||||
Net contribution (to) from Zayo | $ | (1,609,208) |
| $ | 14,879,863 | ||||||
|
|
|
|
|
|
| |||||
The basis of allocation for items described above is as follows:
· Investment in Scott-Rice: Amount represents Zayos initial investment in Scott-Rice.
· Allocation of expenses: Zayo provides certain management and administrative services to each of its business units. See Note 11 for further discussion.
· Income taxes Zayo holds the income tax liabilities and deferred income taxes
· Dividend from parent: Scott-Rice transferred the amount due from Zayo via a dividend.
(9) EMPLOYEE SAVINGS PLAN
The Company maintains a defined contribution plan for eligible employees under Section 401(k) of the Internal Revenue Service (IRS) Code. All employees who meet the plan eligibility requirements may elect to participate in the plan by making contributions up to the maximum permissible IRS limit. The Company makes matching contributions limited to 50% of the participants contributions up to 2% of compensation. Savings plan expense was approximately $10,577 for the three months ended March 31, 2018 and $4,259 for the one month ended March 31, 2017.
(10) COMMITMENTS AND CONTINGENCIES
In the normal course of business, Scott-Rice is party to various outstanding legal proceedings, asserted and unasserted claims, and carrier disputes. In the opinion of management, the ultimate disposition of these matters, both asserted and unasserted, will not have a material adverse effect on Scott-Rices financial condition, results of operations, or cash flows.
16
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(11) RELATED PARTY TRANSACTIONS
Zayo provides certain management and administrative services to Scott-Rice. The costs for such services transferred to Scott-Rice are reflected in appropriate categories in the accompanying statements of during the three months ended March 31, 2018 and the one month ended March 31, 2017. Additionally, Zayo performs cash management functions on behalf of Scott-Rice. Scott-Rices cash needs are managed by Zayo on a daily basis. As a result, all of the charges and cost allocations to Scott-Rice covered by the centralized cash management functions were treated as a payable to Zayo. In addition, all of the cash receipts on behalf of Scott-Rice were deemed to be receivable from Zayo, as they were received.
The transactions to/from Zayo are generally recorded based on actual costs incurred, without a markup. The basis of allocation for items described above is as follows:
· Customer payments and other cash receipts: As indicated above, to the extent payments for other units are received by Scott-Rice, such amounts are applied to the corresponding customer accounts receivable and are reflected as cash contribution from Zayo.
· Allocation of expenses: Zayo provides certain management and administrative services to each of its business units. These costs include, but are not limited to, items such as general management and executive oversight, costs to support Scott-Rices information technology infrastructure, facilities, compliance, human resources, marketing, legal and finance functions, benefit plan administration, and risk management. These corporate allocations are based on one of two utilization measures: 1) full time equivalents and 2) revenue.
· Accounts payable and other payments: A portion of Scott-Rices cash disbursements for trade and other accounts payable and accrued expenses, are funded centrally by Zayo. Such transactions processed for trade and other accounts payable and accrued expenses associated with Scott-Rice are reflected as cash contribution from Zayo.
The significant components of the transactions with Zayos subsidiaries during the three months ended March 31, 2018 and the one month ended March 31, 2017 were as follows:
| Three Months Ended March 31, 2018 |
| One Month Ended March 31, 2017 | ||
Balance, beginning of period | $ | |
| $ | |
Receivable from ELI acquired March 1, 2017 |
| |
|
| 59,437,932 |
Customer payments and other cash receipts |
| (6,544,225) |
|
| 1,288,278 |
Allocation of expenses |
| 149,521 |
|
| 52,798 |
Accounts payable and other payments |
| 8,506,026 |
|
| (407,786) |
Dividend to Zayo |
| (2,111,322) |
|
| (60,371,222) |
Balance, end of period | $ | |
| $ | |
17
SCOTT-RICE TELEPHONE CO.
NOTES TO FINANCIAL STATEMENTS
(12) SUBSEQUENT EVENTS
On February 23, 2018, Zayo entered into an agreement to sell Scott-Rice Telephone Co., a Minnesota incumbent local exchange carrier , to New Ulm Telecom, Inc. (now known as Nuvera Communications, Inc. as a result of their name change on June 4, 2018) for $42.0 million.
