Note 2 - Reorganization

6 Months Ended

Jun. 30, 2013

Reorganizations [Abstract]

Reorganization under Chapter 11 of US Bankruptcy Code Disclosure [Text Block]

2.            Reorganization

On March 24, 2013 (the “Petition Date”), the Company and each of its direct and indirect subsidiaries filed voluntary petitions for reorganization (the “Reorganization Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to effectuate their prepackaged Chapter 11 plan of reorganization (the “Plan”). The Reorganization Cases were jointly administered under the caption “In re Otelco Inc., et al.,” Case No. 13-10593.

On May 6, 2013, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. On May 24, 2013 (the “Effective Date”), the Company and its direct and indirect subsidiaries substantially consummated their reorganization through a series of transactions contemplated by the Plan, and the Plan became effective pursuant to its terms.

Summary of the Material Features of the Plan

Pursuant to the Plan, on the Effective Date, among other things:

● the $162.0 million of outstanding principal loan obligations under the Company’s senior credit facility were reduced to $133.3 million through a cash payment;

● the holders of the outstanding principal term loan obligations under the Company’s senior credit facility, or affiliates thereof, received their pro rata share of the Company’s Class B common stock, which Class B common stock represents 7.5% of the total economic and voting interest in the Company, subject to dilution of up to 10% on account of the issuance of equity interests in the Company pursuant to a management equity plan (the “Management Equity Plan”) that was adopted by the Company’s board of directors on June 18, 2013, that was approved by the holders of Class B common stock on July 12, 2013 and which will be voted on by the holders of Class A common stock at the Company’s annual meeting of stockholders to be held on August 13, 2013 (the “Annual Meeting”);

● all the Company’s outstanding 13% Senior Subordinated Notes due 2019 (the “Notes”) were cancelled and the holders received their pro rata share of the Company’s Class A common stock, which Class A common stock represents 92.5% of the total economic and voting interest in the Company, subject to dilution of up to 10% on account of the issuance of equity interests in the Company pursuant to the Management Equity Plan; and

● all outstanding shares of the Company’s existing Class A common stock (the “Old Common Stock”) were cancelled.

Income Deposit Securities

Prior to the Effective Date, each share of the Company’s Old Common Stock was held as a component of the Company’s Income Deposit Securities (“IDS”). Each IDS consisted of one share of the Company’s Old Common Stock and $7.50 principal amount of Notes. On the Effective Date, all outstanding Old Common Stock and Notes were cancelled.

Issued and Outstanding Shares

As of the Effective Date, a total of 2,870,948 shares of the Company’s Class A common stock and 232,780 shares of the Company’s Class B common stock were issued and outstanding, and 232,780 shares of Class A common stock were reserved for future issuance upon the conversion of Class B common stock. In addition, 344,859 shares of Class A common stock have been reserved for future issuance under the Management Equity Plan.

Senior Credit Facility

On the Effective Date, the Company amended and restated its senior credit facility. The Company’s senior credit facility, as amended and restated, is comprised of:

● term loans of $133.3 million; and

● a revolving loan commitment in an amount of up to $5.0 million.

As of the Effective Date, the term loan facility was fully drawn and no amounts were drawn under the revolving credit facility. Amounts drawn under the term loan facility that are subsequently repaid or prepaid may not be re-borrowed. Amounts drawn under the revolving credit facility may be borrowed, repaid and re-borrowed until the earliest of: (1) April 30, 2016; (2) the date of termination of the lenders’ obligations to make advances or permit existing loans to remain outstanding in the case of an event of default; and (3) the date of indefeasible payment in full by the Company of the loans and the permanent reduction of the commitments to zero dollars (the “Maturity Date”).

The term loan facility requires amortized repayments of the principal amount of the term loans at a straight-line rate of 5.0% per annum of the principal amount of term loans outstanding on the Effective Date on the last day of March, June, September and December of each year, commencing on September 30, 2013. Beginning with the full fiscal quarter ending September 30, 2013, on each date that is 45 days after the last day of each fiscal quarter, the term loan facility also requires repayments of the principal amount of the term loans in an amount equal to 75% of the Excess Cash (as defined in the senior credit facility) of the Company as of the last day of each such fiscal quarter. However, such repayment will be reduced to an amount equal to 50% of the Excess Cash of the Company if, on the applicable quarterly repayment date, the Company’s ratio of debt to Consolidated EBITDA (as defined in the senior credit facility) is less than or equal to 2.25:1.00. The entire remaining principal balance of the term loans, as well as any outstanding borrowings under the revolving loan facility, will be due and payable in full on the Maturity Date.

Interest rates applicable to the term loans and the revolving loans are set at a margin over an index rate (which is defined as the highest of (1) the prime rate, (2) the federal funds rate plus 50 basis points per annum and (3) 4.25% per annum) or a LIBOR rate (which is defined as the higher of (a) 3.0% per annum and (b) LIBOR). The applicable margin under the index rate option is 3.25% per annum and the applicable margin under the LIBOR rate option is 3.5%. The Company is required to pay certain fees, including fees on undrawn committed amounts, in connection with the senior credit facility.

