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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| First Comms. | LSE:FCOM | London | Ordinary Share | COM SHS USD0.001 (REGS) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.015 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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RNS Number : 8894E
First Communications, Inc.
01 October 2008
First Communications, Inc. Accounting Restatement
AKRON, OH, October 1, 2008 -- Further to the announcement dated September 15 in relation to the required restatement of its accounts for
the financial year ended December 31, 2007, First Communications, Inc. (AIM: FCOM)(the "Company"), announces that it has filed its
re-audited financial statements for the six month period ended June 30, 2007 and six month period ended December 31, 2007, resulting from
the re-audit prepared by Frazier and Deeter, LLC and the audit prepared by Bober Markey for the June 30, 2007 period.
The Company confirms that it has today posted its restated accounts to its shareholders and that these will shortly be available on its
website. The Company believes that as a result and following the announcement of its interim results for the 6 month period ended June 30,
2008, that the suspension in trading of its common stock on AIM, initiated on September 15, will be lifted.
Restatement of 2007 Results
As previously announced, in connection with its proposed US listing, the company hired Frazier and Deeter, LLC, an independent public
accounting firm registered with the U.S. Public Company Accounting Oversight Board ("PCAOB"), to perform a re-audit of its 2007 financial
statements. Frazier and Deeter worked in close consultation with the Audit Committee of the Board of Directors and outside legal advisors,
in order to ensure that the Company's audit was performed in compliance with the standards of the PCAOB. Also as part of the US listing
process, a full audit of the June 30, 2007 period for the individual operating companies of First Communications, Inc. was performed. As a
result of the re-audit and in connection with the previously announced change in accounting policies and errors discovered by the re-audit
process, the summary below represents a pro-forma view of the resulting adjustments together with consolidated re-audited accounts for the
Company.
Impact on twelve month aggregated financials
The full year aggregated restated financials reflect a decrease in revenue of $2.34 million, an increase in costs of facilities by $1.65
million resulting in a decrease in EBITDA of $3.97 million and a decrease in cash of $1.9 million for the full year period on a pro-forma
basis.
Restated aggregated cash flow differences were a result of the difference associated with earnings as stated above along with an
accounting reclassification from accounts payable to bank overdraft (or outstanding checks) to conform with PCAOB standards. The restated
balance sheet included a decrease of total assets from $203.4m to $184.9m primarily due to purchase price accounting including Goodwill
($15.4m) along with the reclassification of certain bank overdrafts from accounts payable to cash for ($1.8m). Total liabilities decreased
from $34.9m to $24.5m due primarily to purchase price accounting related to deferred tax liabilities ($9.6m). Shareowners Equity decreased
from $168.5m to $120.4m due to ($40m) Preferred Stock reclassification along with ($5.4m) reduction of Additional Paid In Capital reserve
due to purchase price accounting.
Impact on consolidated financials from incorporation
The consolidated restated financials from July 2, 2007 to December 31, 2007 reflect a decrease in revenue of $3.08 million, an increase
in costs of facilities by $0.88 million resulting in a decrease in cash of $1.9 million. The difference with the above relates to additional
adjustments made in the first half of 2007. While previously reported there would be a decrease in revenue for the first half of 2007, there
was no reduction in revenue in the audited numbers for the first half of 2007.
The re-audit identified certain errors in the internal accounting function of the Company for the year to December 31, 2007. Progress
had since been made to improve these processes prior to the re-audit, and following the review the audit committee has put in place
additional processes and plans to improve these further.
FIRST COMMUNICATIONS, INC
AGGREGATED STATEMENT OF INCOME
For the Twelve Months ended December 31, 2007
(US$ 000's) Original Restated
2007 (a) 2007 (a)
Revenues, net 143,303 140,959
Cost of facilities 93,844 95,496
Depreciation and amortization 5,433 6,580
SGA 31,442 31,867
Income from operations 12,584 7,016
Other income (expenses)
Interest (1,066) (1,416)
Other 379 835
Pre-Tax Income $ 11,897 $ 6,435
Income taxes 2,255 588
Net Income 9,642 5,847
EBITDA $ 18,396 $ 14,431
FIRST COMMUNICATIONS, INC
AGGREGATED STATEMENTS OF CASH FLOW
For the Twelve Months Ended Dec 31, 2007
Original Restated
(US$ 000's) 2007 (a) 2007 (a)
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 9,642 $ 5,847
Add: Depreciation & Amortization 5,433 5,990
Add: Bad Debts Expense - 917
Add: Deferred Taxes 587 225
Changes in Operating Assets & Liabilities
Account Receivable - trade, net (2,978) 1,417
Inventory 104 105
Prepaid expenses 278 (258)
Deposits and other assets (635) (1,568)
Accounts payable 1,505 (3,786)
Federal tax payable 1,466 363
Accrued expenses (978) (5,187)
Deferred revenue (839) 1,287
CASH FLOW FROM OPERATING ACTIVITIES 13,585 5,352
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,419) (2,363)
Deposits on property and equipment (1,278) -
Acquisition of assets and assumption of (98,651) (88,706)
liabilities, net of cash acquired
Investment in Joint Venture (125) -
Net change in accounts receiveable - related 45 (3,599)
party
CASH FLOW FROM INVESTING ACTIVITIES (102,428) (94,668)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from common stock issuance, net of 85,525 81,631
issuance and transaction costs
Proceeds from issuance of long term loans 15,000 15,000
Reduction in preferred stock - -
Payment of deferred financing costs (350) -
Net borrowings and payments on line of credit 706 706
Change in Bank Overdraft - 5,114
Payments on debt (9) (9)
Payments of transaction costs related to sale of - (2,959)
Company
Distributions paid (3,652) (3,653)
CASH FLOW FROM FINANCING ACTIVITIES 97,220 95,830
NET INCREASE (DECREASE) IN CASH $ 8,377 $ 6,514
CASH, BEGINNING OF PERIOD $ 2,786 $ 2,786
CASH, END OF PERIOD $ 11,163 $ 9,300
(a) Audited Proforma First Communications LLC and Xtension and Unaudited Acceris II for the period of
time after the acquisition.