18
EXHIBIT 99.3
Nuvera Communications, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements for the year ended December 31, 2017
Introduction to the Pro Forma Financial Statements
As previously disclosed¸ Nuvera completed the acquisition of Scott-Rice from Allstream Business U.S., LLC, and affiliate of Zayo Group Holdings, Inc. for approximately $42 million pursuant to the terms of the Stock Purchase Agreement dated as of February 22, 2018. This acquisition has resulted in a combined company that provides phone, video and internet services with over 66,000 connections in a number of Minnesota and Iowa communities.
The acquisition has been accounted for using the acquisition method of accounting in accordance with current standards. As a result, the fair value of the consideration paid, which consists of approximately $42 million in cash, has been allocated to the fair value of the assets and liabilities received. The allocation of the purchase price to Scott-Rices assets and liabilities has been based on preliminary estimates of fair values. This allocation is preliminary and further refinements are likely to be made. Criteria have been established in Accounting Standards Codification (ASC) 805, Business Combinations for determining whether intangible assets should be recognized separately from goodwill.
The following unaudited pro forma combined condensed financial statements are based on the historical financial statements of Nuvera and Scott-Rice after giving effect to the acquisition by Nuvera of Scott-Rice, and assumptions and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements. The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by Nuveras management as a result of the merger. In addition, the amounts reflected as increases for depreciation and amortization on the statement of income are due to the stepped-up basis of assets and other intangibles. While these amounts reduce net income, they do not affect cash flow for Nuvera.
1
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | ||||||||||||
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 2017 | ||||||||||||
ASSETS Historical | ||||||||||||
Nuvera Communications, Inc. Pro Forma Combined | ||||||||||||
Pro Forma Adjustments (Note 3) | ||||||||||||
Scott Rice Telephone Co. | ||||||||||||
Nuvera | ||||||||||||
CURRENT ASSETS: | ||||||||||||
Cash and Cash Equivalents | $ | 1,842,092 | $ | 4,513 | $ | - | $ | 1,846,605 | ||||
Other Current Assets | 4,871,188 | 734,551 | - | 5,605,739 | ||||||||
Total Current Assets | 6,713,280 | 739,064 | - | 7,452,344 | ||||||||
INVESTMENTS AND OTHER ASSETS: | ||||||||||||
Goodwill and Intangibles | 56,062,505 | - | 33,023,589 | (b), (c) | 89,086,094 | |||||||
Other Investments | 7,573,985 | 7,573,985 | ||||||||||
Deferred Income Taxes |
| - |
| 2,709,208 |
| (2,709,208) | (b) |
| - | |||
Total Investments and Other Assets |
| 63,636,490 |
| 2,709,208 |
| 30,314,381 |
| 96,660,079 | ||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||
Telecommunications Plant | 127,634,435 | 15,717,392 | - | 143,351,827 | ||||||||
Other Property | 17,750,364 | - | - | 17,750,364 | ||||||||
Video Plant |
| 10,440,379 |
| - |
| - |
| 10,440,379 | ||||
Total Property, Plant and Equipment | 155,825,178 | 15,717,392 | - | 171,542,570 | ||||||||
Less Accumulated Depreciation |
| 113,875,345 |
| 4,431,284 |
| - |
| 118,306,629 | ||||
Net Property, Plant and Equipment | 41,949,833 | 11,286,108 | - | 53,235,941 | ||||||||
TOTAL ASSETS | $ | 112,299,603 | $ | 14,734,380 | $ | 30,314,381 | $ | 157,348,364 | ||||
See accompanying notes to unaudited pro forma combined condensed financial statements. |
2
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | |||||||||||||
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET | |||||||||||||
DECEMBER 31, 2017 | |||||||||||||
LIABILITIES AND STOCKHOLDER'S EQUITY | |||||||||||||
Historical | Nuvera Communications, Inc. Pro Forma Combined | ||||||||||||
Scott Rice Telephone Co. | Pro Forma Adjustments (Note 3) | ||||||||||||
Nuvera | |||||||||||||
CURRENT LIABILITIES: | |||||||||||||
