Form 10-Q ALTEVA, INC. For: Sep 30

Table of Contents

�

�

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

�

�

Form�10-Q

�

x����� QUARTERLY REPORT PURSUANT TO SECTION�13 OR 15(d)�OF THE SECURITIES EXCHANGE ACT OF 1934

�

For the quarterly period ended September�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 No.�001-35724

�

�

Alteva,�Inc.

(Exact name of registrant as specified in its charter)

�

�

�

Registrant�s telephone, including area code:�� (877) 258-3722

�

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 x �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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).� YES x� 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 definitions of �large accelerated filer,� �accelerated filer� and �smaller reporting company� in Rule�12b-2 of the Exchange Act.

�

�

Indicate by check mark whether the registrant is a shell company (as defined by Rule�12b-2 of the Exchange Act.� YES o� NO x

�

The number of shares of Alteva,�Inc. common stock outstanding as of November�3, 2014 was 5,975,970.

�

�

Table of Contents

�

Index to Form�10-Q

�

�

2

Table of Contents

�

Part�I � Financial Information

�

Item 1.� Financial Statements

�

ALTEVA,�INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except per share amounts)

�

�

Please see accompanying condensed notes, which are an integral part of the condensed consolidated financial statements.

�

3

Table of Contents

�

ALTEVA,�INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

�

�

Please see accompanying notes, which are an integral part of the condensed consolidated financial statements.

�

4

Table of Contents

�

ALTEVA,�INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

�

�

Please see accompanying notes, which are an integral part of the condensed consolidated financial statements.

�

5

Table of Contents

�

ALTEVA,�INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

�

�

Please see the accompanying notes, which are an integral part of the condensed consolidated financial statements.

�

6

Table of Contents

�

ALTEVA,�INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

�

NOTE 1:�� NATURE OF OPERATIONS AND CRITICAL ACCOUNTING POLICIES AND ESTIMATES

�

Nature of Operations

�

Alteva,�Inc. (�Alteva� or the �Company�) is a cloud-based communications company that provides Unified Communications (�UC�) solutions, including enterprise hosted Voice over Internet Protocol (�VoIP�) and operates as a regional Incumbent Local Exchange Carrier (�ILEC�) in southern Orange County, New York and northern New Jersey.� Unless otherwise indicated or unless the context requires, all references to the Company means the Company and its wholly-owned subsidiaries.� The Company delivers cloud-based UC solutions including BroadSoft-based VoIP integrated with Microsoft Lync, Microsoft Exchange, Google Apps for Business, leading customer relationship management (CRM) applications such as Salesforce.com and Bring-Your-Own-Device (BYOD) solutions for Mobility, which allows users to take advantage of all of the features available to them no matter where they are located or what device they are using.� The Company�s ILEC operations consist of providing local and toll telephone service to residential and business customers,�Internet high-speed broadband service, and satellite television services provided by DIRECTV.

�

Basis of Presentation

�

The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (�U.S. GAAP�) for interim financial information, the instructions to the Quarterly Report on Form�10-Q and Article�10 of Regulation S-X.� Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.� In the opinion of the Company�s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.� The operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire year or any other future period.� The consolidated balance sheet as of December�31, 2013 has been derived from the audited consolidated financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

�

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.� All material intercompany transactions and balances have been eliminated.� The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company�s Annual Report on Form�10-K for the year ended December�31, 2013.

�

Use of Estimates

�

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.� Significant estimates include, but are not limited to, depreciation and amortization expense, allowance for doubtful accounts, long-lived assets, pension and postretirement expenses, and income taxes.� Actual results could differ from those estimates.

�

Revenue Recognition

�

The Company derives its revenue from the sale of UC services as well as traditional telephone services.

�

The Company recognizes revenue when (i)�persuasive evidence of an arrangement between the Company and the customer exists, (ii)�the delivery of the product to the customer has occurred or service has been provided to the customer, (iii)�the price to the customer is fixed or determinable, and (iv)�collectability of the sales or service price is reasonably assured.� Revenue is reported net of all applicable sales tax.

