10-Q 1 form10q.htm FORM 10-Q  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
þ            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014

OR

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .

Commission file number 0-13721

ENVENTIS CORPORATION
(Exact name of registrant as specified in its charter)

Minnesota
41-1524393
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

221 East Hickory Street
Mankato, Minnesota 56002-3248
(Address of principal executive offices and zip code)

(800) 326-5789
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of "large accelerated filer, accelerated filer, and smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o  No þ

The total number of shares of the Registrant's common stock outstanding as of July 25, 2014: 13,665,701.


TABLE OF CONTENTS


 
 
 
 
 


 
 
Exhibits
33
Part I Financial Information

Item 1. Financial Statements

ENVENTIS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30
   
June 30
 
(Dollars in thousands, except share and per share amounts)
 
2014
   
2013
   
2014
   
2013
 
Operating revenue:
               
Services
 
$
35,671
   
$
34,231
   
$
69,884
   
$
67,636
 
Equipment
   
14,052
     
12,910
     
24,079
     
28,274
 
Total operating revenue
   
49,723
     
47,141
     
93,963
     
95,910
 
 
                               
Costs and expenses:
                               
Cost of sales, excluding depreciation and amortization
   
12,357
     
10,860
     
20,901
     
24,082
 
Cost of services, excluding depreciation and amortization
   
17,335
     
16,971
     
33,995
     
33,570
 
Selling, general and administrative expenses
   
8,327
     
7,047
     
15,290
     
14,496
 
Asset impairment
   
-
     
5
     
-
     
638
 
Depreciation and amortization
   
7,510
     
7,252
     
15,090
     
14,261
 
Total costs and expenses
   
45,529
     
42,135
     
85,276
     
87,047
 
 
                               
Operating income
   
4,194
     
5,006
     
8,687
     
8,863
 
 
                               
Other income (expense):
                               
Interest and other income
   
8
     
13
     
8
     
15
 
Interest expense
   
(991
)
   
(1,131
)
   
(1,970
)
   
(2,270
)
Total other expense
   
(983
)
   
(1,118
)
   
(1,962
)
   
(2,255
)
 
                               
Income before income taxes
   
3,211
     
3,888
     
6,725
     
6,608
 
Income tax provision
   
1,300
     
1,567
     
2,741
     
2,661
 
 
                               
Net income
 
$
1,911
   
$
2,321
   
$
3,984
   
$
3,947
 
 
                               
 
                               
Basic earnings per share
 
$
0.14
   
$
0.17
   
$
0.29
   
$
0.29
 
 
                               
Weighted average common shares outstanding
   
13,641,564
     
13,531,007
     
13,619,055
     
13,543,690
 
 
                               
 
                               
Diluted earnings per share
 
$
0.14
   
$
0.17
   
$
0.29
   
$
0.29
 
 
                               
Weighted average common and equivalent shares outstanding
   
13,696,119
     
13,576,967
     
13,679,378
     
13,584,749
 
 
                               
Dividends per share
 
$
0.15
   
$
0.145
   
$
0.30
   
$
0.29
 

The accompanying notes are an integral part of the consolidated financial statements.

ENVENTIS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30
   
June 30
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
 
               
Net income
 
$
1,911
   
$
2,321
   
$
3,984
   
$
3,947
 
Other comprehensive income:
                               
Designated interest rate swaps:
                               
Changes in fair value
   
5
     
65
     
(16
)
   
60
 
Income tax (expense) benefit
   
(2
)
   
(26
)
   
6
     
(24
)
Unrealized holding gain (loss) on designated interest rate swaps
   
3
     
39
     
(10
)
   
36
 
 
                               
Post-retirement benefit plan:
                               
Amounts included in net periodic benefit cost:
                               
Amortization of net actuarial loss
   
98
     
120
     
196
     
240
 
Amortization of prior service credit
   
(236
)
   
(236
)
   
(472
)
   
(472
)
Income tax benefit
   
55
     
46
     
110
     
92
 
Change in post-retirement benefit plan
   
(83
)
   
(70
)
   
(166
)
   
(140
)
 
                               
Other comprehensive loss
   
(80
)
   
(31
)
   
(176
)
   
(104
)
 
                               
Comprehensive income
 
$
1,831
   
$
2,290
   
$
3,808
   
$
3,843
 

The accompanying notes are an integral part of the consolidated financial statements.

ENVENTIS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
June 30,
   
December 31,
 
(Dollars in thousands except share and per share amounts)
 
2014
   
2013
 
ASSETS
 
Current assets:
       
Cash and cash equivalents
 
$
7,478
   
$
7,960
 
Receivables, net of allowance for doubtful accounts of $344 and $370
   
31,650
     
26,073
 
Inventories
   
1,043
     
1,668
 
Income taxes receivable
   
3,334
     
970
 
Deferred income taxes, net
   
2,377
     
2,660
 
Prepaid expenses
   
2,753
     
2,545
 
Other
   
1,034
     
1,386
 
Total current assets
   
49,669
     
43,262
 
 
               
Investments
   
3,595
     
3,414
 
 
               
Property, plant and equipment
   
471,823
     
461,712
 
Accumulated depreciation and amortization
   
(293,754
)
   
(280,386
)
Property, plant and equipment, net
   
178,069
     
181,326
 
 
               
Other assets:
               
Goodwill
   
29,028
     
29,028
 
Intangible assets, net
   
3,827
     
4,088
 
Deferred costs and other assets
   
6,435
     
5,762
 
Total other assets
   
39,290
     
38,878
 
 
               
Total assets
 
$
270,623
   
$
266,880
 
 
               
LIABILITIES & SHAREHOLDERS' EQUITY
 
Current liabilities:
               
Accounts payable
 
$
3,586
   
$
3,163
 
Extended term payable
   
13,068
     
8,879
 
Deferred revenue
   
5,202
     
6,056
 
Accrued expenses and other
   
11,201
     
10,443
 
Financial derivative instruments
   
371
     
242
 
Current maturities of long-term obligations
   
1,504
     
1,586
 
Total current liabilities
   
34,932
     
30,369
 
 
               
Long-term liabilities:
               
Debt obligations, net of current maturities
   
132,938
     
133,621
 
Accrued income taxes
   
246
     
244
 
Deferred revenue
   
2,570
     
2,705
 
Financial derivative instruments
   
537
     
1,184
 
Accrued employee benefits and deferred compensation
   
12,357
     
12,344
 
Deferred income taxes
   
37,199
     
37,103
 
Total long-term liabilities
   
185,847
     
187,201
 
 
               
Total liabilities
   
220,779
     
217,570
 
 
               
Commitments and contingencies
               
 
               
Shareholders' equity:
               
Common stock, no par value, $0.10 stated value
               
Shares authorized: 100,000,000
               
Shares issued and outstanding: 13,646,449 in 2014 and 13,568,871 in 2013
   
1,365
     
1,357
 
Additional paid-in capital
   
17,271
     
16,462
 
Retained earnings
   
30,675
     
30,782
 
Accumulated other comprehensive income
   
533
     
709
 
Total shareholders' equity
   
49,844
     
49,310
 
 
               
Total liabilities and shareholders' equity
 
$
270,623
   
$
266,880
 

The accompanying notes are an integral part of the consolidated financial statements.

ENVENTIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Six Months Ended
 
 
 
June 30
 
(Dollars in thousands)
 
2014
   
2013
 
 
       
OPERATING ACTIVITIES:
       
Net income
 
$
3,984
   
$
3,947
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
15,090
     
14,261
 
Asset impairment
   
-
     
638
 
Accrued patronage refunds
   
(407
)
   
(353
)
Stock-based compensation expense
   
423
     
429
 
Loss on financial derivative instruments
   
66
     
46
 
Excess tax benefit
   
(63
)
   
(100
)
Other
   
388
     
515
 
Changes in operating assets and liabilities, net of effect from acquired net assets
               
Receivables
   
(5,736
)
   
(4,888
)
Prepaid expenses
   
(208
)
   
(507
)
Inventories
   
625
     
2,106
 
Accounts payable and accrued expenses
   
253
     
(4,686
)
Deferred revenue, billings and deposits
   
(989
)
   
15
 
Income taxes
   
(1,807
)
   
(453
)
Other
   
502
     
664
 
Net cash provided by operating activities
   
12,121
     
11,634
 
 
               
INVESTING ACTIVITIES:
               
Additions to property, plant and equipment and materials and supplies
   
(12,399
)
   
(12,862
)
Broadband stimulus grant received
   
-
     
831
 
Proceeds from sales of assets
   
136
     
114
 
Net cash used in investing activities
   
(12,263
)
   
(11,917
)
 
               
FINANCING ACTIVITIES:
               
Borrowings on extended term payable arrangement
   
30,881
     
32,231
 
Payments on extended term payable arrangement
   
(26,692
)
   
(29,479
)
Payments on credit facility and capital lease obligations
   
(795
)
   
(821
)
Proceeds from issuance of common stock
   
294
     
355
 
Stock repurchase
   
-
     
(1,275
)
Dividends paid
   
(4,091
)
   
(3,936
)
Excess tax benefit
   
63
     
100
 
Net cash used in financing activities
   
(340
)
   
(2,825
)
 
               
Net decrease in cash and cash equivalents
   
(482
)
   
(3,108
)
Cash and cash equivalents at beginning of the period
   
7,960
     
8,305
 
Cash and cash equivalents at the end of the period
 
$
7,478
   
$
5,197
 
 
               
Supplemental disclosure of cash flow information:
               
Cash paid for interest
 
$
2,103
   
$
2,960
 
Net cash paid for income taxes
 
$
4,548
   
$
2,763
 

The accompanying notes are an integral part of the consolidated financial statements.

ENVENTIS CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2014

Note 1. Basis of Presentation and Consolidation

On June 29, 2014, Enventis Corporation, a Minnesota corporation ("Enventis"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among Enventis, Consolidated Communications Holdings, Inc., a Delaware corporation ("Consolidated"), and Sky Merger Sub Inc., a Minnesota corporation and wholly owned subsidiary of Consolidated ("Merger Sub"), pursuant to which Merger Sub will merge with and into Enventis (the "Merger"). See Note 15 "Pending Merger."

The accompanying unaudited consolidated financial statements of Enventis Corporation, formerly Hickory Tech Corporation, and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with the audited consolidated financial statements and notes thereto contained in our Form 10-K for the year ended December 31, 2013.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results may differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.

Our consolidated financial statements report the financial condition and results of operations for Enventis Corporation and its subsidiaries in three reportable segments: Fiber and Data, Equipment and Telecom. Intercompany transactions have been eliminated from the consolidated financial statements.

Recent Accounting Developments

In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-12, "Compensation - Stock Compensation" providing explicit guidance on how to account for share-based payments granted to employees in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.  Early adoption is permitted. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" and created a new topic in the FASB Accounting Standards Codification ("ASC"), Topic 606. The new standard provides a single comprehensive revenue recognition framework for all entities and supersedes nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and also requires enhanced disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related disclosures.

We have reviewed other recently issued accounting pronouncements and determined they are either not applicable to our business or no material effect is expected on our financial position, results of operations, cash flows or disclosures.

Note 2. Earnings and Dividends per Share

We compute earnings per share pursuant to the two-class method. Under the two-class method, unvested restricted shares that contain non-forfeitable rights to dividends are participating securities and therefore, are included in the computation of basic earnings per share. The two-class method includes an earnings allocation formula to determine earnings per share for common stock and participating securities according to dividends and their respective participation rights in undistributed earnings. Our unvested restricted shares issued under the Long-Term Executive Incentive Program ("LTEIP"), which contain the non-forfeitable right to receive dividends, are considered participating securities.

Basic earnings per share ("EPS") is calculated by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during each respective period. Any dividends paid on participating securities and any undistributed earnings considered to be attributable to participating securities are excluded from the numerator. The related participating securities are similarly excluded from the denominator. Diluted earnings per share are calculated by dividing net income applicable to common shares by the weighted average number of shares outstanding during the period increased by potentially dilutive common equivalent shares. Potentially dilutive common shares include stock options, stock subscribed under the Enventis Corporation Amended and Restated Employee Stock Purchase Plan ("ESPP"), retention stock awards and stock awarded under the LTEIP.

The computation of basic and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 using the two-class method is as follows:

 
 
Three Months Ended June 30
   
Six Months Ended June 30
 
(Dollars in thousands, except share and earnings per share amounts)
 
2014
   
2013
   
2014
   
2013
 
 
               
Net income
 
$
1,911
   
$
2,321
   
$
3,984
   
$
3,947
 
Less: net income allocable to participating securities
   
(3
)
   
(4
)
   
(7
)
   
(8
)
Net income attributable to common shares
 
$
1,908
   
$
2,317
   
$
3,977
   
$
3,939
 
 
                               
Weighted average shares outstanding
   
13,641,564
     
13,531,007
     
13,619,055
     
13,543,690
 
Stock options (dilutive only)
   
18,293
     
5,896
     
17,228
     
5,320
 
Stock subscribed ("ESPP")
   
-
     
-
     
-
     
-
 
Retention awards
   
19,667
     
16,775
     
19,544
     
13,980
 
Stock subscribed ("LTEIP")
   
16,595
     
23,289
     
23,551
     
21,759
 
Total dilutive shares outstanding
   
13,696,119
     
13,576,967
     
13,679,378
     
13,584,749
 
 
                               
Earnings per share:
                               
Basic and diluted
 
$
0.14
   
$
0.17
   
$
0.29
   
$
0.29
 
 
                               
Dividends per share
 
$
0.15
   
$
0.145
   
$
0.30
   
$
0.29
 

There were no anti-dilutive shares for the three and six months ended June 30, 2014.  The diluted earnings per share computation excluded 77,150 shares and 82,150 shares for the three and six months ended June 30, 2013, respectively, because their effect on earnings per share would have been anti-dilutive.

Cash dividends are based on the number of common shares outstanding at their respective record dates. The number of shares outstanding as of the record date for the first and second quarters of 2014 and 2013, respectively, are as follows:

Shares outstanding on record date
2014
2013
First quarter (February 15)
13,612,913
13,586,903
Second quarter (May 15)
13,654,438
13,559,043

Dividends per share are based on the quarterly dividend per share as declared by our Board of Directors. During the first six months of 2014 and 2013, shareholders elected to reinvest $154,000 of dividends into Enventis common stock pursuant to the Enventis Corporation Dividend Reinvestment Plan.

There were no share repurchases in the first six months of 2014. During the six months ended June 30, 2013, we acquired and retired 124,285 shares as part of our stock repurchase plan.

Note 3. Long-Lived Assets

There were no asset impairment charges during the first six months of 2014. We did recognize an impairment charge of $5,000 within our Fiber and Data Segment during the quarter ended June 30, 2013, bringing total impairment charges for the six months ended June 30, 2013 to $638,000.