Current Portion of Long-Term Debt | $ | 3,315,822 | $ | - | $ | 2,388,000 | (a) | 5,703,822 | |||||
Other Accounts Payable & Accrued Liabilities |
| 5,209,168 |
| 1,109,984 |
| - |
| 6,319,152 | |||||
Total Current Liabilities | 8,524,990 | 1,109,984 | 2,388,000 | 12,022,974 | |||||||||
LONG-TERM DEBT, Less Current Portion |
| 24,022,465 |
| - |
| 39,612,000 | (a) |
| 63,634,465 | ||||
NONCURRENT LIABILITIES: | |||||||||||||
Loan Guarantees | 158,043 | - | - | 158,043 | |||||||||
Income Taxes | 10,318,689 | - | 1,854,792 | (b) | 12,173,481 | ||||||||
Other Accrued Liabilities | 194,458 | 83,985 | - | 278,443 | |||||||||
Other Deferred Credits | 632,225 | - | - | 632,225 | |||||||||
Total Noncurrent Liabilities |
| 11,303,415 |
| 83,985 |
| 1,854,792 |
| 13,242,192 | |||||
STOCKHOLDER'S EQUITY: | |||||||||||||
| |||||||||||||
Common Stock | 8,600,108 | - | - | ||||||||||
- | 8,600,108 | ||||||||||||
Paid in Capital | - | - | - | - | |||||||||
Accumulated other Comprehensive Income (Loss) | 20,135 | - | - | 20,135 | |||||||||
Unearned Compensation | 13,620 | 13,620 | |||||||||||
Retained Earnings | 59,814,870 | 13,540,411 | (13,540,411) | (c) | 59,814,870 | ||||||||
Total Stockholder's Equity | 68,448,733 | 13,540,411 | (13,540,411) | 68,448,733 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 112,299,603 | $ | 14,734,380 | $ | 30,314,381 | $ | 157,348,364 | |||||
See accompanying notes to unaudited pro forma combined condensed financial statements. |
3
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | |||||||||||||
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS | |||||||||||||
YEAR ENDED DECEMBER 31, 2017 | |||||||||||||
Nuvera Communications, Inc. Pro Forma Combined | |||||||||||||
Historical | |||||||||||||
Pro Forma Adjustments (Note 2) | |||||||||||||
Scott Rice Telephone Co. | |||||||||||||
Nuvera | |||||||||||||
OPERATING REVENUES: | |||||||||||||
Operating Revenues | $ | 46,889,181 | $ | 15,290,171 | $ | 62,179,352 | |||||||
Total Operating Revenues |
| 46,889,181 |
| 15,290,171 |
| - |
| 62,179,352 | |||||
OPERATING EXPENSES: | |||||||||||||
Plant Operations, Excluding Depreciation and Amortization | 20,591,004 | 2,629,533 | 23,220,537 | ||||||||||
Depreciation and Amortization | 9,652,754 | 5,899,309 | 1,164,288 | (e) | 16,716,351 | ||||||||
Selling, General and Administrative |
| 7,185,340 |
| 3,591,820 |
|
|
| 10,777,160 | |||||
Total Operating Expenses |
| 37,429,098 |
| 12,120,662 |
| 1,164,288 |
| 50,714,048 | |||||
OPERATING INCOME | 9,460,083 | 3,169,509 | (1,164,288) | 11,465,304 | |||||||||
OTHER INCOME (EXPENSES): | |||||||||||||
Interest During Construction | 76,705 | - | - | 76,705 | |||||||||
Interest Expense | (1,192,241) | (150) | (2,137,800) | (d) | (3,330,191) | ||||||||
Interest Income | 97,996 |
| - | 97,996 | |||||||||
CoBank Patronage Dividend | 337,137 |
| - | 337,137 | |||||||||
Other Investment Income | 371,241 | 20,497 | - | 391,738 | |||||||||
Total Other Income (Expenses) |
| (309,162) |
| 20,347 |
| (2,137,800) |
| (2,426,615) | |||||
INCOME BEFORE INCOME TAXES | 9,150,921 | 3,189,856 | (3,302,088) | 9,038,689 | |||||||||
INCOME TAXES | (803,315) | 2,183,061 | (924,585) | (f) | 455,161 | ||||||||
NET INCOME | $ | 9,954,236 | $ | 1,006,795 | $ | (2,377,503) | $ | 8,583,528 | |||||
BASIC AND DILUTED NET INCOME PER SHARE | $ | 1.93 | $ | 0.20 | $ | (0.46) | $ | 1.67 | |||||
DIVIDENDS PER SHARE | $ | 0.40 | $ | - | $ | - | $ | 0.40 | |||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
| 5,153,579 |
| 5,153,579 |
| 5,153,579 |
| 5,153,579 | |||||
See accompanying notes to unaudited pro forma combined condensed financial statements. |
4
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Note 1 The Acquisition of Scott-Rice
As previously disclosed¸ Nuvera completed the acquisition of Scott-Rice from Allstream Business U.S., LLC, and affiliate of Zayo Group Holdings, Inc. for approximately $42 million pursuant to the terms of the Stock Purchase Agreement dated as of February 22, 2018. This acquisition has resulted in a combined company that provides phone, video and internet services with over 66,000 connections in a number of Minnesota and Iowa communities.