�

UC

�

The Company�s UC services and solutions consist primarily of its hosted VoIP UC system, certain UC applications, and other professional services associated with the installation and activation. Additionally, the Company offers customers the ability to purchase telephone equipment from the Company directly or independently from external vendors.

�

Multiple element arrangements primarily include the sale of telephone equipment, along with professional services associated with installation, activation and implementation services, as well as follow on hosting services.� The Company has concluded that the separate units of accounting in these arrangements consist of (i)�the telephone equipment sale and (ii)�the professional services provided combined with the follow on hosting services.� The professional services provided do not constitute a separate unit of accounting as they do not have value to the customer on a stand-alone basis.� Arrangement consideration is allocated to the separate units of accounting based on the relative selling price.� The selling price for telephone equipment is based on third-party evidence representing list prices for similar equipment when sold a stand-alone basis.� The selling price for professional and hosting services is based on the Company�s best estimate of selling price (�BESP�).� The Company develops its BESP by considering pricing practices, margin, competition and overall market trends.

�

7

Table of Contents

�

The Company bills a portion of its monthly recurring hosted service revenue a month in advance. Any amounts billed and collected, but for which the service is not yet delivered, are included in deferred revenue. These amounts are recognized as revenues only when the service is delivered.

�

Equipment sales associated with the sale of telephone equipment are recognized upon delivery to the customer, as it is considered to be a separate earnings process. The sales are recognized on a gross basis, as the Company is considered the principal obligor in customer transactions among other considerations.� Other upfront fees, excluding equipment, along with associated costs, up to but not exceeding these fees, are deferred and recognized over the estimated life of the customer relationship.� The Company has estimated its customer relationship life at eight years and evaluates it periodically for continued appropriateness.

�

Telephone

�

Revenue is earned from monthly billings to customers for local voice services, long distance, DSL,�Internet services, hardware and other services. Revenue is also derived from charges for network access to the local exchange telephone network from subscriber line charges and from contractual arrangements for services such as billing and collection and directory advertising. Revenue is recognized in the period in which service is provided to the customer. Directory advertising revenue is recorded ratably over the life of the directory. With multiple billing cycles, the Company accrues revenue earned but not yet billed at the end of a quarter. The Company also defers services billed in advance and recognizes them as income when earned.

�

The Telephone segment markets competitive service bundles which may include multiple deliverables. The base bundles consist of voice services (including a business or residential phone line), calling features and long distance services and customers may choose to add internet services to a base bundle package. Separate units of accounting within the bundled packages include voice services, long distance and Internet services. Revenue for all services included in bundles are recognized over the same service period, which is the time period in which the service is provided to the customer.

�

Certain revenue is realized under pooling arrangements with other service providers and is divided among the companies based on respective costs and investments to provide the services. The companies that take part in pooling arrangements may adjust their costs and investments for a period of two years, which causes the funds distributed by the pool to be adjusted retroactively. The Company believes that recorded amounts represent reasonable estimates of the final distribution from these pools. However, to the extent that the companies participating in these pools make adjustments, there will be corresponding adjustments to the Company�s recorded revenue in future periods.

�

Revenue from these pooling arrangements which includes Universal Service Funds (�USF�) and National Exchange Carrier Association (�NECA�) pool settlements, accounted for 3% and 5% of the Company�s consolidated revenues for the nine months ended September�30, 2014 and 2013, respectively.

�

Materials and Supplies

�

The Company�s materials and supplies are carried at average cost, net of reserves for obsolescence, and consist principally of telephone equipment, telephone pole and wiring spare parts and other ancillary equipment for resale.

�

Fair Value

�

Fair value is the estimated price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required by accounting standards to provide the disclosure framework for measuring fair value and expanded disclosure about fair value measurements.� Fair value measurements are classified and disclosed in one of the following categories:

�

Level 1:��������������������������� Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

�

Level 2:��������������������������� These are inputs, other than quoted prices that are included in Level 1, which are observable in the marketplace throughout the term of the assets or liabilities, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

�

Level 3:�������������������������� Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.