Financial Reporting of Reorganization

Financial Accounting Standards Board Accounting Standards Codification 852, Reorganization (“ASC 852”), requires that the financial statements for periods subsequent to the filing of the Reorganization Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations. In addition, cash provided by and used for reorganization items must be disclosed separately. The Company has applied ASC 852 effective as of the Petition Date, and has segregated those items as outlined above for all reporting periods subsequent to such date. The Company has applied ASC 852 effective as of the Petition Date, and has segregated those items as outlined above for all reporting periods subsequent to such date. The Company’s emergence from bankruptcy did not qualify for fresh-start accounting in accordance with ASC 852, as more than fifty percent of the Company’s new Class A common stock is held by persons who also held the Company’s old Class A common stock through IDS ownership. Company’s emergence from bankruptcy did not qualify for fresh-start accounting in accordance with the ASC 852, as more than fifty percent of the Company’s new Class A common stock is held by persons who also held the Company’s old Class A common stock through IDS ownership.

Implementation of the Plan in the Company’s consolidated balance sheet as of May 24, 2013 is as follows:

Cash and cash equivalents	$	(28,700,000	)
Current maturity of long-term notes payable		(6,665,000	)
Long-term notes payable, net of current maturity		(126,635,000	)
Liabilities subject to compromise		278,984,912		(a)
Old Class A common stock		132,214
New Class A common stock		(28,709	)
New Class B common stock		(2,328	)
Additional paid-in capital		(2,875,853	)
Retained deficit		(114,210,236	)	(b)
	$	—

(a) Liabilities subject to compromise refer to liabilities incurred prior to the Petition Date for which the Company had not received approval from the Bankruptcy Court to pay or otherwise honor. Liabilities not subject to compromise include: (1) liabilities incurred after the Petition Date; (2) pre-Petition Date liabilities that the Company expects to pay in full, such as medical and retirement benefits; and (3) pre-Petition Date liabilities that have been approved for payment by the Bankruptcy Court and that the Company expects to pay (in advance of a plan of reorganization) in the ordinary course of business, including certain employee-related items such as salaries and vacation pay. Liabilities subject to compromise at May 24, 2013, prior to reorganization, consist of the following (unaudited):

	Pre-confirmation
	May 24, 2013
Senior secured credit facility(a)	$	161,537,418
Senior subordinated notes – held in IDS(b)		98,513,017
Senior subordinated notes – held separately(c)		8,385,769
Accrued interest
Senior subordinated notes – held in IDS		9,715,868
Senior subordinated notes – held separately		832,840
Total liabilities subject to compromise	$	278,984,912

^(a)    Net of $462,582 loan cost.

^(b)    Net of $1,945,745 loan cost and premium of $1,298,231.

^(c)    Net of $114,231 loan cost.

(b) Represents amounts recorded for the implementation of the Plan on the Effective Date. This includes the settlement of liabilities subject to compromise, distributions of cash, authorization and partial distribution of the shares of new Class A common stock, and authorization and distribution of shares of new Class B common stock resulting in a pre-tax gain of approximately $114.2 million on extinguishment of obligations pursuant to the Plan and the related tax effects. The following reflects the calculation of pre-tax gain (unaudited):

Liabilities subject to compromise	$	278,984,912
Less: Cash paydown of debt		(28,700,000	)
Remaining liabilities subject to compromise		250,284,912
Less: Issuance of debt and equity
New long-term notes payable		(133,300,000	)
New Class B common stock (at par value)		(2,328	)
New additional paid-in capital		(2,772,348	)
Pre-tax gain from cancellation and satisfaction of debt	$	114,210,236

At the Effective Date, all liabilities subject to compromise were either settled through cash payments or the issuance of shares of new common stock. As such, as of the Effective Date, no liabilities remain subject to compromise.

Reorganization Items

The Company has incurred significant costs associated with the Reorganization Cases. The amount of these costs, which were expensed as incurred, have significantly affected the Company’s results of operations. Reorganization items represent income or expense amounts that have been recognized as a direct result of the Reorganization Cases and are presented separately in the consolidated statements of operations pursuant to ASC 852. Such items consist of the following:

	Three Months			Six Months
	Ended			Ended
	June 30, 2013			June 30, 2013
Professional fees(a)	$	(2,439,448	)	$	(3,863,055	)
Cancellation of debt income(b)		114,210,236			114,210,236
Other(c)		(94,518	)		(94,518	)
Total reorganization items	$	111,676,270		$	110,252,663

^(a)   Professional fees relate to legal and other pofessional costs directly associated with the reorganiziaton process.

^(b)   Net gains and losses associated with the settlement of liabilities subject to compromise.

^(c)   Includes expenses directly associated with the reorganization process other than professional services.

The Company has classified expenses directly related to the Reorganization Cases as reorganization items, including amounts incurred prior to the Petition Date.