The acquisition has been accounted for using the acquisition method of accounting in accordance with current standards. As a result, the fair value of the consideration paid, which consists of approximately $42 million in cash, has been allocated to the fair value of the assets and liabilities received. This allocation is preliminary and further refinements are likely to be made. Criteria have been established in Accounting Standards Codification (ASC) 805, Business Combinations for determining whether intangible assets should be recognized separately from goodwill.
The unaudited pro forma combined condensed balance sheet and statements of income are not necessarily indicative of the financial position and operating results that would have been achieved had the acquisition been completed as of January 1, 2017. They should not be construed as being a representation of financial position or future operating results of the combined companies. The unaudited pro forma combined condensed financial information gives effect only to the adjustments set forth in the accompanying notes and does not reflect any integration or acquisition related costs, or any potential cost savings or other synergies that management expects to realize as a result of the merger.
The accompanying unaudited pro forma combined condensed balance sheet of Nuvera and Scott-Rice gives effect to the acquisition of Scott-Rice as if it had occurred on December 31, 2017. The unaudited pro forma combined condensed balance sheets are based on each entitys respective historical financial statements. The unaudited pro forma combined condensed balance sheets should be read in conjunction with Nuveras audited consolidated financial statements and notes, presented in Nuveras Annual Report on Form 10-K for the year ended December 31, 2017 that was filed on March 15, 2018 with the Securities and Exchange Commission (SEC), and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 that was files on May 15, 2018 with the SEC.
The accompanying unaudited pro forma combined condensed statements of income of Nuvera and Scott-Rice gives effect to the acquisition of Scott-Rice as if it had occurred on January 1, 2017. The statements reflect the unaudited pro forma combined condensed results of operations of Scott-Rice for the year ended December 31, 2017 combined with the unaudited pro forma combined condensed results of operations of Nuvera for the year ended December 31, 2017. The unaudited pro forma combined condensed statements of income are based on each entitys respective historical financial statements. The unaudited pro forma combined condensed statement of income should be read in conjunction with Nuveras audited consolidated financial statements and notes, together with managements discussion and analysis of financial condition and results of operations, presented in Nuveras Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 15, 2018 and Nuveras Quarterly Report on Form 10-Q for the three month period ended March 31, 2018 filed on May 15, 2018 with the SEC.
The unaudited pro forma combined condensed statements of income are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations that would have actually been reported had the acquisition occurred as of January 1, 2017 for statement of income purposes, nor are they necessarily indicative of the future financial position or results of operations of the combined companies.
The unaudited pro forma combined condensed statement of income includes adjustments, which are based upon preliminary estimates, to reflect the allocation of purchase consideration to the acquired assets and liabilities of Scott-Rice. The pro forma adjustments are based upon information and assumptions available at the time of the filing of this report. The unaudited pro forma combined condensed statement of income does not include the realization of cost savings from operating efficiencies or synergies that may result from the acquisition.