�

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.� The Company�s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

�

8

Table of Contents

�

Goodwill

�

Goodwill represents the excess of the purchase price of an acquired business over the net fair value of identifiable assets acquired and liabilities assumed.� Goodwill is not amortized, but rather is assessed for impairment at least annually.� The Company tests goodwill for impairment at the reporting unit level annually on December�31, or whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.� If it is determined that an impairment has occurred, the Company records a write down of the carrying value and records the charge for the impairment as an operating expense during the period in which the determination is made.

�

The Company only has goodwill that is associated with its UC segment, resulting from the purchase of certain assets and certain liabilities of Alteva, LLC in 2011.� The Company is not aware of any events or circumstances that occurred during the nine months ended September�30, 2014 that would have more likely than not reduced the fair value of this reporting unit below its carrying value.

�

Income Taxes

�

The Company records deferred taxes that arise from temporary differences between the financial statement and the tax basis of assets and liabilities.� Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate.� Deferred tax assets and deferred tax liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.� The Company�s deferred taxes result principally from differences in the timing of depreciation and in the accounting for pensions and other postretirement benefits.

�

The process of providing for income taxes and determining the related balance sheet accounts requires management to assess uncertainties, make judgments regarding outcomes and utilize estimates. Management must make judgments currently about such uncertainties and determine estimates of the Company�s tax assets and liabilities. To the extent the final outcome differs, future adjustments to the Company�s tax assets and liabilities may be necessary.

�

The Company assesses the realizability of its deferred tax assets, taking into consideration future reversals of existing temporary differences, the Company�s forecast of future taxable income, and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and the amount of, valuation allowances against the Company�s deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.

�

Accounting for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities unless they are expected to be paid within one year.� The Company recognizes interest accrued related to unrecognized tax benefits in interest expense.

�

Accounting Policies

�

There were no material changes to the Company�s other accounting policies as presented in Item 8 of its Annual Report on Form�10-K for the year ended December�31, 2013.

�

NOTE 2:� NEW ACCOUNTING PRONOUNCEMENTS

�

In August�2014, the Financial Accounting Standards Board (�FASB�) issued accounting standards update (�ASU�) 2014-15 �Presentation of Financial Statements � Going Concern: Disclosure of Uncertainties about an Entity�s Ability to Continue as a Going Concern.� The update provides guidance that previously did not exist under US GAAP about a company�s management�s responsibility to evaluate whether there is substantial doubt about an entity�s ability to continue as a going concern and to provide related footnote disclosures, if applicable.� The standard is effective for annual and interim periods within those annual periods beginning after December�15, 2016.� Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a significant impact to the disclosures in its consolidated financial statements.

�

In June�2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.� The update provides guidance on how to account for certain share-based payment awards where employees would be eligible to vest in the award regardless of whether the employee is still rendering service on the date the performance target is achieved.� The standard is effective for annual and interim periods within those annual periods beginning after December�15, 2015.� Early adoption is permitted.� The Company does not expect the adoption of ASU 2014-12 to have a material impact to its consolidated results of operation.

�

In May�2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, ASU 2014-09, Revenue from Contract with Customers, that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. The standard�s primary principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.� The standard is effective for public entities for annual and interim periods beginning after December�15, 2016. We expect to adopt this standard in the quarter ending March�31, 2017. The Company is still evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

�

In April�2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 revised guidance to only allow disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of

�

9

Table of Contents

�

an entity) and that have a major effect on a reporting entity�s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations, as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. ASU 2014-08 is effective for interim and annual reporting periods beginning after December�15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a significant impact on the Company�s consolidated results of operations, financial position or cash flows.

�

In July�2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (�ASU 2013-11�). ASU 2013-11 provides guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company adopted ASU 2013-11 effective January�1, 2014 and the adoption did not have a significant impact on the Company�s consolidated financial statement presentation.