Note 4. Goodwill and Other Intangible Assets

We have goodwill in each of our reportable segments. Fiber and Data Segment goodwill resulted from our acquisitions of IdeaOne Telecom in 2012, CP Telecom in 2009 and Enventis Telecom in 2005. Equipment Segment goodwill also resulted from our acquisition of Enventis Telecom in 2005 and the Telecom Segment goodwill resulted from our acquisition of Heartland Telecommunications in 1997. The tax deductible portion of goodwill is $26,964,000.

(Dollars in thousands)
 
June 30, 2014
   
December 31, 2013
 
Fiber and Data
 
$
5,384
   
$
5,384
 
Equipment
   
596
     
596
 
Telecom
   
23,048
     
23,048
 
Total goodwill
 
$
29,028
   
$
29,028
 

Intangible assets with finite lives are amortized over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.

The components of intangible assets are as follows:

(Dollars in thousands)
   
June 30, 2014
   
December 31, 2013
 
 
   
Gross Carrying
   
Accumulated
   
Gross Carrying
   
Accumulated
 
 
Useful Lives
 
Amount
   
Amortization
   
Amount
   
Amortization
 
Definite-lived intangible assets
               
Customer relationships
1 - 8 years
 
$
8,459
   
$
6,405
   
$
8,459
   
$
6,061
 
Other intangible assets
1 - 5 years
   
3,312
     
1,539
     
3,130
     
1,440
 
Total
   
$
11,771
   
$
7,944
   
$
11,589
   
$
7,501
 

Amortization expense related to the definite-lived intangible assets was $443,000 for the six months ended June 30, 2014 and 2013.

Note 5. Fair Value of Financial Instruments

Fair value of financial and non-financial assets and liabilities is the price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants. The three levels of the fair value hierarchy for assessing the inputs used in fair value measurements are as follows:

· Level 1 – quoted prices in active markets for identical assets and liabilities
· Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities
· Level 3 – unobservable inputs in which there is little or no market data available and require the entity to develop its own assumptions

The highest priority is given to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority is given to unobservable inputs (Level 3).

The carrying value of cash and cash equivalents, net accounts receivables, payables, and other short-term monetary assets and liabilities was estimated by management to approximate fair value due to the relatively short period of time to maturity for these instruments.

Our long-term debt agreement allows us to select short-term LIBOR pricing options, which we have elected. Therefore, the carrying amounts of our long-term debt approximate fair value. The fair value estimate of our interest rate swaps represent the net present value of future cash flows based on projections of the three-month LIBOR rate over the life of each swap. It also incorporates credit valuation adjustments to appropriately reflect both our own non-performance risk and the non-performance risk of the respective counterparties. See Note 9 "Financial Derivative Instruments" for further discussion regarding our interest rate swaps.

The carrying amount and the fair value of our long-term debt, after deducting current maturities, interest rate swaps and our investments are as follows:

(Dollars in thousands)
       
June 30, 2014
   
December 31, 2013
 
 
 
Input Level
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Long-term debt
   
2
   
$
132,938
   
$
132,938
   
$
133,621
   
$
133,621
 
Interest rate swaps
   
2
   
$
908
   
$
908
   
$
1,426
   
$
1,426
 
Investments
   
3
   
$
3,595
     
n/a
 
 
$
3,414
     
n/a
 

Our investments at June 30, 2014 and December 31, 2013 consist primarily of minority positions in various cooperatives and our investment in CoBank, ACB ("CoBank") and are accounted for under the cost method. It is impractical to determine fair value of these investments because there is no established market for these equity interests. We did not evaluate any of the investments for impairment during the six months ended June 30, 2014 and 2013 as there were no events or changes in circumstances indicating impairment may be present.

Note 6. Accrued Expenses and Other

The following table shows the Company's Consolidated Balance Sheets detail for accrued expenses and other:

(Dollars in thousands)
 
June 30, 2014
   
December 31, 2013
 
Accrued incentive compensation
 
$
1,046
   
$
1,792
 
Accrued wages and commissions
   
3,555
     
3,543
 
Other accrued expenses
   
6,600
     
5,108
 
Total accrued expenses and other
 
$
11,201
   
$
10,443
 

Other accrued expenses are primarily made up of accrued real estate and use taxes, accrued interest, the current portion of post-retirement benefits and other accrued expenses.

Note 7. Extended Term Payable

Enterprise Integration Services, Inc. ("EIS"), a wholly owned subsidiary of Enventis, has an $18,000,000 wholesale financing agreement with a financing company to fund equipment purchases from certain approved vendors. Advances under this financing arrangement are collateralized by the inventory and accounts receivable of our Equipment Segment and a guarantee of an amount up to $2,500,000 by Enventis. The agreement requires EIS to maintain specific levels of collateral relative to the outstanding balance due, provide select monthly financial information, and make all payments when due or on demand in the event of a collateral shortfall, among other requirements. A default on the financing agreement by EIS would require Enventis to perform under the guarantee. The financing agreement provides 60 day, interest-free payment terms for working capital and can be terminated at any time by either party. The balance outstanding under the financing arrangement was $13,068,000 and $8,879,000 at June 30, 2014 and December 31, 2013, respectively. The balance fluctuates on a quarterly basis dependent upon timing of customer orders. These balances are classified as current liabilities in the accompanying Consolidated Balance Sheets and are not considered part of our debt financing.

Note 8. Debt and Other Obligations

Our long-term obligations were as follows:

(Dollars in thousands)
 
June 30, 2014
   
December 31, 2013
 
Debt (current and long-term)
 
$
134,255
   
$
134,932
 
Capital leases
   
187
     
275
 
      Total debt
   
134,442
     
135,207
 
Current portion of:
               
  Debt
   
1,353
     
1,353
 
  Capital leases
   
151
     
233
 
      Current maturities of long-term obligations
   
1,504
     
1,586
 
Long-term debt obligations, net of current maturities
 
$
132,938
   
$
133,621
 

On October 30, 2013 we amended our credit facility with a syndicate of banks, led by CoBank, ACB which provides us the option to pay interest at LIBOR or at a Base Rate, as defined in the agreements, plus an applicable margin. The maturity date of our amended credit facility is December 31, 2019. Our amended credit facility is comprised of a $30,000,000 revolving credit component ($30,000,000 available to borrow as of June 30, 2014, which includes $20,000 reserved for letters of credit) and a $135,270,000 term loan component ($134,255,000 outstanding as of June 30, 2014).

At June 30, 2014, we are in full compliance with specified financial ratios and tests required by our credit facility. The credit facility includes allowances for continued payment of dividends and specific limits on common stock repurchases.

Note 9. Financial Derivative Instruments

We utilize interest-rate swap agreements to manage our exposure to interest rate fluctuations on a portion of our variable-interest rate debt. We have effectively changed our exposure to varying cash flows on the variable-rate portion of our debt into fixed-rate cash flows, therefore reducing the impact of interest rate changes on future cash interest payments. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure. We do not engage in interest rate speculation using derivative instruments.