5
Note 2 Allocation of the Fair Value of Scott-Rice Acquisition
The allocation of the purchase price for the Scott-Rice assets and liabilities has been based on the fair value of the purchased assets and liabilities as if the transaction had taken place on December 31, 2017. GAAP establishes criteria for determining whether intangible assets should be recognized separately from goodwill. GAAP states that goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment on at least an annual basis.
The preliminary allocation of the acquisition value of Scott-Rice is shown below:
Current assets | $ | 739,064 |
Property, plant and equipment | 11,286,108 | |
Customer relationship intangible | 16,300,000 | |
Excess costs over net assets acquired (Goodwill) | 16,723,589 | |
Current liabilities | (1,109,984) | |
Deferred income taxes | (1,854,792) | |
Deferred liabilities |
| (83,985) |
Purchase price allocation | 42,000,000 | |
Less cash acquired | (4,513) | |
Total Consideration for Acquisition | $ | 41,995,487 |
Note 3 Adjustments to Unaudited Pro Forma Combined Condensed Financial Statements
The adjustments to the unaudited pro forma combined condensed balance sheet as of December 31, 2017 and the pro forma combined condensed statement of income for the year ended December 31, 2017 in connection to the acquisition of Scott-Rice are presented below:
Adjustments to Unaudited Pro Forma Combined Condensed Balance Sheet as of December 31, 2017
(a) This adjustment is to reflect the financing from CoBank, ACB to fund the purchase of Scott-Rice.
(b) This adjustment reflects the deferred income tax effect of the fair value adjustment for other intangibles, and the reclassification of the deferred income tax asset.
(c) This adjustment reflects the approximately $42 million paid for Scott-Rice, the recording of Goodwill and Intangibles, and the elimination of historical Scott-Rice equity.
6
Adjustments to the Unaudited Pro Forma Combined Condensed Statement of Income
(d) This adjustment reflects additional estimated interest expense due to additional Nuvera financing from CoBank, ACB in relation to the Scott-Rice acquisition. Interest expense is calculated as if the additional borrowings had occurred on January 1, 2017 and the interest rate is based on the anticipated variable interest rate we will paid CoBank on our new credit facility.
(e) This adjustment reflects estimated amortization expense of $1,164,288 for definitely lived intangible assets for the year ended December 31, 2017.
(f) This adjustment reflects the estimated income tax effect of the above statement of income adjustments.
Note 4 Items Not Adjusted
The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by Nuveras management as a result of the merger.
7
EXHIBIT 99.4
Nuvera Communications, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements for the three months ended March 31, 2018
Introduction to the Pro Forma Financial Statements
As previously disclosed¸ Nuvera completed the acquisition of Scott-Rice from Allstream Business U.S., LLC, and affiliate of Zayo Group Holdings, Inc. for approximately $42 million pursuant to the terms of the Stock Purchase Agreement dated as of February 22, 2018. This acquisition has resulted in a combined company that provides phone, video and internet services with over 66,000 connections in a number of Minnesota and Iowa communities.
The acquisition has been accounted for using the acquisition method of accounting in accordance with current standards. As a result, the fair value of the consideration paid, which consists of approximately $42 million in cash, has been allocated to the fair value of the assets and liabilities received. This allocation is preliminary and further refinements are likely to be made. Criteria have been established in Accounting Standards Codification (ASC) 805, Business Combinations for determining whether intangible assets should be recognized separately from goodwill.
The following unaudited pro forma combined condensed financial statements are based on the historical financial statements of Nuvera and Scott-Rice after giving effect to the acquisition by Nuvera of Scott-Rice, and assumptions and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements. The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by Nuveras management as a result of the merger. In addition, the amounts reflected as increases for depreciation and amortization on the statement of income are due to the stepped-up basis of assets and other intangibles. While these amounts reduce net income, they do not affect cash flow for Nuvera.