�

NOTE 3:� SEAT LICENSES AND OTHER INTANGIBLE ASSETS

�

Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual value. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

�

The components of seat licenses are as follows:

�

�

�

The components of other intangible assets are as follows:

�

�

�

NOTE 4:� LOSS ON DISPOSAL/BUSINESS RESTRUCTURING

�

As part of its ongoing efforts to improve performance of the UC segment, the Company initiated a restructuring of its business by disposing of its Syracuse, New York operations.� Effective September�1, 2013, the Company sold certain assets of its wholly-owned subsidiary Alteva of Syracuse,�Inc. to a third-party for approximately $0.6 million. �The Company recorded a $0.4 million loss in the three months ended September�30, 2013 related to the disposal of the Syracuse, New York operations.

�

NOTE 5: SEVERANCE

�

On May�25, 2014, the Company continued to carry out its plan to contain costs by reducing its company-wide headcount by 7%.� Total severance expense recognized in selling, general and administrative expense during the nine months ended September�30, 2014 related to this reduction was $0.2 million. The Company expects to payout its remaining accrual balance associated with this workforce reduction through December�2014.

�

On May�21, 2013, the Company announced a reduction in workforce of its Warwick, New York facility of approximately 17%

�

10

Table of Contents

�

due to the decline in work associated with the Telephone segment.� Total severance expense recognized in selling, general and administrative expenses during the nine months ended September�30, 2013 related to this reduction was $0.3 million. The Company paid out its remaining accrual balance associated with this workforce reduction in August�2014.

�

The Company reports unpaid severance accrual within other accrued expenses on its balance sheet.� The following summarizes the movement in the severance accrual balance associated with its workforce reductions, for the nine months ended September�30, 2014:

�

�

On October�22, 2014, the Company furthered its cost cutting initiatives and eliminated the Chief Administrative Officer position.� As a result, Ms.�Jennifer M. Brown the Company�s Chief Administrative Officer, Corporate Secretary and Executive Vice President left the Company.� On November�6, 2014, Ms.�Brown signed a severance agreement with terms of six months of severance, plus benefits; however there is a seven day period in which she can repudiate the signed agreement.

�

NOTE 6:� ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP

�

The Company was a limited partner in the Orange County-Poughkeepsie Limited Partnership (�O-P�) and had an 8.108% limited partnership interest until April�30, 2014, which was accounted for under the equity method of accounting.� The majority owner and general partner of the O-P is Verizon Wireless of the East LP (�Verizon�).

�

On May�26, 2011, the Company entered into an agreement with Verizon and Cellco Partnership (d/b/a Verizon Wireless), the other limited partner, in the O-P to make certain changes to the O-P partnership agreement which, among other things, specifies that the O-P will provide 4G cellular services (the �4G Agreement�).� The 4G Agreement provides that the O-P�s business will be converted from a wholesale business to a retail business.� The 4G Agreement provided for guaranteed annual cash distributions to the Company from the O-P through 2013.� For the years ended December�31, 2013, 2012 and 2011, the Company received annual cash distributions from the O-P of $13.0 million, $13.0 million and $13.6 million, respectively.� Starting in 2014, the agreement provided that the Company would receive cash distributions equal to its ownership share percentage of the approved total distributions by the O-P. The 4G Agreement also gave the Company the right (the �Put�) to require Verizon to purchase all of the Company�s ownership interest in the O-P during April�2013 or April�2014 for an amount equal to the greater of (a)�$50.0 million or (b)�the product of five (5)�times 0.081081 times the O-P�s EBITDA, as defined in the 4G Agreement for the calendar year preceding the exercise of the Put.

�

On April�30, 2014, the Company exercised the Put option and sold all of its ownership interest in the O-P for gross proceeds of $50 million, which resulted in a gain on the sale of $49.8 million.� The Company has not and will not receive any income from the O-P after April�30, 2014.� The Company used a portion of the proceeds to repay all of the outstanding borrowings under the TriState credit facility and paid taxes on the related gain (see Note 7).� The Company expects to use the remaining gross proceeds to fund working capital needs and support growth initiatives.