We account for derivatives in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 815, "Derivatives and Hedging." ASC 815 requires all derivative instruments be recorded on the balance sheet as either an asset or a liability measured at its fair value, and changes in the derivatives' fair value be recognized in earnings unless specific hedge accounting criteria are met. If a derivative is designated as a hedge, the effective portion of changes in the fair value of derivatives is recorded as a component of accumulated other comprehensive income in shareholders' equity, net of tax, which is subsequently, reclassified into earnings when the underlying hedged transaction is recognized in earnings. Amounts related to our derivatives will be reclassified from accumulated other comprehensive income to interest expense as interest payments are accrued or made on our variable rate debt. The estimated amount expected to be reclassified as an increase to interest expense within the next twelve months is $81,000 at June 30, 2014. The ineffective portion of the fair value of derivatives is recognized directly in earnings. Hedge ineffectiveness is attributable to the swaps having a non-zero fair value at the time they were designated. If we were to terminate our interest rate swap positions, any related balance in accumulated other comprehensive income would immediately be recognized in earnings or reclassified into earnings as the interest payments are made dependent on the facts and circumstances of the termination. The changes in the fair value of derivatives that are not designated as hedges are recognized immediately in earnings.

The fair value of our interest rate swap agreements were determined based on level 2 inputs. Listed below are the interest rate swap agreements outstanding as of June 30, 2014 which were designated as cash flow hedges of interest rate risk and have the effect of locking our interest rates on a portion of our existing variable interest rate debt.

Interest Rate Swap Agreement Effective Dates
 
Notional Amount
   
Rate
 
September 2011 - September 2014
 
$
24,000,000
     
1.66
%
September 2011 - March 2015
 
$
24,000,000
     
1.91
%
September 2011 - September 2015
 
$
24,000,000
     
2.14
%

The following table presents the fair value of our derivative instruments included in our Consolidated Balance Sheets as either current or long-term liabilities.

(Dollars in thousands)
Balance Sheet Location
 
June 30, 2014
   
December 31, 2013
 
Interest rate derivatives designated as cash flow hedges
 
 
   
 
Pay-fixed swaps liabilities
Financial derivative instruments
 
$
908
   
$
1,426
 

The table below illustrates the effect of derivative instruments on consolidated operations.

 
  
 
Three Months Ended June 30
   
Six Months Ended June 30
 
(Dollars in thousands)
Location of (Gain)/Loss
 
2014
   
2013
   
2014
   
2013
 
Interest rate derivatives designated as cash flow hedges
 
 
   
   
   
 
(Gains)/losses recognized on effective portion of derivative instruments
Other comprehensive income
 
$
29
   
(41
)
 
$
82
   
(15
)
Losses reclassified from accumulated other comprehensive income into income
Interest expense
 
$
34
   
$
25
   
$
66
   
$
46
 
(Gains)/losses recognized in income on ineffective portion and amount excluded from effectiveness testing
Interest expense
 
$
-
   
(6
)
 
$
-
   
$
1
 

Note 10. Employee Post-Retirement Benefits

Enventis provides post-retirement health care and life insurance benefits for eligible employees. We are currently not funding these post-retirement benefits, but have accrued these liabilities. We are required to recognize the funded status of our post-retirement benefit plans on our Consolidated Balance Sheets and recognize as a component of accumulated other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. Employees hired on or after January 1, 2007 are not eligible for post-retirement health care and life insurance benefits.

The components of net periodic benefit cost were as follows:

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30
   
June 30
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Service cost
 
$
55
   
$
67
   
$
110
   
$
134
 
Interest cost
   
131
     
120
     
263
     
240
 
Amortization of prior service credit
   
(236
)
   
(236
)
   
(472
)
   
(472
)
Recognized net actuarial loss
   
98
     
120
     
196
     
240
 
Net periodic benefit cost
 
$
48
   
$
71
   
$
97
   
$
142
 

Note 11. Accumulated Other Comprehensive Income (Loss)

The table below illustrates the effect on certain line items of net income of the amounts reclassified out of each component of accumulated other comprehensive income ("AOCI") for the three and six months ended June 30, 2014. See Note 9 "Financial Derivative Instruments" and Note 10 "Employee Post-Retirement Benefits" for additional details regarding the reclassifications below.

(Dollars in thousands)
 
Amounts Reclassified from AOCI
 
 
Details about AOCI Components
 
Three Months Ended June 30, 2014
   
Six Months Ended June 30, 2014
 
Affected Line Item in the Consolidated  Statements of Income
Gains and losses on cash flow hedges
     
 
  
Interest rate contracts
 
$
34
   
$
66
 
Interest expense
 
   
(14
)
   
(27
)
Income tax provision
 
 
$
20
   
$
39
 
Net of tax
 
               
   
Amortization of benefit pension items
               
  
Prior service credits
 
$
236
   
$
472
 
(a)
Actuarial loss
   
(98
)
   
(196
)
(a)
 
   
138
     
276
 
Total before tax
 
   
(55
)
   
(110
)
Income tax provision
 
 
$
83
   
$
166
 
Net of tax
 
               
   
Total reclassifications of period
 
$
103
   
$
205
 
Net of tax
(a)These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 10 "Employee Post-Retirement Benefits."

Note 12. Income Taxes

The effective income tax rate from operations was 40.5% and 40.3% for the second quarter of 2014 and 2013, respectively. The effective tax rate from operations differs from the federal statutory rate primarily due to state income taxes.

As of June 30, 2014, we had unrecognized tax benefits totaling $240,000 (net of tax) excluding interest. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $213,000. Due to expirations of statute of limitations, it is reasonably possible that the total amount of unrecognized tax benefits will not decrease during the next 12 months.

We file consolidated income tax returns in the United States federal jurisdiction and combined or separate income tax returns in various state jurisdictions. In general, we are no longer subject to United States federal income tax examinations for the years prior to 2010 except to the extent of losses utilized in subsequent years.

Note 13. Stock Compensation

Our stock award plans provide for granting non-qualified stock options, stock awards and restricted stock awards to employees. We recognize stock compensation charges related to stock award plans based on management's best estimates and assumptions that the performance and service requirements of the plan will be achieved. Such compensation charges are recorded based upon the grant date fair value or settlement date fair value (as applicable) of our stock and are recognized over the requisite service period specified by the specific award plans. Share-based compensation expense includes amounts recognized related to the Company Employee Stock Purchase Plan. This plan allows participating employees to acquire shares of common stock at 85% of the average closing price for the five days previous to the purchase date. Stock-based compensation expense was $423,000 and $429,000, respectively, in the six months ended June 30, 2014 and 2013. This includes compensation expense for share-based payment awards granted prior to, but not vested as of June 30, 2014. As of June 30, 2014, we had not yet recognized compensation expense related to non-vested awards totaling $1,438,000. The weighted average period over which this compensation expense will be recognized is 2.42 years.

1993 Stock Award Plan

Long-Term Executive Incentive Program ("LTEIP")

We carry obligations of $800,000 and $971,000 as of June 30, 2014 and December 31, 2013 respectively, related to liability classified awards under the LTEIP that will be settled in company common stock in future periods.

Non-vested restricted stock activity for the six months ended June 30, 2014 is depicted in the table below. Granted shares represent non-vested shares issued to settle an obligation under the LTEIP plan during the period.

 
     
Weighted Average
 
 
 
Shares
   
Fair Value
 
Non-vested at January 1
   
28,525
   
$
9.83
 
Granted/settled
   
41,413
   
$
13.31
 
Vested
   
(50,684
)
 
$
11.35
 
Forfeited
   
-
   
$
-
 
Non-vested at June 30
   
19,254
   
$
13.31
 

Employee Stock Retention

Under this program, designated employees can earn shares of common stock if they complete a requisite service period which typically ranges from 11 to 36 months. Compensation expense related to the Employee Stock Retention program is recognized over the requisite service period.

Retention stock activity for the six months ended June 30, 2014 is as follows:

 
     
Weighted Average
 
 
 
Shares
   
Fair Value
 
Non-vested at January 1
   
31,285
   
$
8.77
 
Granted
   
4,000
   
$
12.10
 
Vested
   
-
   
$
-
 
Forfeited
   
(550
)
 
$
10.39
 
Non-vested at June 30
   
34,735
   
$
9.13
 

Stock Options

Stock options granted may be exercised no later than ten years after the date of grant, with one-third of the options vesting each year.

A summary of stock option activity for the six months ended June 30, 2014 is as follows:

 
     
Weighted Average
 
 
 
Options
   
Exercise Price
 
Outstanding at January 1
   
102,450
   
$
10.35
 
Granted
   
-
   
$
-
 
Exercised
   
(10,800
)
 
$
11.04
 
Forfeited
   
-
   
$
-
 
Expired
   
(28,200
)
 
$
11.68
 
Outstanding at June 30
   
63,450
   
$
9.64
 
Exercisable at June 30
   
63,450
   
$
9.64
 

In the six months ended June 30, 2014, we received $119,000 in cash related to stock options exercised during the period.

Note 14. Quarterly Segment Financial Summary

Our operations are reported in three segments: (i) Fiber and Data, (ii) Equipment and (iii) Telecom.

Our Fiber and Data Segment serves wholesale, enterprise and commercial business customers with advanced data, Internet, cloud, voice and voice over Internet Protocol ("VoIP") services. With our IP network and communication expertise, we are able to provide both custom and broad network solutions which can be extended beyond our regional network through interconnections to provide end-to-end national connectivity. The Fiber and Data Segment includes revenue from Ethernet, Private Line, Multiprotocol Label Switching ("MPLS"), Data Center, Dedicated Internet and our cloud services. We own, lease and utilize long-term indefeasible rights of use ("IRU") agreements for the operation of our network. Fiber and Data services are marketed throughout our core regions: northern Minnesota and the Minneapolis-Saint Paul metropolitan area, southern Minnesota, Des Moines, Iowa and Fargo, North Dakota.

Our Equipment Segment provides equipment solutions and support for a broad spectrum of business customers ranging in size from medium to large enterprise. We design and implement networks utilizing leading technology including: TelePresence Video, Unified Communications and Data Center solutions in collaboration with industry-leading partners. We provide a comprehensive set of services including: Advisory, Implementation, Development and Support. Our Total Care support team provides a proactive approach to monitor and support customer networks, unified communications environment and data centers. Equipment sales and services are marketed primarily in our Minnesota core regions and specifically the Minneapolis-Saint Paul metropolitan area.

Our Telecom Segment provides bundled residential and business services including high-speed Internet, broadband services, digital TV, local voice and long distance services in our legacy telecom service area. Telecom is comprised of the operation of both Incumbent Local Exchange Carrier ("ILEC") and Competitive Local Exchange Carrier ("CLEC") operations. Our ILEC operations provide services in 13 south central Minnesota communities and 13 rural northwest Iowa communities. Our CLEC operation provides services in south central Minnesota and near Des Moines, Iowa. We own our network in both the ILEC and CLEC exchanges.

Segment information for the three and six months ended June 30, 2014 and 2013 is as follows:

(Dollars in thousands)
             
Corporate and
Other (2)
     
Three Months Ended June 30, 2014
 
Fiber and Data
   
Equipment
   
Telecom
       
Consolidated
 
Revenue from unaffiliated customers
 
$
17,632
   
$
17,407
   
$
13,960
   
$
724
   
$
49,723
 
Intersegment revenue
   
211
     
-
     
426
     
(637
)
   
-
 
Total operating revenue
   
17,843
     
17,407
     
14,386
     
87
     
49,723
 
 
                                       
Asset impairment
   
-
     
-
     
-
     
-
     
-
 
Depreciation and amortization
   
3,107
     
130
     
3,708
     
565
     
7,510
 
Operating income (loss)
   
2,377
     
1,716
     
1,852
     
(1,751
)
   
4,194
 
Interest expense
   
-
     
1
     
-
     
990
     
991
 
Income tax provision (benefit)
   
963
     
695
     
751
     
(1,109
)
   
1,300
 
Net income (loss)
   
1,415
     
1,020
     
1,103
     
(1,627
)
   
1,911
 
Total assets
   
116,854
     
26,180
     
105,165
     
22,424
     
270,623
 
Property, plant and equipment, net
   
97,651
     
1,859
     
73,957
     
4,602
     
178,069
 
Additions to property, plant and equipment (1)
   
3,180
     
28
     
3,508
     
133
     
6,849
 

(Dollars in thousands)
             
Corporate and
Other (2)
     
Three Months Ended June 30, 2013
 
Fiber and Data
   
Equipment
   
Telecom
       
Consolidated
 
Revenue from unaffiliated customers
 
$
16,779
   
$
15,116
   
$
14,206
   
$
1,040
   
$
47,141
 
Intersegment revenue
   
213
     
-
     
416
     
(629
)
   
-
 
Total operating revenue
   
16,992
     
15,116
     
14,622
     
411
     
47,141
 
 
                                       
Asset impairment
   
5
     
-
     
-
     
-
     
5
 
Depreciation and amortization
   
2,922
     
124
     
3,756
     
450
     
7,252
 
Operating income (loss)
   
2,249
     
934
     
1,953
     
(130
)
   
5,006
 
Interest expense
   
-
     
-
     
-
     
1,131
     
1,131
 
Income tax provision (benefit)
   
912
     
378
     
791
     
(514
)
   
1,567
 
Net income (loss)
   
1,340
     
555
     
1,163
     
(737
)
   
2,321
 
Total assets
   
112,582
     
24,964
     
109,614
     
18,230
     
265,390
 
Property, plant and equipment, net
   
93,964
     
2,202
     
78,658
     
5,781
     
180,605
 
Additions to property, plant and equipment (1)
   
2,970
     
403
     
2,622
     
521
     
6,516
 
 
 
             
Corporate and
Other (2)
     
Six Months Ended June 30, 2014
 
Fiber and Data
   
Equipment
   
Telecom
       
Consolidated
 
Revenue from unaffiliated customers
 
$
35,110
   
$
29,655
   
$
27,894
   
$
1,304
   
$
93,963
 
Intersegment revenue
   
432
     
-
     
860
     
(1,292
)
   
-
 
Total operating revenue
   
35,542
     
29,655
     
28,754
     
12
     
93,963
 
 
                                       
Asset impairment
   
-
     
-
     
-
     
-
     
-
 
Depreciation and amortization
   
6,297
     
268
     
7,386
     
1,139
     
15,090
 
Operating income (loss)
   
5,324
     
2,202
     
3,747
     
(2,586
)
   
8,687
 
Interest expense
   
-
     
1
     
-
     
1,969
     
1,970
 
Income tax provision (benefit)
   
2,171
     
894
     
1,528
     
(1,852
)
   
2,741
 
Net income (loss)
   
3,154
     
1,307
     
2,221
     
(2,698
)
   
3,984
 
Total assets
   
116,854
     
26,180
     
105,165
     
22,424
     
270,623
 
Property, plant and equipment, net
   
97,651
     
1,859
     
73,957
     
4,602
     
178,069
 
Additions to property, plant and equipment (1)
   
5,768
     
137
     
5,312
     
566
     
11,783
 
 
 
             
Corporate and
Other (2)
     
Six Months Ended June 30, 2013
 
Fiber and Data
   
Equipment
   
Telecom
       
Consolidated
 
Revenue from unaffiliated customers
 
$
33,250
   
$
32,353
   
$
28,454
   
$
1,853
   
$
95,910
 
Intersegment revenue
   
426
     
-
     
833
     
(1,259
)
   
-
 
Total operating revenue
   
33,676
     
32,353
     
29,287
     
594
     
95,910
 
 
                                       
Asset impairment
   
638
     
-
     
-
     
-
     
638
 
Depreciation and amortization
   
5,718
     
209
     
7,459
     
875
     
14,261
 
Operating income (loss)
   
3,887
     
1,755
     
3,823
     
(602
)
   
8,863
 
Interest expense
   
-
     
-
     
-
     
2,270
     
2,270
 
Income tax provision (benefit)
   
1,589
     
715
     
1,558
     
(1,201
)
   
2,661
 
Net income (loss)
   
2,301
     
1,040
     
2,267
     
(1,661
)
   
3,947
 
Total assets
   
112,582
     
24,964
     
109,614
     
18,230
     
265,390
 
Property, plant and equipment, net
   
93,964
     
2,202
     
78,658
     
5,781
     
180,605
 
Additions to property, plant and equipment (1)
   
5,913
     
961
     
4,382
     
1,049
     
12,305
 
(1) Net of Broadband Stimulus Funds received and does not include changes in materials and supplies.
(2) Includes intersegment eliminations.
 
Note 15. Pending Merger

On June 29, 2014, Enventis Corporation, a Minnesota corporation ("Enventis"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among Enventis, Consolidated Communications Holdings, Inc., a Delaware corporation ("Consolidated"), and Sky Merger Sub Inc., a Minnesota corporation and wholly owned subsidiary of Consolidated ("Merger Sub"), pursuant to which Merger Sub will merge with and into Enventis (the "Merger").

Pursuant the terms of the Merger Agreement, each share of our common stock issued and outstanding immediately prior to the closing of the Merger will be converted into the right to receive 0.7402 shares of Consolidated common stock.

Completion of the merger is subject to various customary closing conditions, including, but not limited to, approval and adoption by Enventis' and Consolidated's shareholders and certain regulatory approvals.

We incurred $911,000 of transaction fees related to entering the Merger Agreement during the quarter ended June 30, 2014.

Note 16. Commitments and Contingencies

In April 2014, we received a notice from a large interexchange carrier disputing approximately $486,000 of interstate and intrastate switched access charges that we billed them. We do not agree with this dispute and cannot predict the outcome of such proceedings nor their impact, if any, to the Company. The interexchange carrier has initiated litigation in the states of Minnesota and Iowa. The litigation also involves many similar companies in our industry. The circumstances do not satisfy the criteria for accrual in accordance with FASB ASC Topic 450-20, "Loss Contingencies."

Following our Merger Agreement announcement, four putative class actions were commenced in Minnesota District Court, Blue Earth County, against Enventis, the Enventis Board of Directors, Consolidated Communications Holdings, Inc. and Sky Merger Sub Inc. The actions allege, among other things that our Board of Directors breached their fiduciary responsibilities in connection with the proposed merger. The Company intends to vigorously defend these actions and does not believe the resolution will have a material adverse effect on our financial position, results of operations or cash flows.

We are involved in certain other contractual disputes in the ordinary course of business, but do not believe the resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows.

Note 17. Subsequent Event

Subsequent to June 30, 2014, the Company received customer orders for a significant amount of equipment sales in our Equipment reporting segment. In connection with the large volume of equipment sales demand, we utilized $15,000,000 of our revolving line of credit to accommodate the fulfillment of the sales substantiated by the number of order-backed sales. As of July 30, 2014 we have $15,000,000 available in our revolving line of credit.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "targets," "projects," "will," "may," "continues," and "should," and variations of these words and similar expressions, are intended to identify these forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from such statements. Factors that might cause such a difference include, but are not limited to, those contained in Item 1A of Part II, "Risk Factors" of this Quarterly Report on Form 10-Q and Item 1A of Part I, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated herein by reference.

Because of these risks, uncertainties, and assumptions and the fact that any forward-looking statements made by us and our management are based on estimates, projections, beliefs, and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. In addition, forward-looking statements speak only as of the date they are made. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligations to update any forward-looking information, whether as a result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. A description of the accounting policies we consider particularly important for the portrayal of our results of operations and financial position, and which may require a higher level of judgment by our management, is contained under the caption, "Critical Accounting Policies and Estimates," in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013.

Significant Recent Development

On June 29, 2014, Enventis Corporation, a Minnesota corporation ("Enventis"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among Enventis, Consolidated Communications Holdings, Inc., a Delaware corporation ("Consolidated"), and Sky Merger Sub Inc., a Minnesota corporation and wholly owned subsidiary of Consolidated ("Merger Sub"), pursuant to which Merger Sub will merge with and into Enventis (the "Merger"). See Note 15 "Pending Merger."

Overview

We are a leading provider of advanced communication solutions servicing business and residential customers primarily throughout the upper Midwest. Our multi-state fiber network spans more than 4,200 route miles across Minnesota and into Iowa, North Dakota, South Dakota and Wisconsin. Across this region we provide business customers with IP-based voice, cloud, data and network solutions, managed and hosted services, network integration and support services. We also specialize in unified communication solutions for businesses of all sizes by providing Cisco equipment solutions and support. We provide residential broadband Internet, digital TV and voice services.

Results of Operations

We report our operations in three segments: (i) Fiber and Data, (ii) Equipment and (iii) Telecom. An overall description of our business segments can be found in Note 14 "Quarterly Segment Financial Summary."

Executive Summary

Our overall focus remains on positioning ourselves as a leading business and broadband communications provider. We strive to provide exceptional customer service and deliver reliable products and services which meet the evolving needs and demands of our customers while maintaining our traditional telecom services. Our strategic revenue stream entails business and broadband revenue which accounted for approximately 81% of our total consolidated revenue in the second quarter of 2014 and 79% in the second quarter of 2013. This revenue is derived from the Fiber and Data Segment, Equipment Segment and broadband revenue from our Telecom Segment. Revenue growth in these strategic areas is anticipated to offset the revenue decline in our legacy telecom services and this revenue diversification has transformed our company into a regional communication solutions provider.

We continue to invest in our network to provide high-quality and reliable service allowing us to expand and enhance our service offerings and increase speeds and capacity in our service areas.  As we add fiber access networks within our core fiber footprint we are able to extend our network closer to the customer premises allowing us to service multiple customers in an efficient manner. We leverage our regional network and long-haul routes to provide transport service to wireless service providers and backhaul services to accommodate the growth in wireless data usage. In June 2014, we launched and expanded our business cloud services to businesses of all sizes. Leveraging our network, IP and Cisco expertise, we are able to offer complete network and cloud services as well as premise-based and fully managed and hosted solutions.

Revenue diversification could result in a higher proportion of lower margin revenue. Therefore, we closely manage our costs through a disciplined approach to capital and expense management and plan to manage our costs through network grooming and other expense reductions driven by operational and system efficiencies.

Highlights for the quarter ended June 30, 2014 include:

·
Made significant success-based capital investments in our fiber network, which support specific customer revenue-generating projects and accommodates network capacity and reliability requirements.
·
Consolidated second quarter revenue was $49.7 million, a 5% increase compared to 2013. We experienced growth in both our higher margin services revenue and equipment revenue.
o
We experienced growth in both our business and wholesale services revenue in our Fiber and Data Segment, which offset customer churn and price compression.
o
Within our Equipment Segment, our services revenue grew 52% and equipment revenue increased 9%.
o
Growth in our strategic broadband revenue helped to offset the ongoing decline in the legacy telecom services resulting in an overall Telecom Segment revenue decline of 2%.
·
Total costs and expenses increased $3.4 million due to higher equipment sales levels and costs associated with the announcement of the merger. We continue to focus our efforts on cost management.
·
Net income of $1.9 million is down $410,000 or 18% compared to 2013 and was negatively impacted by $911,000 of costs associated with the pending merger.
·
EBITDA of $11.7 million in 2014 is down $559,000 or 5% due to the costs associated with the pending merger. EBITDA per our credit agreement of $12.6M is up $347,000 or 3%. Management believes this is an important financial measure as it represents our ability to generate cash flow and is used internally in evaluating our performance. A reconciliation of net income to EBITDA can be found in the non-GAAP measures section. Growth in our business segments is offsetting the decline in our traditional telecom services.
·
Successfully launched a suite of new and expanded cloud services which include SingleLink®, Cloud Compute, Data Protection and Cloud Wifi.

Fiber and Data Segment
The following table provides detail of the Fiber and Data Segment operating results.

 
 
Three Months Ended
   
   
Six Months Ended
   
 
 
 
June 30
   
%
   
June 30
   
%
 
(Dollars in thousands)
 
2014
   
2013
   
Change
   
2014
   
2013
   
Change
 
 
 
   
   
   
   
   
 
Operating revenue before intersegment eliminations:
 
   
   
   
   
   
 
   Business
 
$
9,811
   
$
9,239
     
6
%
 
$
19,474
   
$
18,064
     
8
%
   Wholesale
   
7,821
     
7,540
     
4
%
   
15,636
     
15,186
     
3
%
   Intersegment
   
211
     
213
     
-1
%
   
432
     
426
     
1
%
Total operating revenue
 
$
17,843
   
$
16,992
     
5
%
 
$
35,542
   
$
33,676
     
6
%
 
                                               
Cost of services (excluding depreciation and amortization)
 
$
8,865
   
$
8,583
     
3
%
 
$
17,071
   
$
16,840
     
1
%
Selling, general and administrative expenses
   
3,494
     
3,233
     
8
%
   
6,850
     
6,593
     
4
%
Asset impairment
   
-
     
5
     
0
%
   
-
     
638
     
0
%
Depreciation and amortization
   
3,107
     
2,922
     
6
%
   
6,297
     
5,718
     
10
%
   Total costs and expenses
   
15,466
     
14,743
     
5
%
   
30,218
     
29,789
     
1
%
 
                                               
Operating income
 
$
2,377
   
$
2,249
     
6
%
 
$
5,324
   
$
3,887
     
37
%
Net income
 
$
1,415
   
$
1,340
     
6
%
 
$
3,154
   
$
2,301
     
37
%
 
                                               
Capital expenditures (A)
 
$
3,180
   
$
2,970
     
7
%
 
$
5,768
   
$
5,913
     
-2
%
(A) Does not include change in materials and supplies.  
                                         

Revenue

The Fiber and Data Segment revenue streams are generally based on a monthly recurring revenue base, which to a large extent, includes multi-year contracts.

Business. We provide enterprise and commercial business customers with a wide array of advanced data services such as Ethernet, Private Line, MPLS, Dedicated Internet, voice and VoIP services. We deliver cost-effective communication solutions to fit the needs of our customers.

Fiber and Data business revenue grew $572,000 or 6% in the second quarter and $1,410,000 or 8% year-to-date compared to 2013. The growth can be attributed to rising customer demand and purchases of advanced communication services such as integrated voice and data services. The transition from traditional business voice and long-distance services to more advanced integrated voice and data services also favorably impact this revenue stream. To remain competitive, we continue to expand and enhance our capabilities and business service offerings to meet our customers' communication needs. Evidence of this commitment is our launch of a new and expanded suite of cloud services. Last-mile connections and our local networks are also driving the sale of data services, including Ethernet, MPLS, Dedicated Internet, Private Line and VoIP services. The growth in this revenue stream is tempered by customer churn and price compression.

Wholesale. We provide fiber and data services to regional and national service providers including wireless carriers, telecom providers and other service providers. We provide fiber-based transport and access services through our extensive regional fiber network and community access rings, supported by a 24x7x365 Network Operations Center. Through agreements and interconnections with other carriers, our services can be extended beyond our regional network for end-to-end national connectivity. Our expertise allows us to deliver custom network solutions and leverage our capabilities to provide a high-bandwidth, self-healing platform to provide reliable service.

Fiber and Data wholesale revenue grew $281,000 or 4% in the second quarter and $450,000 or 3% year-to-date compared to 2013. Bandwidth demands continue to rapidly accelerate to support traffic growth as voice-only wireless traffic has evolved into full multimedia content and applications. Wireless carriers' need for higher bandwidth connections such as Ethernet, DWDM and MPLS technologies is driving revenue growth in our wholesale services. The number of fiber-served cell sites we service increased from 57 at June 30, 2013 to 105 sites at June 30, 2014. We anticipate continued revenue growth by building to additional cell sites in specific targeted areas, upgrading bandwidth and services on existing towers and serving multiple tenants on a build-out. However, due to the 2014 expiration of certain wholesale contracts with large wireless carriers we anticipate a portion of these contracted services to migrate to customer networks which will temper wholesale revenue growth. Wholesale revenue also continues to be hampered by industry consolidation, technological changes, customer network grooming and price compression.

Cost of Services (excluding Depreciation and Amortization)

Cost of services increased $282,000 or 3% in the second quarter and $231,000 or 1% year-to-date compared to 2013. The main contributors include:
·
Universal Service Fund ("USF") charges increased $81,000 in the second quarter.
·
Leased fiber capacity costs increased $75,000 in the second quarter and $123,000 year-to-date related to the expansion of our fiber footprint.
·
Bad debt expense increased $64,000 in the second quarter and $63,000 year-to-date driven by the uncollectibility of specific customer accounts.
·
Maintenance contract expense increased $65,000 in the second quarter and $122,000 year-to-date related to the deployment of new infrastructure and customer premise equipment.
·
Wages, benefits and other compensation related expenses increased $42,000 in the second quarter and $160,000 year-to-date related to the necessary resources to support the growth initiatives in this segment.
·
A net increase of $67,000 in the second quarter and $62,000 year-to-date in other expenses offset by;
·
Circuit related expense declines of $112,000 in the second quarter and $299,000 year-to-date primarily related to our efforts of grooming circuits from off-net providers to our own network.

Selling, General and Administrative Expenses

We are investing in our business to support growth initiatives and provide exceptional service to our customers. We remain committed to scaling the business through process improvements and building system efficiencies. Selling, general and administrative expenses increased $261,000 or 8% in the second quarter and $257,000 or 4% year-to-date compared to 2013. Expenses to note include:
 
·
Corporate expenses increased $131,000 in the second quarter and $262,000 year-to-date compared to 2013 driven by the increased resources and attention focused on process and system efficiencies, and success and growth of this segment.
·
Wages, benefits and other compensation-related expenses increased $78,000 in the second quarter although decreased $123,000 on a year-to-date basis.
·
Other expenses increased $52,000 in the second quarter and $118,000 on a year-to-date basis.