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | |||||||||||
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET MARCH 31, 2018 | |||||||||||
| ASSETS |
|
|
|
|
| |||||
Historical | Nuvera Communications, Inc. Pro Forma Combined | ||||||||||
Pro Forma Adjustments (Note 3) | |||||||||||
Nuvera | Scott Rice Telephone Co. | ||||||||||
CURRENT ASSETS: | |||||||||||
Cash and Cash Equivalents | $ | 3,201,992 | $ | 3,004 | $ | | $ | 3,204,996 | |||
Other Current Assets |
| 4,640,900 |
| 591,374 |
| |
| 5,232,274 | |||
Total Current Assets |
| 7,842,892 |
| 594,378 |
| |
| 8,437,270 | |||
INVESTMENTS AND OTHER ASSETS: | |||||||||||
Goodwill and Intangibles | 55,473,734 | | 33,936,913 | (b), (c) | 89,410,647 | ||||||
Other Investments | 7,745,942 | | | 7,745,942 | |||||||
Deferred Income Taxes |
| |
| 2,398,352 |
| (2,398,352) | (b) |
| | ||
Total Investments and Other Assets |
| 63,219,676 |
| 2,398,352 |
| 31,538,561 |
| 97,156,589 | |||
PROPERTY, PLANT AND EQUIPMENT: | |||||||||||
Telecommunications Plant | 128,206,890 | 16,171,990 | | 144,378,880 | |||||||
Other Property | 18,587,969 | | | 18,587,969 | |||||||
Video Plant |
| 10,477,052 |
| |
| |
| 10,477,052 | |||
Total Property, Plant and Equipment | 157,271,911 | 16,171,990 | | 173,443,901 | |||||||
Less Accumulated Depreciation | 115,484,070 |
| 5,255,151 |
| |
| 120,739,221 | ||||
Net Property, Plant and Equipment |
| 41,787,841 |
| 10,916,839 |
| |
| 52,704,680 | |||
TOTAL ASSETS | $ | 112,850,409 | $ | 13,909,569 | $ | 31,538,561 | $ | 158,298,539 | |||
See accompanying notes to unaudited pro forma combined condensed financial statements. |
2
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | ||||||||||||
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET MARCH 31, 2018 | ||||||||||||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||||||
Historical |
|
| Nuvera Communications, Inc. Pro Forma Combined | |||||||||
Pro Forma Adjustments (Note 3) | ||||||||||||
Scott Rice Telephone Co. | ||||||||||||
Nuvera | ||||||||||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Current Portion of Long-Term Debt | $ | 3,315,822 | $ | | $ | 2,388,000 | (a) |
| 5,703,822 | |||
Other Accounts Payable & Accrued Liabilities |
| 5,235,995 |
|
| 1,200,622 |
|
| |
|
|
| 6,436,617 |
Total Current Liabilities |
| 8,551,817 |
| 1,200,622 |
| 2,388,000 |
|
| 12,140,439 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, Less Current Portion |
| 23,362,260 |
| |
| 39,612,000 | (a) |
|
| 62,974,260 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES: |
| |||||||||||
Loan Guarantees |
| 151,434 |
|
| |
|
| |
|
|
| 151,434 |
Income Taxes | 10,317,092 | | 2,165,648 | (b) |
| 12,482,740 | ||||||
Other Accrued Liabilities |
| 185,619 |
|
| 81,860 |
|
| |
|
|
| 267,479 |
Other Deferred Credits |
| 624,505 |
| |
| |
| 624,505 | ||||
Total Noncurrent Liabilities |
| 11,278,650 |
|
| 81,860 |
|
| 2,165,648 |
|
|
| 13,526,158 |
STOCKHOLDER'S EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Common Stock |
| 8,607,123 |
|
| |
|
| |
|
|
|
|
| 8,607,123 | |||||||||||
Paid in Capital |
| |
|
| |
|
| |
|
|
| |
Accumulated other Comprehensive Income (Loss) | 16,135 | | | 16,135 | ||||||||
Unearned Compensation |
| 21,792 |
|
|
|
|
|
|
|
|
| 21,792 |
Retained Earnings |
| 61,012,632 |
| 12,627,087 |
| (12,627,087) | (c) |
| 61,012,632 | |||
Total Stockholder's Equity |
| 69,657,682 |
|
| 12,627,087 |
|
| (12,627,087) |
|
|
| 69,657,682 |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 112,850,409 |
| $ | 13,909,569 |
| $ | 31,538,561 |
|
| $ | 158,298,539 |
See accompanying notes to unaudited pro forma combined condensed financial statements. |
3
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | ||||||||||||
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS | ||||||||||||
Historical | Communications, Inc. Pro Forma Combined | |||||||||||
Pro Forma Adjustments (Note 2) | ||||||||||||