The restated comparison balance sheet is reported in the Auditors restated report.
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2007
(in thousands)
(Restated)
Original Restated
2007 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11.163 $ 9,300
Accounts receivable - trade, less allowance for
doubtful accounts of $1,171 and $661 respectively 14,969 13,793
Accounts receivable - related party 502 945
Inventory 136 136
Prepaid expenses 1,256 823
TOTAL CURRENT ASSETS 27,740 24,997
PROPERTY AND EQUIPMENT
Switches 2,750 2,750
Technical equipment 1,923 1,922
Leasehold improvements 28 28
Office equipment 278 232
Furniture and fixtures 606 561
Software 1,500 1,500
Software development in progress 823 823
7,907 7,816
Less: Accumulated depreciation (685) (593)
NET PROPERTY AND EQUIPMENT 7,222 7,223
OTHER ASSETS
Goodwill 103,410 88,079
Other intangible assets, net 63,280 63,280
Deposits and other assets 1,706 1,357
TOTAL OTHER ASSETS 168,397 152,716
TOTAL ASSETS $ 203,359 $ 184,936
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2007
(in thousands, except share data)
(Restated)
Original Restated
2007 2007
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 625 $ 625
Accounts payable - trade 14,803 13,220
Federal income tax payable 1,466 362
Accrued expenses 2,455 2,600
Deferred tax liability, net - current 213
Deferred revenue - current 1,625 3,244
TOTAL CURRENT LIABILITIES 20,974 20,264
NON-CURRENT LIABILITIES
Deferred tax liability, net - long term 13,735 4,064
Deferred revenue - long term 170 170
TOTAL NON-CURRENT LIABILITIES 13,905 4,234
TOTAL LIABILITIES 34,879 24,498
Redeemable Preferred Stock, $0.001 par value;
10,000,000 shares
authorized, 40,000 shares issued and outstanding
(liquidation
preference $1,000 per share) 40,000
SHAREHOLDERS' EQUITY
Series A Common Stock, $0.001 par value;
59,165,000 shares authorized,
26,067,000 shares issued and outstanding 27 26
Series B Non-Voting Common Stock, $0.001 par
value; 835,000 shares
authorized, issued and outstanding 1
Additional paid in capital 164,854 119,482
Retained earnings 3,599 929
TOTAL SHAREHOLDERS' EQUITY 168,480 120,438
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 203,359 $ 184,936
About First Communications
First Communications is a leading competitive local exchange carrier in the Midwestern United States. Founded in 1998, First
Communications has built a highly scalable telecommunications platform, infrastructure and support system, which represents a combination of
world-class technology, and cutting-edge product offerings. First Communications has over 214,000 customers, owns 3,500 miles of fiber and
owns and manages 327 wireless towers leased to 391 tenants, with contractual rights and significant opportunity to increase the number of
towers. First Communications is led by a strong management team that has operated telecom companies throughout all cycles of the
telecommunications market.
Forward-looking Statements
This press release contains statements relating to future results of First Communications (including certain financial information
relating to anticipated results from the restatement for the twelve months ended December 31, 2007, and statements which may be identified
by the use of the words "may", "intend", "expect" and like words) that are "forward-looking statements". Actual results may differ
materially from those projected as a result of certain risks and uncertainties. For First Communications, these risks and uncertainties
include, but are not limited to its ability to successfully complete its re-audit for the twelve months ended December 31, 2007 and expected
resulting restatement and others.
For further information:
First Communications, Inc.
Joe Morris Tel: (330) 835-2472
Financial Dynamics
Harriet Keen / Haya Chelhot Tel: +44 (207) 831-3113
Sherrie Weldon Tel: (212) 850-5658
Collins Stewart Europe Limited - Nominated Adviser and Broker
Seema Paterson / Stewart Wallace Tel: +44 (207) 523-8350
FINANCIAL STATEMENTS
Our previously issued consolidated financial statements for the period from inception (July 2, 2007) to December 31, 2007 have been
restated to reflect adjustments to purchase accounting entries; cash; accounts receivable - trade; deferred tax assets and liabilities;
prepaid expenses; goodwill; deposits and other assets; accounts payable - trade; income tax payable; accrued expenses; deferred revenue;
redeemable preferred stock; additional paid in capital; retained earnings; revenues; cost of facilities; selling, general and administrative
expenses; other expense, net; provision for income taxes; and cash flows. The adjustments reflect lowered income before income taxes by
$4.3 million primarily due to amounts recorded in the statement of operations which should be purchase price adjustments and $350,000 of
aborted financing costs. Net income was lowered by the changes above offset by the income taxes on the adjustments and corrections of other
income tax expense misstatements. Please see Note 14 of the financial statements for further information. The consolidated restated financials from July 2, 2007 to December 31, 2007 reflect a
decrease in revenue of $3.08 million, an increase in costs of facilities by $0.88 million resulting in a decrease in cash of $1.9 million.
The difference from the above compared to the full year aggregated financials relates to additional adjustments made in the first half of
2007. While previously reported there would be a decrease in revenue for the first half of 2007, there was no reduction in revenue in the
audited numbers for the first half of 2007.
Restated aggregated cash flow differences were a result of the difference associated with earnings as stated above along with an
accounting reclassification from accounts payable to bank overdraft (or outstanding checks) to conform with PCAOB standards. The restated
balance sheet included a decrease of total assets from $203.4m to $184.9m primarily due to purchase price accounting including Goodwill
($15.4m) along with a reclassification of certain bank overdrafts from accounts payable to cash for ($1.8m). Total liabilities decreased
from $34.9m to $24.5m due primarily to purchase price accounting related to deferred tax liabilities ($9.6m). Shareowners Equity decreased
from $168.5m to $120.4m due to ($40m) Preferred Stock reclassification along with ($5.4m) reduction of Additional Paid In Capital reserve
due to purchase price accounting.