Asset Impairment

There were no asset impairment charges in the first six months of 2014. We did recognize an asset impairment charge of $633,000 in the first quarter of 2013 related to assets supporting a service we elected to discontinue and minor adjustments in the second quarter of 2013 resulted in the addition of $5,000 bringing the 2013 year-to-date impairment charge to $638,000.

Depreciation and Amortization

Fiber and Data Segment depreciation and amortization increased $185,000 or 6% in the second quarter and $579,000 or 10% year-to-date compared to 2013. We continue to invest in network capacity, expansion and reliability along with investments to support our strategic initiatives.

Equipment Segment
The following table provides detail of the Equipment Segment operating results.
 
 
 
Three Months Ended
   
   
Six Months Ended
   
 
 
 
June 30
   
%
   
June 30
   
%
 
(Dollars in thousands)
 
2014
   
2013
   
Change
   
2014
   
2013
   
Change
 
 
 
   
   
   
   
   
 
Operating revenue before intersegment eliminations:
 
   
   
   
   
   
 
   Equipment
 
$
14,052
   
$
12,910
     
9
%
 
$
24,079
   
$
28,274
     
-15
%
   Services
   
3,355
     
2,206
     
52
%
   
5,576
     
4,079
     
37
%
Total operating revenue
 
$
17,407
   
$
15,116
     
15
%
 
$
29,655
   
$
32,353
     
-8
%
 
                                               
Cost of sales (excluding depreciation and amortization)
 
$
12,357
   
$
10,860
     
14
%
 
$
20,901
   
$
24,082
     
-13
%
Cost of services (excluding depreciation and amortization)
   
1,737
     
1,808
     
-4
%
   
3,514
     
3,503
     
0
%
Selling, general and administrative expenses
   
1,467
     
1,390
     
6
%
   
2,770
     
2,804
     
-1
%
Depreciation and amortization
   
130
     
124
     
5
%
   
268
     
209
     
28
%
   Total costs and expenses
   
15,691
     
14,182
     
11
%
   
27,453
     
30,598
     
-10
%
 
                                               
Operating income
 
$
1,716
   
$
934
     
84
%
 
$
2,202
   
$
1,755
     
25
%
Net income
 
$
1,020
   
$
555
     
84
%
 
$
1,307
   
$
1,040
     
26
%
 
                                               
Capital expenditures
 
$
28
   
$
403
     
-93
%
 
$
137
   
$
961
     
-86
%

Revenue
Equipment. We are a Master Unified Communications and Gold Certified Cisco distributor providing equipment solutions and support for a broad spectrum of business customers. As an equipment integrator, we design and implement networks utilizing emerging technological advancements including TelePresence Video, Unified Communications and Data Center solutions. We also utilize relationships with other industry-leading vendors to provide integrated communication solutions for our clients to meet their emerging networking needs. Equipment sales are non-recurring in nature making this revenue dependent upon attracting new sales from existing and new customers, as well as leveraging relationships with our current customer base by adding more value through enhanced product and service offerings.

Equipment revenue increased $1,142,000 or 9% in the second quarter and declined $4,195,000 or 15% year-to-date compared to 2013. We continue to experience success in selling data and communications equipment as customers invest in technology and IT solutions such as unified communication products, data center products, cloud computing solutions, storage, data analysis and IT virtualization. This revenue stream is non-recurring and the fluctuation in revenue can be attributed to multiple element accounting and the timing of customer sales which vary from quarter to quarter.

Services. We provide a comprehensive set of services to support equipment solutions, including: advisory, implementation, development and support. We have the expertise and experience to transform the available technology into solutions to solve business challenges and meet their objectives. Maintenance contracts ("Smartnet" contracts) are offered in collaboration with Cisco systems. Our Total Care support team provides a proactive approach to monitoring and supporting customer networks, unified communications environments and data centers as well as a single-point-of-contact for the support of applications, systems and infrastructure.

Equipment services revenue increased $1,149,000 or 52% in the second quarter and $1,497,000 or 37% year-to-date compared to 2013. The growth is reflective of our focus on growing the higher margin service revenue in this segment. The increase in contract services revenue accounts for 52% of the quarterly increase and 55% of the year-to-date increase. The increase in maintenance contracts accounts for 43% and 40% of the quarterly and yearly increase, respectively. Maintenance revenue is largely tied to equipment installations, and Smartnet contracts are typically three to five years. This revenue stream is cyclical in nature and is subject to timing of projects and renewal opportunities.

Cost of Sales (excluding Depreciation and Amortization)

Cost of sales is composed of equipment material costs associated with equipment sales. Cost of sales increased $1,497,000 or 14% in the second quarter and declined $3,181,000 or 13% year-to-date when compared to 2013. The change is directly associated with equipment sales along with the timing associated with the receipt of vendor specific rebates which directly decrease cost of sales. Quarter-over-quarter equipment margins were compressed due to a transfer of revenues from Equipment to Services revenue related to multiple element accounting. Labor associated with installation of the equipment is included in cost of services (excluding depreciation and amortization) described below.

Cost of Services (excluding Depreciation and Amortization)

Cost of services declined $71,000 or 4% in the second quarter and remained relatively flat year-to-date compared to 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $77,000 or 6% in the second quarter and declined $34,000 or 1% year-to-date compared to 2013. The primary contributors include:
·
Commissions expense increased $68,000 in the second quarter and declined $54,000 year-to-date which is in direct correlation with revenue.
·
A net increase of $9,000 in the second quarter and $20,000 year-to-date in other expenses.

Depreciation and Amortization

Depreciation expense increased $6,000 or 5% in the second quarter and $59,000 or 28% year-to-date compared to 2013, driven by expansion of office space.

Telecom Segment
The following table provides detail of the Telecom Segment operating results.

 
 
Three Months Ended
   
   
Six Months Ended
   
 
 
 
June 30
   
%
   
June 30
   
%
 
(Dollars in thousands)
 
2014
   
2013
   
Change
   
2014
   
2013
   
Change
 
Operating revenue before intersegment eliminations:
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
    Local service
 
$
2,799
   
$
2,885
     
-3
%
 
$
5,529
   
$
5,848
     
-5
%
    Network access
   
4,220
     
4,482
     
-6
%
   
8,635
     
9,183
     
-6
%
    Broadband
   
5,455
     
5,241
     
4
%
   
10,731
     
10,246
     
5
%
    Other
   
1,486
     
1,598
     
-7
%
   
2,999
     
3,177
     
-6
%
    Intersegment
   
426
     
416
     
2
%
   
860
     
833
     
3
%
Total Telecom operating revenue
 
$
14,386
   
$
14,622
     
-2
%
 
$
28,754
   
$
29,287
     
-2
%
 
                                               
Total Telecom revenue before intersegment eliminations
                                               
   Unaffiliated customers
 
$
13,960
   
$
14,206
           
$
27,894
   
$
28,454
         
   Intersegment
   
426
     
416
             
860
     
833
         
 
   
14,386
     
14,622
             
28,754
     
29,287
         
 
                                               
Cost of services (excluding depreciation and amortization)
   
6,845
     
6,767
     
1
%
   
13,654
     
13,614
     
0
%
Selling, general and administrative expenses
   
1,981
     
2,146
     
-8
%
   
3,967
     
4,391
     
-10
%
Depreciation and amortization
   
3,708
     
3,756
     
-1
%
   
7,386
     
7,459
     
-1
%
   Total Telecom costs and expenses
   
12,534
     
12,669
     
-1
%
   
25,007
     
25,464
     
-2