�

Pursuant to the equity method accounting of the Company�s investment income, the Company is required to record the income from the O-P as an increase to the Company�s investment account.� The Company is required to apply the cash payments made under the 4G Agreement as a return on its investment when received.�As a result of receiving the fixed guaranteed cash distributions from the O-P in excess of the Company�s proportionate share of the O-P income, the investment account was reduced to zero within the first nine months of 2012. Thereafter, the Company recorded the fixed guaranteed cash distributions that were received from the O-P in excess of the proportionate share of the O-P income directly to the Company�s statement of operations as other income.� In 2014 when guaranteed distribution ceased, the Company returned to recording the income from the O-P as in increase to the Company�s investment account and any cash payments received were applied as a return on its investment.� As of September�30, 2014, the investment account had been reduced to zero.

�

For the three and nine months ended September�30, 2014, the Company had zero and $2.6 million in income from the O-P equity investment.

�

11

Table of Contents

�

The following summarizes the income statement (unaudited) for the three months ended September�30, 2013 that the O-P provided to the Company:

�

�

The following summarizes the income statement (unaudited) for the nine months ended September�30, 2013 that O-P provided to the Company:

�

�

The following summarizes the balance sheet as of December�31, 2013 that the O-P provided to the Company:

�

�

NOTE 7: DEBT OBLIGATIONS

�

Debt obligations consisted of the following at September�30, 2014 and December�31, 2013:

�

�

On March�11, 2013, the Company entered into a credit agreement with TriState Capital Bank (�TriState�) to provide for borrowings up to $17.0 million with the ability to increase the facility for borrowings up to $20.0 million with the participation of another lender (the �Credit Agreement�).� All borrowings were to become due and payable on June�30, 2014. The TriState borrowings bore interest at a variable rate based on either LIBOR or a Base Rate, as defined in the Credit Agreement, plus an applicable margin of 3.50% or 2.00%, respectively.

�

Under the terms of the Credit Agreement, the Company was required to comply with certain loan covenants, which included, but were not limited to, the achievement of certain financial ratios and certain financial reporting requirements. The Company was required to maintain a consolidated liquidity ratio, as defined in the Credit Agreement, in excess of 1.0 to 1.0.� The Company obtained the consent of TriState prior to agreeing to any amendment to the agreements the Company has with the O-P. The Company�s obligations under the TriState credit facility were secured by all of the Company�s assets and guaranteed by all of the Company�s wholly-owned subsidiaries except for the Company�s ILEC subsidiary.� The ILEC subsidiary entered into a

�

12

Table of Contents

�

negative pledge agreement with TriState whereby the ILEC subsidiary agreed not to pledge any of its assets as collateral or lien to be placed on any of its assets.

�

On April�30, 2014, the Company sold its ownership interest in the O-P on (see Note 6) and a portion of the proceeds was used to repay all of the outstanding borrowings under the TriState credit facility.

�

On June�1, 2014, the Company reduced the borrowing capacity under the Credit Agreement from a ceiling of $17.0 million to a ceiling of $5.0 million.� On June�30, 2014, the Credit Agreement was amended to extend the expiration of the Credit Agreement from June�30, 2014 to October�8, 2014.� As of September�30, 2014, the Company had $5.0 million available under the Credit Agreement and was in compliance with all of its loan covenants.

�

The Company�s Credit Agreement expired on October�8, 2014.� On November�7, 2014, the Company entered into a demand line of credit with TriState to allow for borrowings up to $5.0 million.� The Company borrows or repays its debt as needed based upon its working capital obligations.� It is up to the discretion of TriState to approve borrowings within the allowed line of credit limit and may, at any time, demand that the Company make payment on an outstanding balance. The Company was previously required to comply with certain loan covenants and restrictions under its prior Credit Agreement.� There are no financial covenants under the new demand line of credit.