The re-audit identified certain errors in the internal accounting function of the Company for the year to December 31, 2007. Progress
had since been made to improve these processes prior to the re-audit, and following the review the audit committee has put in place
additional processes and plans to improve these further.
INDEPENDENT AUDITORS' REPORT
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of First Communications, Inc. and Subsidiaries (the "Company") as of
December 31, 2007, and the related consolidated statements of operations, changes in redeemable stock and shareholders' equity, and cash
flows for the period from inception (July 2, 2007) to December 31, 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2007, and the consolidated results of its operations and its cash flows for the period
from inception (July 2, 2007) to December 31, 2007 in conformity with U.S. generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, the 2007 consolidated financial statements have been restated to
correct misstatements.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
September 21, 2008
RESTATED FROM THE PERIOD OF INCEPTION (JULY 2, 2007) TO DECEMBER 31, 2007
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2007
(in thousands)
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,300
Accounts receivable - trade, less allowance for
doubtful accounts of $1,171 and $661 respectively 13,793
Accounts receivable - related party 945
Inventory 136
Prepaid expenses 823
TOTAL CURRENT ASSETS 24,997
PROPERTY AND EQUIPMENT
Switches 2,750
Technical equipment 1,922
Leasehold improvements 28
Office equipment 232
Furniture and fixtures 561
Software 1,500
Software development in progress 823
7,816
Less: Accumulated depreciation (593)
NET PROPERTY AND EQUIPMENT 7,223
OTHER ASSETS
Goodwill 88,079
Other intangible assets, net 63,280
Deposits and other assets 1,357
TOTAL OTHER ASSETS 152,716
TOTAL ASSETS $ 184,936
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2007
(in thousands, except share data)
(Restated)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 625
Accounts payable - trade 13,220
Federal income tax payable 362
Accrued expenses 2,600
Deferred tax liability, net - current 213
Deferred revenue - current 3,244
TOTAL CURRENT LIABILITIES 20,264
NON-CURRENT LIABILITIES
Deferred tax liability, net - long term 4,064
Deferred revenue - long term 170
TOTAL NON-CURRENT LIABILITIES 4,234
TOTAL LIABILITIES 24,498
Redeemable Preferred Stock, $0.001 par value; 10,000,000 shares
authorized, 40,000 shares issued and outstanding (liquidation
preference $1,000 per share) 40,000
SHAREHOLDERS' EQUITY
Series A Common Stock, $0.001 par value; 59,165,000 shares authorized,
26,067,000 shares issued and outstanding 26
Series B Non-Voting Common Stock, $0.001 par value; 835,000 shares
authorized, issued and outstanding 1
Additional paid in capital 119,482
Retained earnings 929
TOTAL SHAREHOLDERS' EQUITY 120,438
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 184,936
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from Inception (July 2, 2007) through December 31, 2007
(in thousands, except per share amounts)
(Restated)
REVENUES, NET
Revenues, net $ 61,200
Revenues, net - related party 4,353
TOTAL REVENUES, NET 65,553
COST OF FACILITIES, exclusive of depreciation and amortization stated below 44,560
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,706
DEPRECIATION AND AMORTIZATION 3,712
OPERATING INCOME 1,575
OTHER EXPENSES, NET 58
INCOME BEFORE INCOME TAXES 1,517
PROVISION FOR INCOME TAXES 588
NET INCOME $ 929
EARNINGS PER SHARE
Numerator:
Net income $ 929
Preferred stock accretion (12,548)
Net loss attributable to common shareholders $ (11,619)
Per share amounts:
Basic earnings per share $ (0.43)
Diluted earnings per share $ (0.43)
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from Inception (July 2, 2007) through December 31, 2007
(in thousands)
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 929
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 3,712
Bad debt expense 917
Deferred taxes 225
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable - trade, net (839)
Inventory 93
Prepaid expenses (243)
Deposits and other assets (281)
Accounts payable - trade (4,536)
Federal income tax payable 363
Accrued expenses (2,853)
Deferred revenue 196
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,317)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,605)
Acquisition of assets and assumption of liabilities, net of cash acquired (72,250)
Investment in joint venture -
Net change in accounts receivable - related party 45
NET CASH USED IN INVESTING ACTIVITIES (73,810)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance, net of issuance and transaction costs 81,631
Net borrowings on line of credit 625
Payment of deferred financing costs -
Bank overdraft liability 3,171
NET CASH PROVIDED BY FINANCING ACTIVITIES 85,427
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,300
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,300
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid $ 708
Income taxes paid
Non-cash investing and financing activities:
Stock issued in exchange for assets acquired and liabilities assumed $ 77,880
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share data)
December 31, 2007
(Restated)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
First Communications, Inc. and its subsidiaries are publicly traded on the London Stock Exchange's Alternative Investment Market
("AIM"). Unless the context requires otherwise or unless otherwise noted, when we use the terms "we," "us," "our," or the "Company," we are
referring to First Communications, Inc. and its subsidiaries.
The Company was formed on April 4, 2007; however, we did not have any material activity until July 2, 2007, the completion of our
listing on the AIM.
First Communications, Inc. and its subsidiaries provide local and long-distance telephone and other telecommunications related services
to commercial and residential customers throughout the United States. Certain subsidiaries are subject to regulation by state public service
commissions of applicable states for intrastate telecommunications services. For applicable interstate matters related to telephone service,
certain subsidiaries are subject to regulation by the Federal Communications Commission.
Restatement
Our previously issued financial statements for the period from inception (July 2, 2007) to December 31, 2007 have been restated to reflect
adjustments which lowered income before income taxes by $4.3 million primarily due to amounts recorded in the statement of operations which
should be purchase price adjustments and $350 of aborted financing costs. Net income was lowered by the changes above offset by the income
taxes on the adjustments and corrections of other income tax expense misstatements. See Note 14 for further information.
Principles of Consolidation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The consolidated financial statements reflect the accounts of First Communications, Inc. and its wholly
owned subsidiaries, First Communications, LLC and Xtension Services, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
We operate in one reportable segment, the telecommunications industry. Our operations are conducted entirely in the United States.
On July 2, 2007, we completed the acquisitions of First Communications, LLC ("FC LLC") and Xtension Services, Inc. ("Xtensions"). The
financial position and results of operations for FC LLC and Xtensions are included in our consolidated financial statements since the date
of acquisition.
Cash and Cash Equivalents
We consider all short-term securities purchased with an original maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate of probable losses in the accounts receivable balance. The allowance is
based on known troubled accounts, historical experience and other currently available evidence. Accounts are written off when we determine
that the accounts are uncollectible. Activity in the allowance for doubtful accounts for the period from inception (July 2, 2007) through
December 31, 2007 is as follows (in thousands):
Beginning balance $ -
Charged to expense 917
Uncollectable amounts written-off, net of recoveries 256
Ending balance $ 661
Inventory
Inventory consists of cellular telephones and is valued at the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Major additions and improvements are charged to the property
accounts while replacements and maintenance and repairs, which do not improve or extend the life of the assets, are expensed currently. When
property is retired or otherwise disposed of, the cost of the property is removed from the asset accounts, accumulated depreciation is
charged with an amount equivalent to the depreciation provided, and the associated gain or loss is recorded in cost of facilities in the
accompanying consolidated statement of operations.
Software included in property and equipment includes amounts paid for purchased software and implementation services and direct internal
payroll for software used internally that has been capitalized in accordance with the Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
Depreciation is computed using the straight-line method over the useful lives of the assets as follows:
Years
Switches 7
Technical equipment 3-5
Leasehold improvements 5
Office equipment 3
Furniture and fixtures 5
Software 6
Software development in progress 6
Depreciation expense for the period from inception (July 2, 2007) through December 31, 2007 amounted to $593.
Valuation of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and the carrying amount of the asset. No impairments were recorded in the period from inception
(July 2, 2007) through December 31, 2007.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the net fair value of assets acquired and liabilities assumed. We
account for our goodwill in accordance with Statement of Financial Accounting Standard No. ("SFAS") 142, "Goodwill and Other Intangible
Assets." Under this pronouncement, goodwill is not amortizable, but requires us to test goodwill and other indefinite lived intangibles for
impairment annually or if certain impairment indicators arise. We perform our annual impairment test on a recurring basis in the fourth
quarter of each year. Impairments, if any, will be expensed in the year incurred. As of December 31, 2007, there was no impairment to
goodwill.
Other intangible assets primarily consist of trademarks, customer lists and Local Multipoint Distribution System ("LMDS") licenses. The
useful lives of trademarks were determined to be indefinite and, therefore, these assets are not being amortized and have been tested for
impairment. There was no impairment of trademarks at December 31, 2007. LMDS is an authorized fixed broadband wireless service that may be
used to provide high-speed data transfer, telephone service, telecommunications network transmission, internet access, video broadcasting,
video conferencing, and other services. Customer lists and LMDS licenses are being amortized on a straight-line basis over their estimated
economic lives of eight and 25 years, respectively, and are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable as described above.
The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in
proportion to the amount of economic benefits obtained by us in each reporting period.
Income Taxes
We account for income taxes in accordance with SFAS 109, "Accounting for Income Taxes." Deferred income taxes are determined based upon
enacted tax laws and the rates applied to the differences between the financial statements and tax basis of assets and liabilities.
We utilize the liability method of accounting for income taxes, as set forth in SFAS 109. Under the liability method, deferred taxes are
determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. Deferred tax benefit or expense represents the change in the deferred tax asset and
liability balances.
On July 2, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 48, "Accounting
for Uncertainty in Income Taxes." FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the consolidated financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48
also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and it
requires increased disclosures. At the date of adoption, and as of December 31, 2007, our unrecognized tax benefit for uncertain tax positions was immaterial.
Accounts Payable
We perform periodic bill verification procedures to identify errors in vendors' billing processes. The bill verification procedures
include the examining of bills, comparing billed rates with contracted rates, evaluating the trends of invoice amounts by vendors, and
reviewing the types of charges being assessed. If we conclude that we have been billed inaccurately, we will dispute the charge with the
vendor and begin resolution procedures. Although dispute charges may relate to several periods, in accordance with industry standards
dispute resolutions are recognized in the period of resolution. Disputes of this nature occur in the ordinary course of business within the
telecommunications industry. As of December 31, 2007, the offset to accounts payable as a result of the unresolved disputes was $1,471.
Included in accounts payable is a bank overdraft liability of $3,171, which is not available for netting against other cash accounts.
Financial Instruments
The amounts in the financial statements for cash equivalents, accounts receivable, accounts payable, and line of credit approximate fair
value due to the short-term maturities of these instruments.
Warrants
Warrants (as defined in Note 11) to purchase shares of our common stock have been classified as equity in accordance with Emerging
Issues Task Force Issue No. ("EITF") 00-19: ''Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.''
Sales Taxes
We collect sales taxes from customers and remit these amounts to applicable taxing authorities. Our accounting policy is to exclude
these taxes from revenues and cost of facilities.
Revenue Recognition
We record as revenue the amount of communications services rendered. Revenue is recognized as service is provided to customers, who are
billed monthly. Provisions for discounts and credits are recorded when the revenue is recognized. Unbilled receivables (Note 3) represent
revenues earned for communications services rendered but not yet billed.
Advertising
We expense all advertising costs when the advertising first takes place. Advertising expenses for the period from inception (July 2,
2007) through December 31, 2007 amounted to $46.
Earnings Per Share
We follow SFAS No. 128, "Earnings Per Share," which requires the disclosure of basic net income per share and diluted net income per
share. Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive securities.
Common stock issuable upon the exercise of warrants is excluded from the calculation of diluted earnings per share when the calculation
of equivalent shares is anti-dilutive. The calculation of diluted earnings per share for 2007 excludes 5,333,333 shares that were
anti-dilutive.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist primarily of accounts receivable and cash
depository accounts. We grant credit and perform ongoing credit evaluations of our customers, and generally do not require collateral. We
maintain all of our cash in accounts at high credit quality financial institutions. The Federal Deposit Insurance Corporation ("FDIC")
insures these cash accounts up to $100. We periodically assess the financial conditions of the commercial banks and believe the risk of loss
is minimal.
Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our
estimates, including those related to collectability of accounts receivable, valuation of inventories, useful lives of property, plant and
equipment, recoverability of goodwill and intangible assets, income taxes and contingencies. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. These changes in estimates are recognized in the period they are realized.
New Accounting Pronouncements
In April 2008, FASB Staff Position 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3") was issued. This
standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS 142. FSP 142-3 is effective for consolidated financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We have not yet determined the impact,
if any, from the adoption of FSP 142-3 on our consolidated financial statements.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS 133."
SFAS 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are
accounted for, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. We have not yet
determined the impact, if any, from the adoption of SFAS 161 on our consolidated financial statements.
In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin ("ARB") 51." SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 changes the way the consolidated
statement of operations is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable
to both the parent and the noncontrolling interest. SFAS 160 is effective for the fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations." SFAS 141(R) replaces SFAS 141, "Business
Combinations." SFAS 141(R) retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141(R)
defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control. SFAS 141(R) requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. SFAS 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure
requirements to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 159 to
materially effect on our consolidated financial statements.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for consolidated financial
statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to materially affect our
consolidated financial statements.
NOTE 2 - BUSINESS COMBINATIONS
On July 2, 2007, we acquired all of the issued and outstanding membership units of FC LLC (an Ohio Limited Liability Company) ("FC LLC")
for $61.3 million in cash, which included $29.5 million for the repayment of its debt and the issuance of 13,176,000 shares of common stock
having a value, based on the $5 per share IPO price (See Note 11), of approximately $65.9 million, together with an earn-out in an amount
equal to five percent of gross revenues of the in-building Broadband over Power Lines ("BPL") business payable on a rolling five-year basis,
with us having an option at the end of each such five-year period to purchase royalty streams at their fair market value.
Concurrently, we acquired all of the issued and outstanding stock of Xtensions (a Delaware Corporation) for $11 million cash and the
issuance of 2,400,000 shares of common stock having a value, based on the $5 per share IPO price (See Note 11), of approximately $12
million.
The primary reason for the acquisitions was to increase our market share in certain targeted areas and to position us for further
expansion.
In accordance with SFAS 141 we applied the purchase method of accounting to record these acquisitions. The accompanying consolidated
financial statements include the operating results of each company from the date of acquisition.
The purchase price allocation to the assets acquired and liabilities assumed are based on their fair values on the date of acquisition
and are as follows:
FC LLC Xtensions TOTAL
*Restated) (Restated) (Restated)
(in thousands)
Assets Acquired:
Cash and cash equivalents $ 33 $ 460 $ 493
Accounts receivable - trade, net 11,842 1,503 13,345
Accounts receivable - related party 990 - 990
Inventory 228 - 228
Prepaid expenses 562 20 582
Property and equipment 6,143 33 6,176
Goodwill 71,704 16,375 88,079
Other intangibles, net 55,600 10,800 66,400
Deferred tax assets 86 - 86
Deposits and other assets 1,075 - 1,075
Total assets acquired 148,263 29,191 177,454
Liabilities Assumed:
Accounts payable - trade 13,115 1,470 14.585
Accrued expenses 4,800 583 5,383
Deferred tax liability - 4,138 4,138
Deferred revenues 3,218 - 3,218
Total liabilities assumed 21,133 6,191 27,324
Net assets acquired $ 127,130 $ 23,000 $ 150,130
Of the $66.4 million of acquired intangible assets, $12.4 million was assigned to trademarks that are not subject to registered
trademarks that are not subject to amortization, $48.0 million was allocated to customer lists which have a weighted average useful life of
8 years, and $6.0 million was allocated to LMDS licenses which have a weighted average useful life of 25 years.
Approximately $66.5 million of goodwill arising from prior acquisitions of FC LLC is expected to be deductible for income tax purposes
over a period of 15 years from the original acquisition dates.
We have identified certain contingencies related to disputes regarding vendor billing errors and vendor bill-backs from the 24-month
preceding period that have not yet been resolved and cannot be reasonably estimated at this time. Our vendors have the right to bill us for
errors for a period of two years. Should amounts relate to periods prior to the acquisition, our goodwill amount could change.
NOTE 3 - ACCOUNTS RECEIVABLE - TRADE
Trade accounts receivable are comprised of billed and unbilled receivables. At December 31, 2007, billed receivables amounted to $9,904.
Unbilled receivables amounted to $4,550 as of December 31, 2007. Trade accounts receivable are offset by an allowance for doubtful accounts
of $661 at December 31, 2007.
NOTE 4 - OTHER INTANGIBLE ASSETS
The following is a summary of other intangible assets at December 31, 2007:
Other Accumulated Net Weighted Average
Intangia Amortizatio Amortization Period
ble n
Assets
Trademarks $ 12,400 $ - $ 12,400 Indefinite
Customer lisrts 48,000 3,000 45,000 8 years
LMDS licenses 6,000 120 5,880 25 years
$ 66,400 $ 3,120 $ 63,280
Total amortization expense related to other intangible assets for the period from inception (July 2, 2007) through December 31, 2007 was
$3,120.
As of December 31, 2007, future estimated amortization expense related to amortizable other identifiable intangible assets will be:
2008 $ 6,240
2009 6,240
2010 6,240
2011 6,240
2012 6,240
Thereafter 19,680
$ 50,880
NOTE 5 - LINE OF CREDIT
In July 2007, we entered into a $6 million unsecured demand line of credit with a bank, with a variable interest rate of one month
London Inter-Bank Offered Rate ("LIBOR") plus 150 basis points (effective rate of 6.345% at December 31, 2007). The balance outstanding on
the line of credit was $625 at December 31, 2007. We had $171 in letters of credit outstanding under the line of credit at December 31, 2007
related to three vendors.
NOTE 6 - OPERATING LEASES
We lease facilities and certain office equipment under operating leases expiring at various dates through February 2013. Certain leases
require us to pay specified taxes, insurance, utilities, and repairs and maintenance on the leased items.
Approximate minimum future rental payments under these operating leases are as follows:
2008 $ 1,405
2009 1,416
2010 975
2011 689
2012 567
Thereafter 95
$ 5,147
Rental expense under these operating leases was $785 for the period from inception (July 2, 2007) through December 31, 2007.
NOTE 7 - RELATED PARTY TRANSACTIONS
We provide telecommunication services to a shareholder, and also had a management service agreement (the "Agreement") with the
shareholder to provide management services through December 31, 2007 which amounted to $4,353 or 6.7% of revenues, recorded within revenues,
net - related party in the accompanying Consolidated Statement of Operations, for the period from inception (July 2, 2007) through December
31, 2007. The Agreement related to the shareholder's telecommunications subsidiary, which we subsequently acquired on March 6, 2008. In
accordance with the Agreement, included in the related party revenue is management fee income of $400. The accounts receivable balance for
this shareholder was $945 at December 31, 2007.
We also have an agreement with related parties to provide services to unrelated parties. As a result of this agreement, we recorded
deferred revenue of $196 from an unrelated party at December 31, 2007 of which $27 is classified as current. This deferred revenue will be
earned ratably over twenty years beginning October 2003.
NOTE 8 - EMPLOYEE BENEFIT PLAN
We have a contributory 401(k) profit-sharing plan covering substantially all employees. Generally, employees must have at least one-half
year of service and be twenty-one years of age to be eligible to participate in the plan. Employees are able to contribute up to 15% of
their compensation to the plan with employer matching contributions of up to 4% of employee compensation. Total employer contributions made
under the plan equaled $49 for the period from inception (July 2, 2007) through December 31, 2007.
NOTE 9 - MAJOR CARRIERS AND CUSTOMERS
We have agreements with various carriers to permit our customers to use their networks. If these carriers decide not to continue those
agreements due to a change in ownership or other circumstances, this could cause a loss of service in certain areas and possible loss of
customers.
We purchase network access from three major carriers comprising 65.6% (24.3%, 21.6%, and 19.7%) of cost of facilities for the period
from inception (July 2, 2007) through December 31, 2007. No individual customer comprised more than 10% of our total revenues for the period
from inception (July 2, 2007) through December 31, 2007.
NOTE 10 - INCOME TAXES (RESTATED)
The income tax provision for the period from inception (July 2, 2007) to December 31, 2007 is comprised of the following (in
thousands):
(Restated)
Current:
Federal $ 323
State and local 40
363
(Restated)
Current:
Federal $ 323
State and local 40
363
Deferred:
Federal $ 200
State and local 25
225
$ 588
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets and liabilities
as of December 31, 2007 are as follows (in thousands):
Current deferred tax (assets) liabilities:
Allowance for doubtful accounts $ (253)
Vacation accrual (85)
Prepaid expenses 342
COGS disputes 209
Deferred tax liability , net - current 213
Non-current deferred tax (assets) liabilities:
Non-goodwill intangibles $ (3,649)
Goodwill 280
Fixed assets 242
Deferred rent (28)
Unearned revenue (65)
Other (14)
Deferred tax liability, net- long-term 4,064
Net deferred tax liability $ 4,277
A reconciliation of the income tax provision computed at statutory tax rates to the income tax provision for the period from inception
(July 2, 2007) to December 31, 2007 is as follows (in thousands):
Statutory federal income tax rate 34.0%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit 4.3%
Other, net 1.4%
Effective income tax rate for the period 39.7%
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2007, we have made no
provisions for interest or penalties related to uncertain tax positions.
We file income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. For federal tax purposes, our 2007 tax
year remains open for examination by the tax authorities under the normal three year statute of limitations. Generally, for state tax
purposes, our 2007 tax year will remain open for examination by the tax authorities under a four year statute of limitations.
The realization of our deferred tax assets are significant estimates requiring assumptions regarding the sufficiency of future taxable
income to realize the future tax deductions from the reversal of deferred tax assets. Our unrecognized tax benefit for uncertain tax
positions was immaterial at December 31, 2007.
note 11 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
Amended Articles of Incorporation
On April 16, 2007, we amended and restated our articles of incorporation to authorize 70,000,000 shares of capital stock that may be
issued consisting of 59,165,000 ("Series A common stock") shares of common stock, par value $0.001 per share, 835,000 shares of Series B
nonvoting common stock ("Series B common stock"), par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per
share.
Management Shares
Prior to the Initial Public Offering ("IPO") transaction we issued 1,326,000 shares of common stock to certain members of management of
FC LLC and Xtensions in exchange for their interests in FCI Investments, Inc. in an exchange recorded at fair value.
Initial Public Offering
On July 2, 2007, in our IPO on the AIM of the London Stock Exchange, we issued 9,165,000 shares of Series A common stock, 835,000 shares
of Series B common stock, 40,000 shares of Series A Redeemable Preferred Stock ("Series A Preferred Stock"), and 15,333,333 warrants to
purchase common stock for gross proceeds of approximately $81.6 million, net of issuance costs of $8.4 million. We recorded the value of the
common stock, preferred stock and warrants issued as part of the IPO at their relative fair values. On July 2, 2007, we issued 16,902,000
shares of common stock in conjunction with the acquisitions of FC LLC and Xtension, see Note 2 for further details. On March 6, 2008, 25,000
shares of the Series A Preferred Stock were redeemed in conjunction with the closing of a new credit facility, see Note 13 for further
details.
The aforementioned warrants consist of the following:
Tranche 1 Warrants
We issued Tranche 1 Warrants to the holders of Series A Preferred Stock in conjunction with our IPO, pursuant to which they are entitled
to purchase up to 5,333,333 shares of common stock at $0.05 per share. The Tranche 1 Warrants expire on July 2, 2012. The holders of the
Tranche 1 Warrants have agreed that, subject to certain exceptions, they will not dispose of any interest in the Tranche 1 Warrants or
common stock issued upon the exercise of the warrants before July 2008. The relative fair value of the Tranche 1 Warrants was $19,329 and is
included in additional paid in capital.
Tranche 2 Warrants
We issued Tranche 2 Warrants to the holders of Series A Preferred Stock in conjunction with our IPO, pursuant to which they are entitled
to purchase up to 8,000,000 shares of common stock at $7.50 per share. The Tranche 2 Warrants expire on July 2, 2010. The holders of the
Tranche 2 Warrants have agreed that, subject to certain exceptions, they will not dispose of any interest in the Tranche 2 Warrants or
common stock issued upon the exercise of the warrants before July 2008. The relative fair value of the Tranche 2 Warrants was $3,909 and is
included in additional paid in capital.
IPO Warrants
We issued IPO Warrants to certain holders of common stock and Series A Preferred Stock in conjunction with our IPO, pursuant to which
they are entitled to purchase up to 2,000,000 shares of common stock at $7.50 per share. The IPO Warrants expire on July 2, 2010. The
holders of the IPO Warrants have agreed that, subject to certain exceptions, they will not dispose of any interest in the IPO Warrants or
common stock issued upon the exercise of the warrants before July 2008. The relative fair value of the IPO Warrants was $977 and is included
in additional paid in capital.
The following table summarizes the Black-Scholes assumptions used to determine the fair value of the aforementioned warrants:
Tranche 1 Tranche 2 IPO
Warrant Warrants Warrants Warrants
Term (years) 5 3 3
Volatility 40.0% 35.0% 35.0%
Risk-free rate 3.6% 3.1% 3.1%
Dividend rate 0.0% 0.0% 0.0%
Based on our articles of incorporation and share purchase agreements the common and preferred shares have the following rights and
privileges:
Conversion
The Series B common stock is convertible into common stock on a one to one basis. The Series A Preferred Stock is not convertible.
Dividends
The Series A Preferred Stock is entitled to dividends subsequent to September 2008, which are cumulative and accrue at a 12% annual rate
based on the original issue price of $1,000 per share.
Liquidation preference
The holders of Series A Preferred Stock have liquidation rights equal to the original purchase price of $1,000 per share, plus any
declared but unpaid dividends on a pari passu basis. The holders of Series A Preferred Stock have preference over common stockholders. After
payment in full to the holders of Series A Preferred Stock, the remaining assets, if available, of the Company shall be distributed ratably
to the holders of Series A common stock and Series B common stock.
Redemption
We have the option to redeem the Series A Preferred Stock at any time at the original issue price of $1,000 per share plus all accrued
but unpaid dividends. On or after July 2, 2012, at the election of the holders of the majority of the then outstanding Series A Preferred
Stock, the holders may redeem part or all of the Series A Preferred Stock at the original issue price of $1,000 per share plus all accrued
but unpaid dividends.
The Series B common stock had the right to become redeemable if we failed to obtain certain regulatory approvals, as defined in the
articles of incorporation, prior to November 2, 2007. We obtained the regulatory approvals in October 2007 thus the Series B common stock
redemption feature was terminated.
Voting and Other Rights
The Series A Common stock exclusively possesses all voting power and each share of common stock has one vote. Gores FC Holdings, LLC, as
the majority owner of the Series A Preferred Stock, is entitled to elect a majority of the members of the Board of Directors. As long as
they hold a majority of the Series A Preferred Stock, they shall have the right at each annual meeting to elect the majority of the members
of the Board of Directors or upon written notice a special meeting shall be called to immediately elect the majority of the Board of
Directors. In addition, we cannot, without obtaining the approval by vote or written consent of Gores FC Holdings, LLC, take any number of
actions, including but not limited to changing the lines of business or exit existing lines of business, incur indebtedness above a leverage
level or hire or materially change the terms of employment of any member of senior management.
Stock-Based Compensation
We have reserved 274,000 shares of Series A common stock for the issuance of shares under a stock option incentive plan. The terms of a
stock option plan have not been approved by the Board of Directors and none of the reserved shares have been granted as of December 31,
2007.
NOTE 12 - CONTINGENCIES
We are subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of our business
activities. We believe that any liability that may ultimately result from the resolutions of these matters will not have a material effect
on our financial position, results of operations or cash flows.
We have identified certain contingencies related to disputes regarding vendor billing errors and vendor bill-backs from the 24-month
preceding period that have not yet been resolved and can not be reasonably estimated at this time. Our vendors have the right to bill us for
errors for a period of two years. Should amounts relate to periods prior to the acquisition, our goodwill amount could change.
Disclosure of the potential for changes in other estimates used in determining amounts reported for our vendor billing errors and vendor
bill-backs is not required because, given our history of making similar estimates, it is not considered at least reasonably possible that
they will change in the near term by amounts that would be material to the consolidated financial statements.
NOTE 13 - SUBSEQUENT EVENTS
On March 6, 2008, we acquired substantially all of the assets and certain assumed liabilities of FirstEnergy Telecom Services, Inc. ("FE
Telecom"), a fiber and wireless infrastructure provider, for $45 million and subject to certain working capital adjustments to be determined
subject to closing the transaction. FE Telecom was a subsidiary of FirstEnergy Corp., which is a shareholder of the Company. We are still
evaluating the allocation of purchase price to the fair value of acquired assets and assumed liabilities.
Concurrently, we closed a $90 million credit facility syndicated by JP Morgan Securities Inc. The financing facility includes a $70
million term loan and a $20 million revolving line of credit (which replaces the line of credit agreement described in Note 5), secured by
substantially all of our assets. The proceeds of the new credit facility were used to pay for the acquisition of FE Telecom's assets, along
with the pro-rata redemption of $25 million of our outstanding Preferred Stock, and will be used ongoing for general working capital
purposes. The facility is five years, with pricing starting at 375 basis points over US LIBOR (53% of which is fixed under interest rate
swaps for three years at 3.03% and 22% of which is fixed for five years at 3.56%). We also have the ability to increase the term loan by an
additional $25 million under an accordion feature.
On March 31, 2008, we merged our joint venture BPL operations, FirstSpeed, LLC with PowerGrid Communications, Inc. ("PowerGrid"), a
Delaware based C corporation. We now own a 25% interest in PowerGrid, which is the surviving company. PowerGrid provides utilities and
energy users a more efficient, reliable, and responsible power grid through the deployment of BPL and other communication technologies and
management software.
On July 21, 2008, we signed a definitive agreement to acquire GCI Globalcom Holdings, Inc., the sole shareholder of Globalcom, Inc.
("Globalcom"), a fiber and wireless infrastructure provider, for $58.5 million in cash.
Concurrently, we closed $50 million in incremental term loan commitments, syndicated by JP Morgan Securities Inc. The proceeds of the
debt raise will be used to pay for the acquisition along with $8.5 million under the existing $20 million revolving credit facility.
On August 15, 2008, we signed a letter of intent to transact a reverse merger with Renaissance Acquisition Corp. ("RAK") in which we
will be the surviving company. The purchase price will be approximately $365 million. RAK is listed on the American Stock Exchange and was
organized as a special purpose acquisition corporation. RAK will issue $224 million of stock to our current equity holders, assume $130
million of our debt, including the Globalcom transaction, and retire $15 million of our Preferred Stock less $4 million of our cash.
NOTE 14 - RESTATEMENT
Our previously issued consolidated financial statements for the period from inception (July 2, 2007) to December 31, 2007 have been
restated to reflect adjustments to purchase accounting entries; cash; accounts receivable - trade; deferred tax assets and liabilities;
prepaid expenses; goodwill; deposits and other assets; accounts payable - trade; income tax payable; accrued expenses; deferred revenue;
redeemable preferred stock; additional paid in capital; retained earnings; revenues; cost of facilities; selling, general and administrative
expenses; other expense, net; provision for income taxes; and cash flows.
The restatement lowered income before income taxes by $4.3 million, which was primarily due to amounts recorded in the consolidated
statement of operations, which should be purchase price adjustments and $350 of aborted financing costs. Net income was lowered by the
changes above offset by the income taxes on the adjustments and corrections of other income tax expense misstatements.
Earnings per share was not disclosed in the previously reported consolidated financial statements and notes.
Effects on the financial statements are as follows:
As
Previous
ly
Reported Restated
Consolidated Balance Sheet:
Cash and cash equivalents $ 11,163 $ 9,300
Accounts receivable - trade 14,469 13,793
Accounts receivable - related party 502 945
Deferred tax asset- current 215 -
Prepaid expenses 1,256 823
Total current assets 27,740 24,997
Office equipment 278 232
Furniture and fixtures 606 561
Goodwill 103,410 88,079
Deposits and other assets 1,707 1,357
Total other assets 168,397 152,716
Total assets 203,359 184,936
Accounts payable - trade 14,802 13,220
Federal income tax payable 1,466 362
Accrued expenses 2,455 2,600
Deferred tax liability, net - current - 213
Deferred revenue - current 1,625 3,244
Total current liabilities 20,974 20,264
Deferred tax liability, net- long-term 13,735 4,064
Total non-current liabilities 13,905 4,234
Redeemable preferred stock- mezzanine - 40,000
Redeemable preferred stock - shareholders' equity 40 -
Common stock 27 -
Series A common stock - 26
Series B common stock - 1
Additional paid in capital 164,854 119,482
Retained earnings 3,599 929
Total shareholder-s equity 168,480 120,438
Total liabilities and shareholder's equity 203,359 184,936
Consolidated Statement of Operations
Revenues, net $ 64,286 $ 61,200
Total revenues, net 68,640 65,553
Cost of facilities 43,683 44,560
Selling, general and administrative expenses 15,384 15,706
Operating income 5,860 1,575
Other expenses, net 5,860 1,575
Income before income taxes 5,854 1,517
Provision for income taxes 2,255 588
Net income 3,599 929
Consolidated Statement of Cash Flows:
Net cash flows- operating activities $ 8,150 $ (2,317)
Net cash flows- investing activities (82,787) (73,810)
Net cash flows- financing activities 85,799 85,427
Cash and cash equivalents, end of period 11,163 9,300
This information is provided by RNS
The company news service from the London Stock Exchange
END
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