Scott Rice Telephone Co. | ||||||||||||
Nuvera | ||||||||||||
OPERATING REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues | $ | 11,613,186 | $ | 3,725,396 | $ | 15,338,582 | ||||||
Total Operating Revenues |
| 11,613,186 |
|
| 3,725,396 |
|
| |
|
|
| 15,338,582 |
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Plant Operations, Excluding Depreciation and |
| 5,244,764 |
|
| 624,775 |
|
|
|
|
|
| 5,869,539 |
Depreciation and Amortization | 2,255,848 | 823,890 | 291,072 | (e) |
| 3,370,810 | ||||||
Selling, General and Administrative |
| 1,965,016 |
|
| 917,814 |
|
|
|
|
|
| 2,882,830 |
Total Operating Expenses |
| 9,465,628 |
| 2,366,479 |
| 291,072 |
|
| 12,123,179 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
| 2,147,558 |
| 1,358,917 |
| (291,072) |
|
| 3,215,403 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
| |||||||||||
Interest During Construction |
| 31,845 |
|
| |
|
| |
|
|
| 31,845 |
Interest Expense | (286,935) | (66) | (534,450) | (d) |
| (821,451) | ||||||
Interest Income |
| 53,861 |
|
|
|
|
| |
|
|
| 53,861 |
CoBank Patronage Dividend | 290,895 |
| |
| 290,895 | |||||||
Other Investment Income |
| 54,541 |
|
| 482 |
|
| |
|
|
| 55,023 |
Total Other Income (Expenses) |
| 144,207 |
| 416 |
| (534,450) |
|
| (389,827) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES | 2,291,765 | 1,359,333 | (825,522) |
| 2,825,576 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES |
| 641,692 |
| 663,449 |
| (231,146) | (f) |
|
| 1,073,995 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME | $ | 1,650,073 | $ | 695,884 | $ | (594,376) | $ | 1,751,581 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET INCOME PER SHARE | $ | 0.32 |
| $ | 0.13 |
| $ | (0.12) |
|
| $ | 0.34 |
DIVIDENDS PER SHARE | $ | 0.10 |
| $ | |
| $ | |
|
| $ | 0.10 |
WEIGHTED AVERAGE |
| 5,161,468 |
|
| 5,161,468 |
|
| 5,161,468 |
|
|
| 5,161,468 |
See accompanying notes to unaudited pro forma combined condensed financial statements. |
4
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Note 1 The Acquisition of Scott-Rice
As previously disclosed¸ Nuvera completed the acquisition of Scott-Rice from Allstream Business U.S., LLC, and affiliate of Zayo Group Holdings, Inc. for approximately $42 million pursuant to the terms of the Stock Purchase Agreement dated as of February 22, 2018. This acquisition has resulted in a combined company that provides phone, video and internet services with over 66,000 connections in a number of Minnesota and Iowa communities.
The unaudited pro forma combined condensed balance sheet and statements of income are not necessarily indicative of the financial position and operating results that would have been achieved had the acquisition been completed as of January 1, 2018. They should not be construed as being a representation of financial position or future operating results of the combined companies. The unaudited pro forma combined condensed financial information gives effect only to the adjustments set forth in the accompanying notes and does not reflect any integration or acquisition related costs, or any potential cost savings or other synergies that management expects to realize as a result of the merger.
The accompanying unaudited pro forma combined condensed balance sheet of Nuvera and Scott-Rice gives effect to the acquisition of Scott-Rice as if it had occurred on March 31, 2018. The unaudited pro forma combined condensed balance sheets are based on each entitys respective historical financial statements. The unaudited pro forma combined condensed balance sheets should be read in conjunction with Nuveras audited consolidated financial statements and notes, presented in Nuveras Annual Report on Form 10-K for the year ended December 31, 2017 that was filed on March 15, 2018 with the Securities and Exchange Commission (SEC), and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 that was files on May 15, 2018 with the SEC.
The accompanying unaudited pro forma combined condensed statements of income of Nuvera and Scott-Rice gives effect to the acquisition of Scott-Rice as if it had occurred on January 1, 2017. The statements reflect the unaudited pro forma combined condensed results of operations of Scott-Rice for the year ended March 31, 2018 combined with the unaudited pro forma combined condensed results of operations of Nuvera for the quarter ended March 31, 2018 are presented. The unaudited pro forma combined condensed statements of income are based on each entitys respective historical financial statements. The unaudited pro forma combined condensed statement of income should be read in conjunction with Nuveras audited consolidated financial statements and notes, together with managements discussion and analysis of financial condition and results of operations, presented in Nuveras Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 15, 2018 and Nuveras Quarterly Report on Form 10-Q for the three month period ended March 31, 2018 filed on May 15, 2018 with the SEC.
The unaudited pro forma combined condensed statements of income are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations that would have actually been reported had the acquisition occurred as of January 1, 2018 for statement of income purposes, nor are they necessarily indicative of the future financial position or results of operations of the combined companies.
The unaudited pro forma combined condensed statement of income includes adjustments, which are based upon preliminary estimates, to reflect the allocation of purchase consideration to the acquired assets and liabilities of Scott-Rice. The pro forma adjustments are based upon information and assumptions available at the time of the filing of this report. The unaudited pro forma combined condensed statement of income does not include the realization of cost savings from operating efficiencies or synergies that may result from the acquisition.
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Note 2 Allocation of the Fair Value of Scott-Rice Acquisition
The allocation of the purchase price for the Scott-Rice assets and liabilities has been based on the fair value of the purchased assets and liabilities as if the transaction had taken place on March 31, 2018. GAAP establishes criteria for determining whether intangible assets should be recognized separately from goodwill. GAAP states that goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment on at least an annual basis.
The preliminary allocation of the acquisition value of Scott-Rice is shown below:
Current assets | $ | 594,378 |
Property, plant and equipment | 10,916,839 | |
Customer relationship intangible | 16,300,000 | |
Excess costs over net assets acquired (Goodwill) | 17,636,913 | |
Current liabilities | (1,200,622) | |
Deferred income taxes | (2,165,648) | |
Deferred liabilities |
| (81,860) |
Purchase price allocation | 42,000,000 | |
Less cash acquired | (3,004) | |
|
| |
Total Consideration for Acquisition | $ | 41,996,996 |
Note 3 Adjustments to Unaudited Pro Forma Combined Condensed Financial Statements
The adjustments to the unaudited pro forma combined condensed balance sheet as of March 31, 2018 and the pro forma combined condensed statement of income for the quarter ended March 31, 2018, in connection to the acquisition of Scott-Rice are presented below:
Adjustments to Unaudited Pro Forma Combined Condensed Balance Sheet as of March 31, 2018
(a) This adjustment is to reflect the financing from CoBank, ACB to fund the purchase of Scott-Rice.
(b) This adjustment reflects the deferred income tax effect of the fair value adjustment for other intangibles, and the reclassification of the deferred income tax asset.
(c) This adjustment reflects the approximately $42 million paid for Scott-Rice, the recording of Goodwill and Intangibles, and the elimination of historical Scott-Rice equity.
Adjustments to the Unaudited Pro Forma Combined Condensed Statement of Income
(d) This adjustment reflects additional estimated interest expense due to additional Nuvera financing from CoBank, ACB in relation to the Scott-Rice acquisition. Interest expense is calculated as if the additional borrowings had occurred on January 1, 2018 and the interest rate is based on the anticipated variable interest rate we will pay CoBank on our new credit facility.
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(e) This adjustment reflects estimated amortization expense of $291,072 for definitely lived intangible assets for the three months ended March 31, 2018.
(f) This adjustment reflects the estimated income tax effect of the above statement of income adjustments.
Note 4 Items Not Adjusted
The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by Nuveras management as a result of the merger.
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