Note 3 - Impairments

12 Months Ended

Dec. 31, 2012

3. Impairments

ASC 350 requires that goodwill be tested for impairment annually, unless potential interim indicators exist that could result in impairment. During the second quarter of 2012, an interim goodwill impairment test was performed in response to indicators revealed in the annual forecasting process. The forecast included the non-renewal of the TW contract beyond its December 31, 2012 expiration date and the impact of the recent FCC reform. Forecasted operating profits were reduced below the levels projected during the fourth quarter of 2011 and first quarter of 2012.

The FCC’s Intercarrier Compensation order, released in November 2011, has and will significantly change the way telecommunication carriers receive compensation for exchanging traffic. Over the next three years, all intrastate rates that exceed the interstate rate will be reduced to the interstate rate. Beginning in 2014, the interstate rate will be reduced over three years to “bill and keep” in which carriers bill their customers for services and keep those charges but neither pay for or receive compensation from traffic sent to or received from other carriers. In addition, subsidies to carriers serving high cost areas will be phased out over an extended period.

The Company performed an impairment test on each reporting unit (Alabama, Missouri, and New England) using the two step approach prescribed in ASC 350. Step one compares the fair value of each reporting unit to its carrying value. Fair value was calculated using a blended analysis of the income approach and the market approach of valuation. The Company believes the blended approach is the best method for determining fair value because this approach compensates for inherent risk associated with either model on a stand-alone basis. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. The impact of the non-renewal of the TW contract impacts the New England reporting unit. The FCC’s Intercarrier Compensation order impacts all three reporting units with the largest impact being in New England in 2012 and all reporting units in 2013. In addition, the FCC’s Intercarrier Compensation order is likely to have an impact on the market valuation of all wireline telecommunications businesses, including the Company, as future revenue streams are reduced.

The income approach method utilized was the discounted cash flow method. This method requires the use of estimates and judgments about the future cash flows of the reporting units. Although cash flow forecasts are based on assumptions that are consistent with plans and estimates used to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes, tax rates, capital spending, discount rate and working capital changes. The market approach method employed in the analysis was the public company method. This method is based on a comparison of the Company to comparable publicly traded firms in similar lines of business. The estimates and judgments used to determine comparable companies include such factors as size, growth, profitability, risk and return on investment.

The Company determined that the fair value of the three reporting units was below its carrying value, which necessitated a step two review to determine whether or not to record a charge to goodwill impairment. The step two review involved determining the fair value of the identifiable net assets of each reporting unit, excluding goodwill, and comparing this to the fair value from step one. The Company performed its interim goodwill impairment testing as of April 30, 2012 and recorded impairment charges of $62,404,000, $12,071,000 and $69,523,000 to reduce the carrying value of goodwill to its implied fair value for its three reporting units: Alabama, Missouri and New England, respectively. In third quarter 2012, the New England impairment charges were reduced by $344,256 due to an adjustment related to the STC acquisition. See note 4, Acquisitions, below.

The changes in the carrying amounts of goodwill for the twelve months ended December 31, 2012 are as follows:

	Alabama Reporting Unit			Missouri Reporting Unit			New England Reporting Unit			Total

Balance as of December 31, 2011
Goodwill	$	101,602,718		$	17,829,122		$	69,523,000		$	188,954,840
Accumulated impairment losses		-			-			-			-
		101,602,718			17,829,122			69,523,000			188,954,840

Adjustment related to STC acquisition (1)		-			-			(344,256	)		(344,256	)
Impairment losses		(62,404,000	)		(12,071,000	)		(69,178,744	)		(143,653,744	)

Balance as of December 31, 2012
Goodwill		101,602,718			17,829,122			69,178,744			188,610,584
Accumulated impairment losses		(62,404,000	)		(12,071,000	)		(69,178,744	)		(143,653,744	)
	$	39,198,718		$	5,758,122		$	-		$	44,956,840

(1) Third quarter 2012, Adjustment to the finalized purchase price allocation of the STC acquisition. See Note 4, Acquisitions, below.

During the impairment review, the Company determined that the fair value of the New England reporting unit’s intangible assets was below its carrying value. Fair value of intangible assets was calculated using the income approach of valuation. The Company recorded an impairment charge of $5,748,000 to reduce the carrying value of intangible assets to its implied fair value for its New England reporting unit

The changes in the carrying amount of intangible assets for the twelve months ended December 31, 2012, are as follows:

	Alabama Reporting Unit			Missouri Reporting Unit			New England Reporting Unit			Total

Balance as of December 31, 2011
Intangible assets	$	128,441		$	356,384		$	20,060,866		$	20,545,691
Accumulated impairment losses		-			-			-			-
		128,441			356,384			20,060,866			20,545,691

Amortization		(48,068	)		(120,000	)		(7,959,231	)		(8,127,299	)
Impairment losses		-			-			(5,748,000	)		(5,748,000	)

Balance as of December 31, 2012
Intangible assets		80,373			236,384			12,101,635			12,418,392
Accumulated impairment losses		-			-			(5,748,000	)		(5,748,000	)
Intangible asset adjusted cost basis	$	80,373		$	236,384		$	6,353,635		$	6,670,392

Prior to completing the ASC 350 testing, the Company determined the fair value of property and equipment in the New England reporting unit was below its carrying value in accordance with ASC 360, Property, Plant and Equipment. Fair value of property and equipment was calculated primarily by using the indirect cost approach. This method requires estimates and judgments about asset replacement cost, including physical deterioration, functional obsolescence and economic obsolescence. The Company recorded an impairment charge of $2,874,000 to reduce the carrying value of property and equipment to its implied fair value for its New England reporting unit.