�

NOTE 8:� INCOME TAXES

�

The effective tax rate for the nine months ended September�30, 2014, and September�30, 2013 was 36% and 891%, respectively.� We determined our interim tax provision by developing an estimate of the annual effective tax rate and applying such rate to interim pre-tax results. The estimated rate includes projections of tax expense on the expected increase in our valuation allowance for deferred tax assets.� The estimated effective tax rate differed from the U.S. statutory rate primarily due to the expected increase in the valuation allowance, which reduced the overall tax benefit recorded for the period ended September�30, 2014. The estimated tax effects of the gain on the O-P put exercise have been treated as a discrete item in the second quarter.

�

As of September�30, 2014 and December�31, 2013, the Company carried a full valuation allowance against its deferred tax assets because management determined that it was not more likely than not that it would realize the benefits of such deferred tax assets. The Company maintains a deferred tax liability related to indefinite lived intangibles.

�

The Company periodically assesses liabilities and contingencies for all periods open to examination by tax authorities based on the latest available information. Where it is not more likely than not that the Company�s tax position will be sustained, the Company records its best estimate of the resulting tax liability and interest in the consolidated financial statements.� As of September�30, 2014 and December�31, 2013, the Company had no liability for unrecognized tax benefits.

�

The Company�s policy is to recognize interest related to unrecognized tax benefits in interest expense.� For the nine months ended September�30, 2014 and 2013, there was no interest expense relating to unrecognized tax benefits.

�

NOTE 9:� PENSION AND POSTRETIREMENT OBLIGATIONS

�

The components of net periodic cost (benefit) for the three months ended September�30, 2014 and 2013 are as follows:

�

�

13

Table of Contents

�

The components of net periodic cost (benefit) for the nine months ended September�30, 2014 and 2013 are as follows:

�

�

For the nine months ended September�30, 2014 and September�30, 2013, the Company has contributed $0.2 million and $0.8 million, respectively, to its pension and postretirement benefits plans.� The amortization of prior service cost and recognized actuarial (gain) loss included in pension and postretirement expense represent reclassifications out of other comprehensive income (loss).

�

NOTE 10: �� STOCK BASED COMPENSATION

�

The Company has a shareholder approved long-term incentive plan (the �LTIP�) to assist the Company and its affiliates in attracting, motivating and retaining selected individuals to serve as employees, directors, consultants and advisors of the Company and its affiliates by providing incentives to such individuals through the ownership and performance of the Company�s common stock. There are 1.1 million shares of common stock authorized for issuance under the LTIP.� Shares available for grant under the LTIP may be either authorized, but unissued shares or shares that have been reacquired by the Company and designated as treasury shares. As of September�30, 2014 and December�31, 2013, 371,910 and 57,923 shares, respectively, of the Company�s common stock were available for grant under the LTIP. The LTIP permits the issuance by the Company of awards in the form of stock options, stock appreciation rights, restricted stock and restricted stock units and performance shares. The exercise price per share of the Company�s common stock purchasable under any stock option or stock appreciation right may not be less than 100% of the fair market value of one share of common stock on the date of grant. The term of any stock option or stock appreciation right may not exceed ten years. The LTIP also provides plan participants with a cashless mechanism to exercise their stock options. Issued restricted stock, stock options and restricted stock units are subject to vesting restrictions.

�

Restricted Stock Awards

�

Stock-based compensation expense for restricted stock awards was $0.7 million and $1.0 million for the nine months ended September�30, 2014 and 2013, respectively.� Restricted stock awards are amortized over their respective vesting periods of two or three years.� The Company records stock-based compensation for grants of restricted stock awards on a straight-line basis.

�

The following table summarizes the restricted common stock activity for the nine months ended September�30, 2014:

�

�

The total grant-date fair value of restricted stock vested for the nine months ended September�30, 2014 was $1.5 million.� As of September�30, 2014, $1.0 million of total unrecognized compensation expense related to restricted common stock is expected to be recognized over a weighted average period of approximately 2 years.

�

14

Table of Contents

�

Stock Options

�

The following tables summarize stock option activity for the nine months ended September�30, 2014, along with stock options exercisable at the end of the period:

