Horizon Telcom, Inc. and Subsidiaries Horizon Telcom...stockholders' equity, december 31, 2016 423,836$ 1,274,133$ (11,663,095 ... horizon telcom, inc. and subsidiaries notes to consolidated

Report of Independent Auditors and Consolidated Financial Statements

with Supplementary information for

Horizon Telcom, Inc. and Subsidiaries

December 31, 2016 and 2015

CONTENTS PAGEREPORTOFINDEPENDENTAUDITORS 1‐2CONSOLIDATEDFINANCIALSTATEMENTS Consolidatedbalancesheets 3‐4 Consolidatedstatementsofincome 5 Consolidatedstatementsofcomprehensiveincome 6 Consolidatedstatementsofstockholders’equity 7 Consolidatedstatementsofcashflows 8‐9 Notestoconsolidatedfinancialstatements 10‐32

SUPPLEMENTARYINFORMATION Reportofindependentauditorsonsupplementaryinformation 33 Consolidatingbalancesheetdetail 34‐35 Consolidatingstatementofincomedetail 36 Consolidatingstatementofcashflowsdetail 37 Businessunitoperatingincomedetail 38

HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATEDBALANCESHEETS

3 Seeaccompanyingnotes.

December31,2016 2015

CURRENTASSETSCashandcashequivalents 6,998,466$ 6,668,623$Accountsreceivable‐subscriber,lessallowancefordoubtful

accountsofapproximately$167,000asofDecember31,2016and$137,000asofDecember31,2015 1,632,958 656,673

Accountsreceivable‐interexchangecarriers,accesschargepools,lessallowancefordoubtfulaccountsofapproximately$112,000asofDecember31,2016and$56,000asofDecember31,2015 627,642 894,259

Accountsreceivable‐other 1,682,264 447,670Incometaxreceivable 17,300 42,000Inventories 2,606,209 1,826,724Prepaidexpensesandothercurrentassets 781,072 678,990

Totalcurrentassets 14,345,911 11,214,939

OTHERASSETSOtherinvestments 1,561,740 1,115,902Prepaidindefeasiblerightofuse 1,660,960 1,766,897Othernoncurrentassets 6,980,768 6,747,023

Totalotherassets 10,203,468 9,629,822

PROPERTY,PLANT,ANDEQUIPMENTRegulatedtelecommunicationsplantinservice 163,265,601 160,117,737Nonregulatedtelecommunicationsplantinservice 181,641,368 177,863,729Regulatedtelecommunicationsplantunderconstruction 348,211 667,282Nonregulatedtelecommunicationsplantunderconstruction 940,731 1,937,675

346,195,911 340,586,423Lessaccumulateddepreciation (176,396,402) (163,042,587)

Netproperty,plant,andequipment 169,799,509 177,543,836

Totalassets 194,348,888$ 198,388,597$

ASSETS

HORIZONTELCOM,INC.ANDSUBSIDIARIES

CONSOLIDATEDBALANCESHEETS

Seeaccompanyingnotes. 4

2016 2015CURRENTLIABILITIES

Currentportion,long‐termdebt 4,500,000$ 3,000,000$Accountspayable 642,681 278,152Otheraccruedliabilities 7,356,625 8,227,002Postretirementbenefitobligation 98,179 124,000Pensionbenefitobligation 771,553 1,784,000Deferredrevenue 5,779,063 7,713,527

Totalcurrentliabilities 19,148,101 21,126,681

LONG‐TERMDEBT 69,451,936 73,682,950

OTHERLIABILITIESANDDEFERREDCREDITSDeferredincometaxes,net 7,888,529 5,120,832Postretirementbenefitobligation 499,471 716,520Pensionbenefitobligation 8,738,018 8,822,950Deferredrevenue‐BTOPgrant 47,604,625 50,622,597Deferredrevenue‐SouthernOhioHealthCareNetwork 6,657,318 8,515,424Deferredrevenue‐other 5,424,246 5,848,648Otherlong‐termliabilities ‐ 209,862

Totalotherliabilitiesanddeferredcredits 76,812,207 79,856,833

STOCKHOLDERS'EQUITYCommonstock‐ClassA,noparvalue.Authorized200,000

shares;issued99,726sharesandoutstanding87,099sharesatDecember31,2016andDecember31,2015,statedat$4.25pershare 423,836 423,836

Commonstock‐ClassB,noparvalue.Authorized500,000shares;issued299,796sharesandoutstanding234,127atDecember31,2016andDecember31,2015,statedat$4.25pershare 1,274,133 1,274,133

Treasurystock,12,627ClassAshares,statedatcost (1,721,337) (1,721,337)Treasurystock,65,669ClassBshares,statedatcost (9,941,758) (9,941,758)Accumulatedothercomprehensiveloss,netofincome

taxbenefit (8,697,772) (9,309,649)Additionalpaid‐incapital 73,190,873 73,133,160Retaineddeficit (25,591,331) (30,136,252)

Totalstockholders'equity 28,936,644 23,722,133

Totalliabilitiesandstockholders'equity 194,348,888$ 198,388,597$

December31,

LIABILITIESANDSTOCKHOLDERS'EQUITY

HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATEDSTATEMENTSOFINCOME


2016 2015

OPERATINGREVENUEWireline 19,029,758$ 20,806,387$Internet 4,302,387 4,068,964Video 4,377,520 4,445,277Fibertransport 27,396,545 19,787,535Othernonregulated 2,685,634 2,827,637Uncollectibles (413,636) (287,483)

Totalnetoperatingrevenues 57,378,208 51,648,317

OPERATINGEXPENSEPlantspecificoperations 5,267,817 5,493,106Plantnonspecificoperations 2,220,407 1,996,440Depreciation 5,953,718 6,507,443Customeroperations 1,667,094 1,661,660Corporateoperations 4,051,780 4,905,639Otheroperatingtaxes 204,125 257,331Nonregulated

Fibertransport 13,670,663 9,259,771Video 3,722,111 3,850,982Other 1,246,774 1,747,114Depreciation 9,631,762 8,990,405

Totaloperatingexpense 47,636,251 44,669,891

Operatingincome 9,741,957 6,978,426

NONOPERATINGINCOME(EXPENSE)Interestincome 3,867 3,113Allowanceforfundsusedduringconstruction 54,218 57,240Dividendincome 1,783,343 ‐Interestexpense (4,389,321) (5,223,911)Othernonoperatingexpense (23,285) (138,389)Lossonabandonedconstruction (125,014) (20,269)

Totalnonoperatingexpense (2,696,192) (5,322,216)

Incomebeforeincometaxes 7,045,765 1,656,210

INCOMETAXEXPENSE (2,500,844) (134,878)

Netincome 4,544,921$ 1,521,332$

YearsEndedDecember31,


CONSOLIDATEDSTATEMENTSOFCOMPREHENSIVEINCOME


2016 2015

Netincome 4,544,921$ 1,521,332$

OthercomprehensiveincomeGainonpensionobligationnetofincometaxexpenseof$311,023and$547,093 576,094 1,013,355Gainonotherpostretirementbenefitobligationnetofincometaxexpenseof$19,319and$12,828 35,783 23,760

Othercomprehensiveincome 611,877 1,037,115

Comprehensiveincome 5,156,798$ 2,558,447$


HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATEDSTATEMENTSOFSTOCKHOLDERS’EQUITY


AccumulatedClassA ClassB Other Additional TotalCommon Common Treasury Comprehensive Paid‐In Retained Stockholders'Stock Stock Stock Loss Capital Deficit Equity

STOCKHOLDERS'EQUITY,December31,2014 423,836$ 1,274,133$ (11,663,095)$ (10,346,764)$ 73,074,315$ (31,657,584)$ 21,104,841$

Stockoptioncompensationexpense ‐ ‐ ‐ ‐ 58,845 ‐ 58,845

Netincome ‐ ‐ ‐ ‐ ‐ 1,521,332 1,521,332

Changeinpensionobligation,netofincometax

expenseof$547,093 ‐ ‐ ‐ 1,013,355 ‐ ‐ 1,013,355

Changeinadditionalminimumotherpostretirement

benefitliability,netoftaxexpenseof$12,828 ‐ ‐ ‐ 23,760 ‐ ‐ 23,760

STOCKHOLDERS'EQUITY,December31,2015 423,836 1,274,133 (11,663,095) (9,309,649) 73,133,160 (30,136,252) 23,722,133

Stockoptioncompensationexpense ‐ ‐ ‐ ‐ 57,713 ‐ 57,713

Netincome ‐ ‐ ‐ ‐ ‐ 4,544,921 4,544,921

Changeinpensionobligation,netofincometax

expenseof$311,023 ‐ ‐ ‐ 576,094 ‐ ‐ 576,094

Changeinadditionalminimumotherpostretirement

benefitliability,netoftaxexpenseof$19,319 ‐ ‐ ‐ 35,783 ‐ ‐ 35,783

STOCKHOLDERS'EQUITY,December31,2016 423,836$ 1,274,133$ (11,663,095)$ (8,697,772)$ 73,190,873$ (25,591,331)$ 28,936,644$

HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATEDSTATEMENTSOFCASHFLOWS


2016 2015CASHFLOWSFROMOPERATINGACTIVITIES

Netincome 4,544,921$ 1,521,332$Adjustmentstoreconcilenetincometonetcash

fromoperatingactivitiesDepreciationandamortization 15,585,480 15,497,848Deferredincometax 2,437,355 134,754Deferredcompensationrelatedtostockoptionplan 57,713 58,845Amortizationofdeferredloancosts 268,986 350,383Provisionforbaddebtexpense 413,636 287,483Allowanceforfundsusedduringconstruction (54,218) (57,240)Lossonabandonedconstruction 125,014 20,269Changesinoperatingassetsandliabilities

Accountsreceivable (2,357,898) 196,336Incometaxesreceivable 24,700 45,975Inventories (779,485) 170,362Prepaidexpensesandothercurrentassets (102,085) (256,610)Accountspayable 364,525 690,266Accruedliabilities (2,768,456) 1,281,523Accruedpensioncosts (210,262) (939,131)Postretirementbenefitobligation (187,768) (127,258)Changeinotherassetsandliabilities,net (6,475,571) (7,879,563)

Netcashfromoperatingactivities 10,886,587 10,995,574

CASHFLOWSFROMINVESTINGACTIVITIESCapitalexpenditures,net (7,565,110) (9,403,131)Proceedsonsaleofassets,netofcostofremoval 8,366 (41,369)

Netcashusedininvestingactivities (7,556,744) (9,444,500)



CONSOLIDATEDSTATEMENTSOFCASHFLOWS


2016 2015

CASHFLOWSFROMFINANCINGACTIVITIESPaymentsonlong‐termdebt (3,000,000)$ ‐$Debtissuancecosts ‐ (479,796)

Netcashusedinfinancingactivities (3,000,000) (479,796)

NETCHANGEINCASHANDCASHEQUIVALENTS 329,843 1,071,278

CASHANDCASHEQUIVALENTS,atbeginningofyear 6,668,623 5,597,345

CASHANDCASHEQUIVALENTS,atendofyear 6,998,466$ 6,668,623$

SUPPLEMENTALDISCLOSUREOFCASHFLOWINFORMATIONCashpaidduringtheyearfor

Incometaxes 24,668$ 46,379$

Interest,netofamountscapitalized 4,344,136$ 3,926,621$

SUPPLEMENTALDISCLOSURESOFNONCASHINVESTMENTANDFINANCINGACTIVITIES

Definedbenefitplanadjustments,netofincometaxexpenseof$330,342and$559,921 611,877$ 1,037,115$Inventoriessalvagedfromplantunderconstruction ‐ 688,597Make‐readyaccrualadjustments 36,388 381,297Accruedliabilitiessatisfiedwithnewlong‐termdebt ‐ 2,400,000


HORIZONTELCOM,INC.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

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Note1–SummaryofSignificantAccountingPoliciesBusinessorganizationandprinciplesofconsolidation – The accompanying consolidated financialstatementsreflecttheoperationsofHorizonTelcom,Inc.anditssubsidiaries,collectivelyreferredtoasthe Company. Horizon Telcom, Inc., a parent holding company, is comprised of The ChillicotheTelephone Company (Chillicothe Telephone), a local voice, video and data service provider and aregional fiber optic transport provider; Horizon Technology, Inc. (Horizon Technology); andHorizonServices, Inc. (Horizon Services). Both Horizon Technology and Horizon Services are inactivesubsidiariesatDecember31,2016and2015,respectively.Allmaterialintercompanytransactionsandbalanceshavebeeneliminatedinconsolidation.ChillicotheTelephoneprovidesservicestraditionallyprovidedasanIncumbentLocalExchangeCarrier(ILEC). These services include switched wireline voice communications, video and Internet accessprovidedtocommercial,residentialandsmallbusinesscustomersinandaroundRossCounty,Ohio.Inaddition, Chillicothe Telephone provides fiber optic‐based carrier services over its extensive regionalnetworkandthenetworksofvendorcarriers.TheseservicesincludecarrierEthernet,Internetaccess,voiceoverIP(VOIP),andleaseddarkfibertowirelessserviceproviders,carriers,healthcareproviders,educationalinstitutions,governmentagencies,andenterprisesinOhioandsurroundingstates.Accounting for regulation – Chillicothe Telephone is subject to rate regulation and follows theaccounting and reporting requirements set forth by the Regulated Operations Topic of the FinancialAccounting Standards Board (FASB)Accounting StandardsCodification (ASC). This guidance providesthatrate‐regulatedpublicutilitiesaccountforrevenuesandexpensesinadditiontoreportingassetsandliabilitiesconsistentwiththeeconomiceffectofthewayinwhichregulatorsestablishrates.Accounting forvideoservices –ChillicotheTelephoneprovidesvideoprogrammingand follows theaccounting and reporting requirements set forth by the Entertainment‐Cable Television Topic of theFASBASCtoaccountforcapitalizationofinstallationcostsandrecognitionofhook‐uprevenue.Accounting estimates – The preparation of financial statements in conformity with accountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpenses during the reporting period. Actual results could differ materially from those estimates.Significant estimates include depreciation expense, revenue recognition from deferred revenuearrangements,deferredincometaxes,definedbenefitobligations,interstateaccessrevenuesettlements,andmakereadyfees.Cashandcashequivalents–Forpurposesofthestatementsofcashflows,cashandcashequivalentsincludecashonhand,moneymarketaccounts,U.S.treasurybills,corporatebonds,andinvestmentsincommercialpaperwithoriginalmaturitiesofthreemonthsorless.


NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

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Note1–SummaryofSignificantAccountingPolicies(continued)Valuationofaccountsreceivable–Accountsreceivablearestatedattheamountmanagementexpectstocollectonoutstandingbalances.TheCompanyreviewsthecollectabilityofaccountsreceivablebasedupon an analysis of outstanding receivables, historical collection information, and existing economicconditions.Receivablesfromcustomersaredue30daysafterissuanceofthesubscriberbills.Estimatesareusedindeterminingtheallowancefordoubtfulaccountsreceivable,whichisbasedonapercentageoftheaccountsreceivablebyagingcategoryforsubscribersandbyspecificidentificationforother receivables. The percentage is derived by considering the historical collections and write‐offexperience, current aging of the accounts receivable, and credit quality trends. Account balances arechargedoffagainsttheallowanceafterallmeansofcollectionhavebeenexhaustedandthepotentialforrecoveryisconsideredremote.Concentrationofcreditrisk–TheCompanymaintainscashandcashequivalentsinanaccountwithafinancial institution in excess of the amount insured by the Federal Deposit Insurance Corporation(FDIC).Managementdoesnotbelievethereissignificantcreditriskassociatedwithdepositsinexcessoffederally‐insuredamounts.Other financial instruments that potentially subject the Company to concentrations of credit riskprimarilyconsistofaccountsreceivablefromsubscribers.ManagementbelievestheriskislimitedduetothenumberofcustomerscomprisingtheCompany’scustomerbase.Inventories – Inventories consist of materials and supplies for both regulated and nonregulatedconstruction activities and are stated at the lower of weighted‐average cost or net realizable value.Inventoriesalsoconsistofthecost(determinedbyfirst‐in,first‐outmethod)ofequipmenttobeusedinthe installation of services or items held for resale, aswell as costs related to direct sales orders inprocess.Managementreviewsandrecordsadjustments tonetrealizablevalueusingareserveagainstinventory.Property, plant, and equipment – Property, plant, and equipment, including improvements thatextend useful lives, are stated at cost, while maintenance and repairs are charged to operations asincurred. Plant under construction includes expenditures for the purchase of capital equipment,construction, and items, such as direct payroll and related benefits and interest capitalized duringconstruction.TheCompanycapitalizesinterestasrequiredbytheInteresttopicoftheFASBASC.Property,plant,andequipmentaredepreciatedusingstraight‐linemethodsovertheirestimatedusefullives.Inaccordancewithcompositegroupdepreciationmethodology,whenaportionoftheCompany’sdepreciable property, plant, and equipment is retired in the ordinary course of business, the originalcost,includingsalvageandcostofremoval,ischargedtoaccumulateddepreciationwithnogainorlossrecognized.


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Note1–SummaryofSignificantAccountingPolicies(continued)Depreciation of the Company’s nonregulated plant is provided by the straight‐line method over theestimatedusefullivesoftheassets.Uponretirement,sale,orotherdispositionofnonregulatedproperty,plant and equipment, the cost and related accumulated depreciation are removed from the relatedaccountsandtheresultinggainsorlossesareincludedinoperations.Debt issuance costs – Effective January 2, 2014, the Company refinanced its debt agreement withCoBank(Note6).Aspartoftherefinancing,deferredfinancingcostsrelatedtothepriordebtagreementof approximately $528,000 were written off as a loss on debt extinguishment in the statement ofoperations.Aspartoftherefinanceddebtagreement,theCompanyincurrednetdeferredfinancingfeesof$456,819.In2014,thesefeeswereamortizedusingtheeffectiveinterestmethodoverthetermoftheunderlying obligation, which is two years. Effective July 31, 2015, the Company amended its debtagreementwith CoBank through an amended and restated credit agreement (Note 6). As part of theagreement,TheCompany incurrednetdeferred financing feesof$479,796andthematuritydatewasextendedtoJanuary4,2018.TheCompanyadjustedthemonthlyamortizationbasedontheadditionalcostandextendedmaturitydate.Amortizationofdebtissuancecostsincludedininterestexpensewasapproximately $238,801 and $236,000, respectively, during the years endedDecember 31, 2016 and2015.Inaddition,aspartoftherefinancingeffectiveJanuary2,2014,theCompanyissuedstockwarrantstoCoBank (Note 6). The valuation of the warrants of $350,150 was considered to be additional debtissuance costs, which is being amortized using the effective interest method over the term of theunderlying debt obligation. However, due to the amended and restated credit agreement effectiveJuly31,2015,theCompanyadjustedthemonthlyamortizationbasedontheextendedmaturitydatetoJanuary4, 2018.Amortization of debt issuance costs included in interest expensewas approximately$30,182and$115,000duringtheyearsendedDecember31,2016and2015.Othernoncurrentassets–Othernoncurrentassetsareprimarilycomprisedofcostsassociatedwithcontemplated construction projects and property held for future use. The costs associated withcontemplatedconstructionprojectsaretransferredbackintoplantunderconstructionwhenandiftheCompany determines that the construction projects will move forward. Costs associated withabandonedprojectsarerecordedasnonoperatingexpense.Abandonedconstructionprojectsexpensedwere$125,014and$20,269,respectively,duringtheyearsendedDecember31,2016and2015.Impairment of long‐lived assets – Long‐lived assets, such as property, plant, and equipment arereviewed for impairment whenever events or changes in circumstances indicate that the carryingamountofanassetmaynotberecoverable.Recoverabilityofassetstobeheldandusedismeasuredbyacomparisonofthecarryingamountofanassettoestimatedundiscountedfuturecashflowsexpectedtobegeneratedbytheasset.Ifthecarryingamountofanassetexceedsitsestimatedfuturecashflows,animpairmentchargeisrecognizedbytheamountbywhichthecarryingamountoftheassetexceedsthefairvalueoftheasset.Assetstobedisposedofarereportedatthelowerofthecarryingamountorfairvaluelesscoststosell,anddepreciationceases.AtDecember31,2016and2015,theCompanydidnothaveimpairedassets.



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Note1–SummaryofSignificantAccountingPolicies(continued)Comprehensive income – Comprehensive income is defined as the change in equity of a businessduring a period as a result of net income and other gains and losses affecting equity that, underaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,areexcludedfromnetincome.Accumulated other comprehensive loss includes adjustments to reflect the effect of the Company’sdefinedbenefitpensionandpostretirementplans.Revenue recognition –Monthly service fees derived from localwireline, Internet access, and videoservicesarebilledinadvancebutrecognizedinthemonththatserviceisprovided.Usagesensitiverevenues,suchasaccess(revenuesearnedfromoriginating/terminating long‐distancecalls) and long‐distance calls are generally billed as per‐minute charges and are billed in arrears.Estimatedunbilledamountsareaccruedattheendofeachmonth.InterstateaccessrevenuesalsoincludesettlementsbasedontheCompany'sparticipationinthecarriercommon line revenue pool administered by the National Exchange Carrier Association (NECA).Settlement revenues are determined by annually prepared separations and interstate access coststudies. The studies are prepared subsequent to year‐end and, therefore, the related revenues arerecordedonthebooksbasedonanestimateofNECApoolearningsandonotherassumptionsrelatedtoinformationutilized inthepreparationof theCompany'scoststudies.Thestudiesaresubjecttoa24‐monthpoolearningsadjustmentperiodandareviewofthestudybyNECA.Therewasaninsignificantrevenue impact for 2016 and 2015 for adjustments related to prior‐year differences between therecordedestimatesandactualrevenues.Managementdoesnotanticipatethat2016and2015recordedrevenueswillrequiresignificantadjustmentinfutureyears.Other revenues include security monitoring, equipment systems sales and directory advertisingrevenues.Securitymonitoringrevenuesaremonthlyservicefeesandotherchargesbilledtocustomersof Chillicothe Telephone's securitymonitoring services. Equipment systems sales revenues consist ofsalesmadebyChillicotheTelephonetovariousbusinessorresidentialcustomersforequipmentusedonthelocalnetwork.FibertransportrevenuesarederivedfromcarrierEthernet,Internetaccess,VOIPandleaseddarkfiberandarebilledinadvance,butrecognizedinthemonththatserviceisprovided.Fibertransportrevenuesalso include dark fiber Indefeasible Rights of Use (IRU) purchases and non‐recurring installationcharges. These charges are generally billed in advance and recognized in the month the service isprovided.


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Note1–SummaryofSignificantAccountingPolicies(continued)Chillicothe Telephone recognizes revenue on a completed contract basis for the installation oftelecommunication and other related equipment. These revenues are reported as other nonregulatedrevenue on the accompanying consolidated statements of operations and maintenance revenue isrecognized over the life of the contract and recorded as other nonregulated revenue on the beingconsolidatedstatementsofoperations.Revenueonequipmentsalesarerecognizedatthetimeofsale.Recognition periods for deferred revenues vary. Rural Utilities Service (RUS) and BroadbandTechnology Opportunities Program (BTOP) deferred revenues are related to the construction ofnetworkassetsandarerecognizedonastraight‐linebasisoverthevarioususefullivesoftheassociatednetworkassets(Note11).RevenuesderivedfromtheSouthernOhioHealthCareNetwork(SOHCN)arerecognized on a straight‐line basis over a ten‐year period consistent with the SOHCN participants’connectionagreements(Note5).Otherdeferredrevenuesareshort‐terminnatureandarerecognizedonastraight‐linebasisoverthetermofthecontractoragreement.TheCompany’swirelineUniversalServicesupportrevenueisintendedtocompensatetheCompanyforthe high cost of providing rural telephone service. Universal Service support revenue includes fundsreceived for high cost loop support (HCLS), interstate common line support (ICLS), Connect AmericaFund (CAF) and othermiscellaneous programs. HCLS and ICLS are based on the Company’s currentrelative levelofoperatingexpenseandplant investment. Support from theCAF isbasedonhistoricalfrozen amounts related to2011 investment andexpenses associatedwith the switching function andcertain2011 intrastate access revenues,which togethermakeup theCAFbase.TheCAFbasewill bereducedby5percenteachyearinthedeterminationofCAFsupport.Regulation–TheCompany’sservicesaresubjecttorateregulationasfollows: Local telephone and intrastate access revenues are regulated by the Public Utilities Commission

of Ohio (PUCO). The FCC also has assumed preemptive authority to regulate intrastatetelecommunicationsservices,includingterminatingintrastateaccessrates.

InterstateaccessrevenuesareregulatedbytheFCCthrough itsregulationofratesandsettlementproceduresasadministeredbyNECA.

UniversalServicesupportrevenuesareadministeredbyUniversalServiceAdministrativeCompany(USAC),basedonrulesestablishedbytheFCC.

Nonregulatedexpensesandnonregulatedplantaredirectlyattributablefibertransport,Internet,video,businesstelecommunicationssystems,andothermiscellaneousrevenues.Allotheroperatingexpensesandtelecommunicationsplantarerelatedprimarilytowirelinerevenues.However,someofthesecostsjointlyrelatetoregulatedandnonregulatedservices.Forinterstateaccesssettlement, Universal Service support, rate case, and other regulatory purposes, the portion of thesecommon costs related to nonregulated activities are removed in accordancewith Part 64 of the FCCrulesinordertoensureregulatedrevenuesarebasedoncostsofprovidingregulatedservices.



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Note1–SummaryofSignificantAccountingPolicies(continued)TheFCCreleasedanOrderandFurtherNoticeofProposedRulemaking(FNPRM)in2016thatreformsthe High Cost Program supporting rate‐of‐return carriers. The FCC has also created amechanism toensurethe$2billionbudgetforUniversalServiceSupportisnotexceeded.Thefollowingchangeshavebeenimplementedtomodernizetheprogram:

Providessupportforstand‐alonebroadband; Requiresbroadbanddeploymentbasedonthenumberoflocationslackingserviceandthecost

ofprovidingservice; Requiresallowancesforcapitalinvestmentsandlimitsonoperationalexpenses;and Phasesoutsupportforareasservedbyaqualifyingcompetitor.

TheFNPRMalso created twopaths toaConnectAmericaFund for rateof returncarriers.Themodelbasedoptionisvoluntaryandisafixedamountofsupportfortenyears.ThelegacymechanismreformstheexistingICLSmechanismtosupportstand‐alonebroadbandandwillnowbeknownastheConnectAmericaFundBroadbandLoopSupport(CAFBLS).TheCompanyhaselectedtoreceivesupportunderthemodelbasedoptioninfutureyears.Concentrationofrevenue –TheCompanyreceivesa significantportionof itsannual revenues fromfibertransporttowirelesscustomersandUSF.FortheyearsendedDecember31,2016and2015,fibertransportrevenues fromwirelesscustomersrepresentedapproximately24percentand15percentoftotal revenue, respectively. For the years ended December 31, 2016 and 2015, USF revenuesrepresentedapproximately15percentand17percentoftotalrevenue,respectively.Advertisingcosts–Costsrelatedtoadvertisingandotherpromotionalexpendituresareexpensedasincurred. Advertising costs totaled approximately $162,000 and $64,000, respectively, for the yearsendedDecember31,2016and2015.Stock‐based compensation – The Company follows the provisions of the Compensation—StockCompensationtopicofFASBASCtomeasurethecostofemployeeservicesreceivedinexchangeforstockcompensationbasedonthegrant‐datefairvalueoftheemployeestockoption.Underthismethod,thefair value of each option grant is estimated on the date of the grant using the Black‐Scholes‐Mertonoption‐pricingmodeltodeterminethecompensationcostassociatedwiththegrant.Thecompensationcostassociatedwiththestockoptionsisrecognizedoverthevestingperiodofthestockoptions.Incometaxes–Incometaxesareaccountedforundertheassetandliabilitymethod.Deferredtaxassetsand liabilities are recognized for the future tax consequences attributable to differences between thefinancialstatementcarryingamountsofexistingassetsandliabilitiesandtheirrespectivetaxbasesandoperating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured usingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate.


16

Note1–SummaryofSignificantAccountingPolicies(continued)In assessing theCompany’s ability to realizedeferred taxassets,management considerswhether it ismore‐likely‐than‐notthatsomeoralloftheassetswillnotberealized.Managementconsiders,amongotherthings,thescheduledreversalofdeferredtaxassetsandliabilitiesandestimatesoffuturetaxableincome in making this assessment, as well as the outcome of any uncertainties. The Company hasprovidednovaluationallowanceasofDecember31,2016and2015.The Company records uncertain tax positions if the likelihood the position will be sustained uponexaminationislessthan50percent.AsofDecember31,2016and2015,theCompanyhadnoaccruedamounts related to uncertain tax positions. Interest and penalties, if any, are recorded as interestexpenseandotherexpense,respectively.Union representation –At December 31, 2016 and 2015, Chillicothe Telephone had approximately37percent and 36 percent of itswork force represented by a union, respectively. The current unioncontractwasenactedonSeptember12,2014andexpiresonNovember15,2017.Taxesimposedbygovernmentalauthorities–TheCompanyissubjecttotaxesassessedbyvariousgovernmental authorities onmany different types of revenue transactionswith its customers. ThesespecifictaxesarechargedtoandcollectedfromtheCompany’scustomersandsubsequentlyremittedtotheappropriatetaxingauthority.Thetaxesareaccountedforonanetbasisandexcludedfromrevenues.Subsequentevents–Subsequenteventsareeventsortransactionsthatoccurafterthebalancesheetdate but before the financial statements are available to be issued. The Company recognizes in thefinancial statements the effects of all subsequent events that provide additional evidence aboutconditionsthatexistedatthedateofthebalancesheet,includingtheestimatesinherentintheprocessof preparing financial statements. The Company’s financial statements do not recognize subsequentevents that provide evidence about conditions that did not exist at the date of the balance sheet butarose after thebalance sheetdate andbefore the financial statements are available tobe issued.TheCompany has evaluated subsequent events though March 27, 2017, which is the date the financialstatementsareavailabletobeissued.Fairvaluemeasurement–Fairvaluerepresents theprice thatwouldbereceived tosellanassetortransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.TheCompany follows a fair value hierarchy,which requires an entity tomaximize the use of observableinputsandminimizetheuseofunobservable inputswhenmeasuringfairvalue.Thefollowingarethethreelevelsofinputsthatmaybeusedtomeasurefairvalue:

Level1 Quotedpricesinactivemarketsforidenticalassetsandliabilities.

Level2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets orliabilities;quotedpricesinmarketsthatarenotactive,orotherinputsthatareobservableor can be corroborated by observable market data for substantially the full term of theassets.

Level3 Unobservable inputs that are supported by little or no market activity and that aresignificanttothefairvalueoftheassetsorliabilities.



17

Note1–SummaryofSignificantAccountingPolicies(continued)ThefairvaluemeasurementguidanceisapplicabletotheCompanyinthefollowingareas:• financialinstruments• benefitplanassets(Level1and2)• stock‐basedcompensation(Level2)Theestimatesoffairvaluerequiretheapplicationofbroadassumptionsandestimates.Accordingly,anyactual exchange of such financial instruments could occur at values significantly different from theamountsdisclosed.Ascashandcashequivalents,currentreceivables,currentpayablesandcertainothershort‐termfinancial instrumentsareallshortterminnature, theircarryingamountsapproximatefairvalue.ThefairvalueofbenefitplanassetsisbasedonLevel1and2inputsinNote8.Otherinvestmentsarenot intendedforresaleandarenotreadilymarketable; thus,areasonableestimateoffairvalueisnot practical. The fair value of long‐term debt is estimated based on current rates offered to theCompany for debt with similar terms and maturities. The carrying value of the Company’s debtapproximatesfairvalue.ThetermsoftheCompany’slong‐termdebtobligationsarestatedinNote6.Note2–OtherInvestments

Otherinvestmentsconsistprimarilyofinvestmentsinlendinginstitutionsandnonmarketablestockoftelephoneindustrycorporations.Otherinvestmentsarecarriedatcost,astheinvestmentsdonothaveanyreadilydeterminablefairvalues,andconsistofthefollowingatDecember31:

2016 2015

CoBankStock 1,474,606$ 1,028,768$Other 87,134 87,134

Total 1,561,740$ 1,115,902$

CoBank, fromwhich theCompanyhas loans, is a cooperativeownedand controlledby its customers.Eachcustomerborrowingfromthebanksharesinthebank’snetincomethroughpaymentofpatronagerefunds.Approximately65to75percentofpatronagerefundsarereceivedincash,withthebalanceinCoBankstock.IncomefromtheinvestmentinCoBankisrecordedasothernonoperatingincomeintheconsolidatedstatementsofoperations.Patronagestockisredeemableatitsfacevalueforcashaftertherelated debt is paid off. The Company recorded a receivable for patronage refunds to be received of$1,337,507and$0duringtheyearsendedDecember31,2016and2015.


18

Note3–Property,Plant,andEquipment

Property,plant,andequipmentconsistedofthefollowingasofDecember31:

Plant 2016 2015

Account NetBalance NetBalanceRegulatedplantGeneralsupportassets 5‐39years 22,396,601$ (16,691,409)$ 5,705,192$ 5,667,282$Centralofficeassets 5‐13years 47,456,771 (41,636,159) 5,820,612 5,685,432Cableandwirefacilitiesassets 13‐54years 93,412,229 (71,030,132) 22,382,097 25,002,286Plantunderconstruction n/a 348,211 ‐ 348,211 667,282

163,613,812 (129,357,700) 34,256,112 37,022,282

NonregulatedplantGeneralsupportassets 5‐39years 8,986,048 (3,602,192) 5,383,856 5,940,360Cabletelevisionequipment 3‐12years 20,912,918 (17,461,929) 3,450,989 3,609,170Internetequipment 3‐5years 406,267 (406,267) ‐ ‐Fibertransportequipment 13‐54years 151,336,135 (25,568,314) 125,767,821 129,034,349Plantunderconstruction n/a 940,731 ‐ 940,731 1,937,675

182,582,099 (47,038,702) 135,543,397 140,521,554

346,195,911$ (176,396,402)$ 169,799,509$ 177,543,836$

DepreciableLife

AccumulatedDepreciation

Capitalizedinterestwas$54,218and$57,240,respectively,duringtheyearsendedDecember31,2016and2015.Note4–OtherAccruedLiabilitiesOtheraccruedliabilitiesconsistedofthefollowingasofDecember31:

2016 2015

Accruedinterest 342,325$ 351,358$Accruedmakereadycosts 2,940,881 3,678,836Accruedvacationandpayroll 473,162 558,172Polecontacts 524,420 929,619Allotheraccruedliabilities 3,075,837 2,709,017

Totalotheraccruedliabilities 7,356,625$ 8,227,002$



19

Note5–SignificantContractandDeferredRevenueDuring2013,theCompanyenteredintoanamendedcontractwithVerizonWireless(Verizon)toreceivea total upfront payment of $5,549,310 ($4,624,425 was received during 2013) to provide backhaulservicestoVerizoninexchangefortheissuanceofbillingcreditsinrespecttofutureservicesrenderedto existing cell sites. Revenue is recognized upon the issuance of billing credits each month andmateriallyapproximatesa36‐monthamortizationoftheprepayments.AsofDecember31,2016,allofthedeferredrevenuerelatedtoVerizonWirelesshasbeenfullyamortizedandincludedinearnings.During2013, theCompanyentered intoan indefeasible rightofuse (IRU)agreementwithVerizon toprovideaccesstoapproximately223routemilesofopticalfibersinvariousportionsoftheCompany’snetwork.The total contract is for$3,500,000andhasan initial contract termof fiveyears, subject tofutureextensionsofuptoatotalof20years.TheCompanyreceivedaprepaymentof$1,750,000duringtheyearuponexecutionoftheIRUrouteorder.TheCompanyreceivedtheremainingcontractamountfollowing theacceptancedateof the IRU routeorder inDecember2014.TheCompany is recognizingrevenueratablyoverthe20‐yeartermoftheagreement.During 2012, the Company entered into an IRU agreement with Windstream KDL, Inc., a Kentuckycorporation, to provide Windstream approximately 250 route miles of dark fiber and associatedproperty. The revenue from the IRU, includingnetworkmaintenance, is recognizedon a straight‐linebasisoverthetermoftheagreement.Thetermoftheagreementis20years.During2010, theCompanyentered intoacontractwithSOHCNtoconstructandmanagea fiber‐opticnetwork.SOHCNhadpreviouslybeenawardeda$15,765,417subsidyfromtheFCC’sRuralHealthcarePilotProgram(administeredbyUSAC)todevelopanetworktoconnectruralhealthcareprovidersin13southernOhiocountiesandpartneredwiththeCompanytobuildthenetwork.Thetotalamountofthecontractwas$18,547,549,withUSACcontributing$15,765,417andSOHCNcontributingthebalanceof$2,782,132. The term of the contract is 20 years, and themaximum term of network services to beprovided to SOHCN participants is ten years. The Company completed the network in 2014 and hasreceived the entire contract payment. The Company is recognizing revenue ratably over the 10‐yearmaximumtermofthenetworkservicesagreementwiththeSOHCNparticipants.TheCompanyhas also granted toSOHCNan IRU for certaindark fiber strandswithin theCompany’snetwork,shouldtheCompanyfail tocomplywithcertaintermsof thecontract.Eventsthatconstitutenoncompliance include the early termination of the contract, failure to meet specified service andregulatory requirements, a bankruptcy petition filed by or against the Company, breach of law orregulation, and sale of all or substantially all of the network to an entity that fails tomeet all of therequirementsof Section13.2.BHealthcareRegulatoryRequirements. SOHCN isprohibited fromusingthe dark fiber and associated equipment for any commercial or noncommercial activity prior to anyeventoreventsthatresultintheactivationoftheIRU.ThetermoftheIRUis20years.WiththeexceptionofthedarkfiberIRUrightsgrantedtoSOHCN,theCompanyretainsfulltitle,rights,andinterestinthenetworkandisresponsibleforitsmanagementandmaintenance.


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Note5–SignificantContractandDeferredRevenue(continued)Deferredrevenuesassociatedwithsignificantcontractsandgovernmentgrants(Note11)consistsofthefollowingatDecember31:

2016 2015

CurrentSOHCN 1,852,483$ 1,852,483$BTOPgrant 2,996,829 3,331,606RUSgrant 20,376 20,376Other 909,375 2,509,062

Currentdeferredrevenue 5,779,063 7,713,527

NoncurrentSOHCN 6,657,318 8,515,424BTOPgrant 47,604,625 50,622,597RUSgrant 339,925 360,301Other 5,084,321 5,488,347

Noncurrentdeferredrevenue 59,686,189 64,986,669

Totaldeferredrevenue 65,465,252$ 72,700,196$

Note6–Long‐TermDebtLong‐termdebtconsistsofthefollowingatDecember31:

InterestrateatDecember31,2016 2016 2015

Seniorsecurednotes 5.52% 74,220,922$ 77,220,923$

Lessunamortizeddebtissuancecosts 268,986 537,973

Lesscurrentmaturities 4,500,000 3,000,000

Totallong‐termdebt 69,451,936$ 73,682,950$



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Note6–Long‐TermDebt(continued)EffectiveJuly31,2015,theCompanyenteredintoThirdAmendedandRestatedCreditAgreementwithCoBank. The restated agreement provides for a term note that amends and restates all outstandingprincipalandaccruedinterestintheaggregateof$77,220,923andgrantsarevolvingtermloanfacilityinanaggregateprincipalamountof$1,300,000.ThematuritydateoftheagreementistheearlierofaneventofdefaultasoutlinedintheagreementorJanuary4,2018.Interest ispayableattheone‐monthLIBORIndexRate,plustheapplicablemarginof5percent,whichtotaled5.52percentatDecember31,2016.Theagreementcallsformandatoryprincipalpaymentsof$3,000,000in2016and$4,500,000in2017, with the remaining total principal balance due January 4, 2018. The loan is subject to certainfinancialandnonfinancialcovenants.TheCompanyhadnoborrowingsagainsttherevolvingtermloancommitmentasofDecember31,2016.Maturitiesoflong‐termdebtobligationsfortheyearsfollowingDecember31,2016,areasfollows:2017 4,500,000$2018 69,720,922

Lessunamortizeddebtissuancecosts (268,986)

73,951,936$

In 2016, the Company retroactively adopted the requirements in FASB ASC 835‐30 to present debtissuancecostsasareductiontothecarryingamountofthedebtratherthanasanasset.Long‐termdebtas of December 31, 2015, was previously reported on the balance sheet as $74,220,923 with theassociated$537,973unamortizeddebtissuancecostsincludedindeferredcharges.Amortizationofthedebtissuancecostsisreportedasinterestexpenseintheincomestatement.EffectiveMarch22,2017, theCompanyentered intoFourthAmendedandRestatedCreditAgreementwithCoBank.Therestatedagreementprovidesforatermnotethatamendsandrestatesalloutstandingprincipalandaccruedinterestintheaggregateof$73,095,923andgrantsarevolvingtermloanfacilityinanaggregateprincipalamountof$4,300,000.ThematuritydateoftheagreementistheearlierofaneventofdefaultasoutlinedintheagreementorMarch22,2022. Interest ispayableattheone‐monthLIBOR Index Rate, plus the applicable margin of 4.25 percent. The agreement calls for mandatoryprincipalpaymentsof$4,125,000in2017,$5,000,000in2018,$6,000,000in2019,and$7,000,000in2020and2021,respectively.Theloanissubjecttocertainfinancialandnonfinancialcovenants.


22

Note7–IncomeTaxesTheCompany’sincometaxexpenseconsistsofthefollowingfortheyearsendedDecember31:

TotalincometaxCurrent Deferred Expense(benefit)

2016Federal 41,700$ 2,437,355$ 2,479,055$Stateandlocal 21,789 ‐ 21,789

Total 63,489$ 2,437,355$ 2,500,844$

2015Federal ‐$ 134,754$ 134,754$Stateandlocal 124 ‐ 124

Total 124$ 134,754$ 134,878$

Theeffectivetaxratefor2016and2015differsfromthestatutoryfederalincometaxrateprimarilydueto nondeductible items, state income taxes and return to accrual adjustments related to prior yearaccruals.Deferredincometaxesresultfromtemporarydifferencesbetweenthefinancialreportingandtaxbasisamountsofexistingassetsand liabilities.Thesourceof thesedifferencesandtaxeffectofeachareasfollowsatDecember31:

2016 2015Deferredincometaxassets

Uncollectibleaccounts 97,496$ 67,854$Accruedvacation 118,622 119,863Pensionsandotherretirementbenefits 3,710,918 4,180,810Deferredrevenue 22,817,937 25,369,835Netoperatinglosscarryforwards 5,973,292 6,977,354Inventoryreserve 6,078 21,387Other 246,801 199,102

Totaldeferredincometaxassets 32,971,144 36,936,205

DeferredincometaxliabilitiesPropertyandequipment (40,859,673) (42,057,037)

Totaldeferredincometaxliabilities (40,859,673) (42,057,037)

Totaldeferredincometaxes,net (7,888,529)$ (5,120,832)$

TheCompanyhasa federalnetoperating losscarryforwardofapproximately$17,040,000,whichwillexpirebetween2031and2035.TheCompanyhasminimumtaxcreditcarryforwardofapproximately$220,000.



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Note7–IncomeTaxes(continued)InNovember2015, theFASB issuedAccountingStandardsUpdateNo.2015‐17, IncomeTaxes (Topic740):BalanceSheetClassificationofDeferredTaxes(ASU2015‐17),whichsimplifiesthepresentationofdeferredincometaxesbyrequiringdeferredtaxassetsandliabilitiesbeclassifiedasnoncurrentonthebalance sheet. The Company has elected to early adoptASU2015‐17 and retrospectively apply to allperiodspresented.Thisresultedinnetadjustmentsofa$260,993decreaseanda$260,993increasetocurrentdeferredassets andnoncurrentdeferred tax liability, respectively,on theDecember31,2015balancesheet.Note8–PensionPlansandOtherRetirementBenefitsThe Company has three trusteed pension plans covering certain salaried and hourly employees. TheCompany’s funding policy is to be in compliancewith the EmployeeRetirement Income Security Actguidelines.Theplan’sassetsconsistprimarilyofinvestmentsincommonstocks,bonds,notes,andcashequivalents. The Company applies the accounting and measurement practices prescribed by theCompensation—RetirementBenefitstopicoftheFASBASC.

In 2006, the Company amended both the union and salaried employees’ defined benefit plans byfreezing theplanseffectiveDecember31,2006.By freezing theplans,vestedemployeeswill cease toaccruepensionbenefitsbasedonfutureyearsofserviceafterDecember31,2006.

In addition, the Company provides coverage of postretirementmedical and life insurance benefits toeligible retirees whose status at retirement from active employment qualifies for postretirementbenefits.Coverageofpostretirementbenefitsisalsoprovidedtototallyandpermanentlydisabledactiveemployeeswhose status at disablement qualifies for postretirement benefits as a retiree from activeemployment.Certaineligibleretireesarerequiredtocontributetowardthecostofcoverageunderthepostretirementhealthcareplan.Nocontributionisrequiredforcoverageunderthepostretirementlifeinsurance benefits plan. During 2012, the Company elected to amend its postretirement plan byeliminating life insurance coverage for all current retirees. The effective date of the amendmentwasJune1,2012.Effective January 1, 2014, the Company elected to amend its postretirement plan by discontinuingmedical, dental, andprescription coverage forplanparticipants that areolder than65. In lieuof thiscoverage,retireeswhoareolderthan65whohadpreviouslybeenentitledtoreceivethiscoveragewillreceivea stipendof $100permonth for single retireesor$200permonth formarried retireesuponprovidingproofofcoverage.InDecember2003,theMedicarePrescriptionDrug,Improvement,andModernizationActof2003(theAct)becamelawintheUnitedStates.TheActintroducesaprescriptiondrugbenefitunderMedicare,aswellasafederalsubsidytosponsorsofretireehealthcarebenefitplansthatprovideabenefitthatisatleastactuariallyequivalenttotheMedicarebenefit.InaccordancewiththeDefinedBenefitPlans—OtherPostretirementtopicoftheFASBASC,theCompanyconcludedthatitsbenefitsareactuariallyequivalentunder the Act and has included the effect of the Act in its measurement of its benefit obligationrecognizedasofandfortheyearsendedDecember31,2016and2015.


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Note8–PensionPlansandOtherRetirementBenefits(continued)

In accordance with the Compensation—Retirement Benefits topic of the FASB ASC, the Company haselectedtoamortizetheaccumulatedpostretirementbenefitobligationsexistingatthedateofadoption(the transition obligation) over a 20‐year period. The unrecognized prior service cost is also beingamortizedovera20‐yearperiod.ThemeasurementdateforthepensionplansandthepostretirementbenefitplanisDecember31.

ThefundedstatusoftheplansareasfollowsatDecember31:

Pension OtherPostretirementBenefits Benefits

2016 2015 2016 2015(Inthousands)

ChangeinbenefitobligationBenefitobligation,beginningofyear 32,516$ 35,607$ 841$ 1,004$

Interestcost 1,436 1,447 31 33Actuarial(gain)loss 255 (2,148) (150) (111)Changeinplanprovisions ‐ ‐ ‐ ‐Benefitspaid (2,198) (2,390) (124) (85)Benefitobligation,endofyear 32,009 32,516 598 841

ChangeinplanassetsFairvalueofplanassets,beginningofyear 21,909 22,501 ‐ ‐

Actualreturnonplanassets 1,440 (181) ‐ ‐Employercontributions 1,348 1,979 124 85Benefitspaid (2,198) (2,390) (124) (85)Fairvalueofplanassets,endofyear 22,499 21,909 ‐ ‐

Fundedstatus (9,510)$ (10,607)$ (598)$ (841)$


2016 2015 2016 2015

WeightedaverageassumptiontocalculatebenefitobligationatDecember31DiscountrateSalariedemployees'plan 4.28 4.54 3.64 4.00Unionemployees'plan 4.29 4.56 3.64 4.00Supplementalplan 3.82 4.05 3.64 4.00

Expectedreturnonplanassets 6.47 6.75 ‐ ‐

Percent Percent

Theexpected long‐termrateof returnwasdevelopedbyconsidering the targetassetallocation, long‐termhistoricalmarketreturns,andlong‐termprojectedmarketreturn.



25


Theassumedmedicalbenefitcosttrendrateusedinmeasuringtheaccumulatedpostretirementbenefitobligationwas8.5percentand7.5percentin2016and2015,declininggraduallyto5percentforbothyears.A1percentincreasetothepremiuminflationratewouldincreasethenetperiodicbenefitcostbyapproximately$1,000,andthebenefitobligationby$18,000.The following table summarizes benefit amounts recognized in other comprehensive income and theexpectedfutureamortizationofthecomponentstonetperiodicpensioncost:


2016 2015 2016 2015

Theamountsthathavenotbeen (Inthousands)recognizedascomponentsofnetperiodicbenefitcosts

Priorservicecost ‐$ ‐$ (6,977)$ (7,622)$Netactuarialloss 15,574 16,461 4,797 5,497Deferredtaxes (5,460) (5,771) 764 745

Totals 10,114$ 10,690$ (1,416)$ (1,380)$

Theamountsexpectedtoberecognizedascomponentsofperiodicbenefitcostovernextfiscalyear

Priorservicecost ‐$ ‐$ (645)$ (645)$Netactuarialloss 1,110 1,167 579 550

Totals 1,110$ 1,167$ (66)$ (95)$

Thecomponentsofnetperiodicbenefitcostinclude:


2016 2015 2016 2015(Inthousands)

Interestcost 1,436$ 1,446$ 31$ 33$Expectedreturnonplanassets (1,465) (1,635) ‐ ‐Amortizationofpriorservicecost ‐ ‐ (644) (644)Recognizednetactuarialloss 1,167 1,229 550 569

Netperiodicbenefitcost 1,138$ 1,040$ (63)$ (42)$


26


Assetsofthepensionplanswereinvestedasfollows:

SalariedBenefits HourlyBenefitsTarget% PlanAssetsat PlanAssetsatAllocation December31 December312016 2016 2015 2016 2015

AssetcategoryEquitysecurities 50‐70 63 60 63 62Fixedsecuritiesandother 30‐50 37 40 37 38

Total 100 100 100 100

Percent Percent

Thefairvaluesofplanassetsbyassetcategoryareasfollows:

FairValue SalariedPensionBenefits HourlyPensionBenefitsHierarchy atDecember31 atDecember31Level 2016 2015 2016 2015

AssetcategoryEquitysecuritiesTelecommunicationsandutilities 1 553,016$ 176,727$ 424,728$ 52,085$Pharmaceuticalsandmedical 1 855,559 521,442 371,267 406,104Bankingandinsurance 1 993,313 792,896 493,281 557,214Petroleumandchemicals 1 598,965 412,290 294,478 310,653Computersandtechnology 1 1,225,294 786,260 423,256 360,285Foodandbeverage 1 153,923 306,120 76,655 137,144Machineryservices,andother 1 1,443,961 892,016 771,515 573,618Equityfunds 1 3,809,799 4,873,258 1,678,569 2,046,499

FixedsecuritiesandotherCashandcashequivalents 1 542,873 645,921 293,508 279,681Corporatedebtsecurities 2 5,115,656 5,251,050 2,324,909 2,474,751USGovernmentdebtsecurities 2 5,388 7,895 5,388 7,685Preferredstockandother 2 31,086 26,410 13,210 11,042

Total 15,328,833$ 14,692,285$ 7,170,764$ 7,216,761$

TheCompany’sinvestmentpoliciesandstrategies,asestablishedbytheRetirementPlanCommittee,areto invest assets per the target allocations stated above. The assetswill be reallocated periodically tomeet the above target allocations. The investment policy will be reviewed periodically, under theadvisement of a certified investment advisor, to determine if the policy should be changed.Postretirementmedicalandlifebenefitsarepaidonapay‐as‐you‐gobasis;therefore,noassetsareheldbytheplantofundthesebenefitobligations.



27


Thetablebelowshowstheexpectedcontributionsandthebenefitsexpectedtobepaidforthepensionplanandpostretirementbenefitplan.TheexpectedbenefitsarebasedonthesameassumptionsusedtomeasuretheCompany’sbenefitobligationatDecember31.

SalaryPension HourlyPension OtherBenefits

ExpectedemployercontributionsDecember31,2017 579,839$ 453,158$ 98,179$

EstimatedfuturebenefitpaymentsreflectingexpectedfutureservicefortheyearsendingDecember312017 1,249,000 497,000 98,0002018 1,264,000 504,000 75,0002019 1,277,000 520,000 66,0002020 1,295,000 534,000 56,0002021 1,313,000 557,000 33,000Thereafter 6,729,000 3,094,000 137,000

TheCompanyhasadefinedcontributionplancoveringalleligibleemployeesoftheCompany.Theplanprovidesforeligibleparticipantstodeferupto60percentofannualcompensation,asdefinedundertheplan, as contributions to the plan. For 2016 and 2015, the Company matched 100 percent of eachparticipant’ssalarydeferraluptoamaximumof3percentofaparticipant’scompensationandmatchedan additional 2 percent on 50 percent of the participant’s compensation. In addition, the Companycontributedforeacheligibleparticipantanamountequalto2percentofaparticipant’scompensation,for a maximum Company match of 6 percent. The Company’s contributions to this plan wereapproximately $468,457 and $475,625, respectively, for 2016 and 2015 and are included in theapplicablebenefitsexpenseintheconsolidatedstatementsofoperations.Note9–CommitmentsandContingenciesLeases – The Company leases certain equipment, vehicles, and co‐location sites for varying periodsunder lease agreements. The operating lease expense was approximately $521,807 and $751,780,respectively,for2016and2015.ThetablebelowisasummaryofthefutureminimumleasepaymentsunderoperatingleaseswithtermsofmorethanoneyearatDecember31,2016:

2017 182,373$2018 117,3112019 111,7432020 8,252

Totalminimumleasepayments 419,679$


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Note9–CommitmentsandContingencies(continued)Make ready fees – During the recent buildout of its fiber‐optic broadband network, the Companyenteredintoagreementswithvariousutilitycompaniestoattachitsfiber‐opticcablefacilitiestopolesownedbytheseutilitycompanies.Certainmake‐readyprocessesmustbecompletedattheexpenseoftheCompany for the facilities attached to poles in thenetwork. TheCompanyhas accrued formake‐readyfeesof$2,940,881and$3,678,836asofDecember31,2016and2015,respectively.Duetotimerequirementsduringthebuild‐out,makereadyprocesseswerenotcompletedatthetimeofthe initial build in various locations. Make ready processes are expected to be on‐going for theforeseeablefuture.TheCompanyhasestimateditsobligationtothevariousutilitycompaniesformake‐readyfeestobeapproximately$8millionto$11millionasofDecember31,2016.Legalmatters–TheCompanyispartytolegalclaimsarisinginthenormalcourseofbusiness.Althoughtheultimateoutcomeoftheclaimscannotbeascertainedatthistime,itistheopinionofmanagementthatnoneofthesematters,whenresolved,willhaveamaterialadverseimpactontheCompany’sresultsofoperationsorfinancialcondition.Note10–StockOptionPlans

InAugust2012,theCompany’sBoardofDirectorsgrantedrestrictedstockawardswithrespecttoClassBcommonstock to fourexecutiveofficersof theCompany, totaling9,240shares.Therestrictedstockawardsvest ratablyovera five‐yearperiod, subject to theCompanymeetingcertainreturnonequitytargets.Thefairvalueoftherestrictedstockawardsisthemarketpriceoftheunderlyingcommonstockonthedateofthegrant.

In May 2014, the Board of Directors and the stockholders approved the 2014 Stock Incentive Plan,which authorized the grant of incentives for up to an aggregate of 40,000 shares of ClassB commonstock.EffectiveAugust20,2014,theCompany’sBoardofDirectorsgrantedsharesoptionswithrespecttoClassBcommonstocktoexecutivesanddirectors,totaling34,320shares,with11,500sharesbeinggranted to directors and 22,820 shares being granted to executives. These option grants replaced alloutstandingoptiongrantsissuedinprioryearsandtherestrictedstockawardsissuedinAugust2012.Themaximumtermofsuchshareoptionsistenyears,andtheshareoptionsvestoverfiveyearsfromthe date of the grant in quarterly increments of 5 percent. The exercise price of the share optionsgranted is $16 per share. Using the Black‐Scholes‐Merton option‐pricing model, management hasdeterminedthat theoptions issued in2014haveacalculated fairvalueat thegrantdateof$6.05pershare.ThevestedoptionsasofDecember31,2016haveaweightedaverageremainingcontractuallifetermof2.6years.

TheCompanyuseshistoricaldatatoestimateshareoptionexerciseandemployeedeparturebehaviorused in the Black‐Scholes‐Merton option‐pricingmodel. The expected term of share options grantedrepresentstheperiodoftimethatshareoptionsgrantedareexpectedtobeoutstanding.Therisk‐freerateforperiodswithinthecontractualtermoftheshareoptionisbasedontheU.S.Treasuryyieldcurveineffectatthetimeofgrant.



29

Note10–StockOptionPlans(continued)

AstheCompany’sstockisnotactivelytraded,itisnotpracticablefortheCompanytoestimateexpectedvolatility of its share price; therefore, the Company calculated the expected volatility assumption byaveraging the historical volatility of certain public companies from the landline telecommunicationssectorthathaveoperationscomparabletotheCompany.

AsummaryoftheassumptionsfortheAugust2014optiongrantsareasfollows:

August2014Grant

Expectedvolatility 142%Weighted‐averagevolatility 142%Expecteddividends ‐Expectedterm(inyears) 10Riskfreerate 6.00% InMarch2015,theBoardofDirectorsauthorizedthegrantofincentivesforuptoanaggregateof4,000sharesofClassBcommonstocktothreekeyemployeesinaccordancewithprovisionsofthe2014StockIncentivePlanapproved inMay2014.Themaximumtermofsuchshareoptions is tenyears,andthesharesvestinfive‐quarterincrementsatarateof20%.Theexercisepriceoftheshareoptionsgrantedvaryaftereachsucceedingfive‐quarterincrement,includingsuccessivepricesof$19.21,$60.00,$90.00,and$120.00.Using theBlack‐Scholes‐Mertonoption‐pricingmodel,managementhasdetermined thattheincentiveoptionsgrantedin2015haveacalculatedfairvalueatthegrantdateof$19.21pershare.ThevestedoptionsasofDecember31,2016haveaweightedaverageremainingcontractuallifetermof5.5years.AsummaryoftheassumptionsfortheMarch2015optiongrantsareasfollows:

March2015Grant

Expectedvolatility 202%Weighted‐averagevolatility 202%Expecteddividends ‐Expectedterm(inyears) 10Riskfreerate 0.11% In June2015, theBoardofDirectorsauthorized thegrantofnon‐qualified stockoptionswith respectClassBcommonstocktovariousmembersoftheCompany’sBoardofDirectors,Boardobservers,andofficersoftheCompany,totaling21,950shares.TheBoardofDirectorsapprovedanamendmenttothe2014StockIncentivePlanapprovedinMay2014toreserveanadditional37,500sharesforthegrantoffutureawardsotherthaninitialstockofferings.Themaximumtermofsuchshareoptionsistenyears,andtheshareoptionsvestquarterlyoverafive‐yearperiod.Theexerciseoftheshareoptionsgrantedis$12.00per share.Using theBlack‐Scholes‐Mertonoption‐pricingmodel,managementhasdeterminedthattheshareoptionsissuedhaveacalculatedfairvalueatthegrantdateof$8.00pershare.ThevestedoptionsasofDecember31,2016haveaweightedaverageremainingcontractuallifetermof3.1years.


30

Note10–StockOptionPlans(continued)

AsummaryoftheassumptionsfortheJune2015optiongrantsareasfollows:

June2015Grant

Expectedvolatility 206%Weighted‐averagevolatility 206%Expecteddividends ‐Expectedterm(inyears) 10Riskfreerate 0.08% AsummaryoftheshareoptionactivityfortheyearsendedDecember31,2016and2015follows:

May2015Grant March2015Grant August2014GrantWeighted Weighted Weighted

ClassB average ClassB average ClassB averageoptions exerciseprice options exerciseprice options exerciseprice

December31,2014 ‐ ‐$ ‐ ‐$ 33,570 16.00$

Granted 21,950 12.00$ 4,000 72.30$ ‐ ‐$Exercised ‐ ‐ ‐ ‐ ‐ ‐Forfeited ‐ 12.00 (1,500) ‐ (1,190) 16.00

December31,2015 21,950 ‐$ 2,500 72.30$ 32,380 16.00$

Granted ‐ ‐$ ‐ ‐$ ‐$Exercised ‐ ‐ ‐ ‐ ‐ ‐Forfeited ‐ ‐ ‐ ‐ ‐ ‐

December31,2016 21,950 12.00$ 2,500 72.30$ 32,380 16.00$

ExercisableatDecember31,2016 6,585 12.00$ 875 60.00$ 14,571 16.00$

Theaccompanyingconsolidatedfinancialstatementsreflectanoncashcompensationchargerelatedtothe share options of $57,713 and $58,845, respectively, for the years endedDecember 31, 2016 and2015. As of December 31, 2016, the Company had $198,370 of unrecognized compensation expenserelatedtostockoptions,whichisexpectedtoberecognizedoveraweightedaverageperiodof3.1years.Note11–GovernmentGrantsRUS grant – On November 2, 2007, the Company secured a community‐oriented connectivitybroadband grant by the United States Department of Agriculture, RUS, to assist in financing theconstruction of a fiber‐optic broadband network and community center in Darbyville, Ohio. Thebroadbandnetworkisintendedtoprovidefiber‐to‐the‐homeservices,suchashigh‐speedInternetanddigital television services toDarbyville residents andmake free‐of‐charge Internet access available atthe community center.Themaximumgrant amount is $603,200.During2009, theCompany received$508,030ingrantfunding,whichwasrecordedasdeferredrevenuetobeamortizedoverthelifeoftheconstructed assets. During 2011 and 2010, the Company applied for and received grant funding of$19,993and$66,409,respectively,whichwasusedtooffsetoperatingcostsofthecommunitycenter.AsofDecember31,2011,themaximumgrantfundinglimitwasmet.



31

Note11–GovernmentGrants(continued)BTOPgrant–OnAugust1,2010,theCompanywasawardeda$66,474,246BTOPgrantadministeredbytheNationalTelecommunicationsandInformationAdministration(NTIA)toconstructafiber‐opticbroadbandnetworkthroughout34countiesineastcentralandsoutheasternOhio.Thenetwork,whichwillbeownedandmaintainedbytheCompany,isintendedtoprovideadvancedbroadbandservicestoanchorinstitutions,suchashealthcarefacilities,educational institutions,(includingcollegesandK‐12schools),governmentagencies,andotherbusinessesinhistoricallyunderservedareas.Thenetworkwillalso provide backhaul to commercial providers for “last mile” services. BTOP grant represents 70percent of the total cost of the project, which was expected to be $94,963,209, with the Companymatchingtheremaining30percent,or$28,488,963.Constructioncommencedduringthefirstquarterof2011.TheNTIAretainsafederalinterestinthenetworktoprotectagainstanyunauthorizeduseorsaleofthenetworkassets.During 2011, the Company applied for and received approximately $800,000 of funding foradministrativecostsandapproximately$19,776,000forconstructioncosts.During2012,theCompanyappliedforandreceivedapproximately$948,000offundingforadministrativecostsandapproximately$36,188,000forconstructioncosts.During2013,theCompanyappliedforandreceivedapproximately$353,000infundingforadministrativecostsandapproximately$7,039,000forconstructioncosts.ThegrantreceiptsarereflectedintheCompany’sconsolidatedbalancesheetsindeferredrevenuesandtheconsolidatedstatementsofincomeinfibertransportrevenues.Aspartof this total, theCompanyreceived$2,100,000during2013fromtheOhioStateUniversityonbehalfofOARnet,whoisasubrecipientoftheBTOPgrantforanamendmenttoanexistingdark‐fiberIRUtoincreasethenumberoffibersandforanextensionofthetermoftheroutesfrom10yearsto20years.ThegrantreceiptsarereflectedintheCompany’sconsolidatedbalancesheets,asnothingwastobe recorded in the consolidated statements of operations until work orders were transferred intoservice.During 2014, the Company did not receive any funding, as it had applied for and receivedmaximumfunding under the award. The Company has completed construction of the fiber‐optic broadbandnetworkasofDecember31,2014.TheCompanycompletedfinalstagesoftheclose‐outprocessforthegrantwiththeNTIAin2015.


32

Note12–OperatingRevenueWirelinerevenuesconsistofthefollowingfortheyearsendedDecember31:

2016 2015WirelineCustomer 7,283,111$ 8,068,729$IntercarrierInterstate 2,719,981 3,024,535Intrastate 594,397 752,836UniversalServiceSupport‐federal 8,432,269 8,960,287

Totalwirelinerevenues 19,029,758$ 20,806,387$0 0

Wirelinerevenuesareclassifiedaboveasfollows: Customerrevenuesincludeend‐usercharges,suchasthesubscriberlinecharge,FederalUniversal

ServiceCharge(FUSC),andARC. UniversalServiceSupportincludestheHCLS,ICLS,andCAF. Allaccesschargerevenue,exceptasdescribedabove,isclassifiedasintercarrierrevenue.OthernonregulatedrevenuesconsistofthefollowingfortheyearsendedDecember31:

2016 2015OthernonregulatedDirectory 1,421,943$ 1,437,780$Maintenance&installations 519,460 657,299Businesssystemsales 392,797 460,141Rents 74,559 68,222Other 276,875 204,195

Totalothernonregulatedrevenues 2,685,634$ 2,827,637$

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33

REPORTOFINDEPENDENTAUDITORSONSUPPLEMENTARYINFORMATION

BoardofDirectorsHorizonTelcom,Inc.WehaveauditedtheconsolidatedfinancialstatementsofHorizonTelcom,Inc.anditssubsidiariesasofand for the year ended December 31, 2016, and our report thereon dated March 27, 2017, whichcontained an unmodified opinion on those consolidated financial statements appears on page 1. Ourauditwasconductedforthepurposeofforminganopinionontheconsolidatedfinancialstatementsasawhole. The consolidating balance sheet detail, consolidating statement of operations detail,consolidatingstatementofcashflowsdetail,andbusinessunitoperatingincomedetailarepresentedforpurposesofadditionalanalysisratherthantopresentfinancialposition,resultsofoperations,andcashflowsof the individualcompanies,and isnotarequiredpartof theconsolidated financialstatements.Suchinformationistheresponsibilityofmanagementandwasderivedfromandrelatesdirectlytotheunderlying accounting and other records used to prepare the consolidated financial statements. Theinformation has been subjected to the auditing procedures applied in the audit of the consolidatedfinancial statements and certain additional procedures, including comparing and reconciling suchinformationdirectly to theunderlyingaccountingandotherrecordsused toprepare theconsolidatedfinancial statements or to the consolidated financial statements themselves, and other additionalproceduresinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Inouropinion,thesupplementaryinformationisfairlystatedinallmaterialrespectsinrelationtotheconsolidatedfinancialstatementstakenasawhole.

OverlandPark,KansasMarch27,2017

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HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATINGBALANCESHEETDETAIL

34

ChillicotheTelephone HorizonTechnology HorizonServices HorizonTelcom Eliminations Consolidated

CURRENTASSETSCashandcashequivalents 6,998,466$ ‐$ ‐$ ‐$ ‐$ 6,998,466$Accountsreceivable‐subscriber,lessallowancefordoubtful

accountsofapproximately$167,000asofDecember31,2016and$137,000asofDecember31,2015 1,632,958 ‐ ‐ ‐ ‐ 1,632,958

Accountsreceivable‐interexchangecarriers,accesschargepools,lessallowancefordoubtfulaccountsofapproximately$56,000asofDecember31,2016and$112,000asofDecember31,2015 627,642 ‐ ‐ ‐ ‐ 627,642

Accountsreceivable‐other 344,757 ‐ ‐ 1,337,507 ‐ 1,682,264Incometaxreceivable ‐ ‐ ‐ 17,300 ‐ 17,300Inventories 2,606,209 ‐ ‐ ‐ ‐ 2,606,209Prepaidexpensesandothercurrentassets 781,072 ‐ ‐ ‐ ‐ 781,072

Totalcurrentassets 12,991,104 ‐ ‐ 1,354,807 ‐ 14,345,911OTHERASSETS

Accountsreceivable‐affiliates 15,289,254 409,685 39,443 1,247,283 (16,985,665) ‐Otherinvestments 18,500 ‐ ‐ 1,543,240 ‐ 1,561,740Prepaidindefeasiblerightofuse 1,660,960 ‐ ‐ ‐ ‐ 1,660,960Othernoncurrentassets 6,980,768 ‐ ‐ ‐ ‐ 6,980,768Investmentinsubsidiaries ‐ ‐ ‐ 107,855,099 (107,855,099) ‐

Totalotherassets 23,949,482 409,685 39,443 110,645,622 (124,840,764) 10,203,468

PROPERTY,PLANT,ANDEQUIPMENTRegulatedtelecommunicationsplantinservice 163,265,601 ‐ ‐ ‐ ‐ 163,265,601Nonregulatedtelecommunicationsplantinservice 181,641,368 ‐ ‐ ‐ ‐ 181,641,368Regulatedplantunderconstruction 348,211 ‐ ‐ ‐ ‐ 348,211Nonregulatedplantunderconstruction 940,731 ‐ ‐ ‐ ‐ 940,731

346,195,911 ‐ ‐ ‐ ‐ 346,195,911Lessaccumulateddepreciation (176,396,402) ‐ ‐ ‐ ‐ (176,396,402)

Netproperty,plant,andequipment 169,799,509 ‐ ‐ ‐ ‐ 169,799,509

Totalassets 206,740,095$ 409,685$ 39,443$ 112,000,429$ (124,840,764)$ 194,348,888$

HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATINGBALANCESHEETDETAIL

December31,2016

35


CURRENTLIABILITIESCurrentportion,long‐termdebt ‐$ ‐$ ‐$ 4,500,000$ ‐$ 4,500,000$Accountspayable 642,783 (102) ‐ ‐ ‐ 642,681Otheraccruedliabilities 7,014,101 193 ‐ 342,331 ‐ 7,356,625Postretirementbenefitobligation 98,179 ‐ ‐ ‐ ‐ 98,179Pensionbenefitobligation 771,553 ‐ ‐ ‐ ‐ 771,553Deferredrevenue 5,779,063 ‐ ‐ ‐ ‐ 5,779,063

Totalcurrentliabilities 14,305,679 91 ‐ 4,842,331 ‐ 19,148,101

LONG‐TERMDEBT ‐ ‐ ‐ 69,451,936 ‐ 69,451,936

OTHERLIABILITIESANDDEFERREDCREDITSDeferredincometaxes,net 12,292,626 ‐ ‐ (4,404,097) ‐ 7,888,529Accountspayable‐affiliates 3,771,898 1,209 38,943 13,173,615 (16,985,665) ‐Postretirementbenefitobligation 499,471 ‐ ‐ ‐ ‐ 499,471Pensionbenefitobligation 8,738,018 ‐ ‐ ‐ ‐ 8,738,018Deferredrevenue‐BTOPgrant 47,604,625 ‐ ‐ ‐ ‐ 47,604,625Deferredrevenue‐SouthernOhioHealthCareNetwork 6,657,318 ‐ ‐ ‐ ‐ 6,657,318Deferredrevenue‐other 5,424,246 ‐ ‐ ‐ ‐ 5,424,246Otherlong‐termliabilities ‐ ‐ ‐ ‐ ‐ ‐

Totalotherliabilitiesanddeferredcredits 84,988,202 1,209 38,943 8,769,518 (16,985,665) 76,812,207

STOCKHOLDERS'EQUITYCommonstock‐ClassA,noparvalue.Authorized200,000

shares;issued99,726sharesandoutstanding87,099sharesatDecember31,2016andDecember31,2015,statedat$4.25pershare 423,836 ‐ ‐ 423,836 (423,836) 423,836

Commonstock‐ClassB,noparvalue.Authorized500,000shares;issued299,796sharesandoutstanding234,127atDecember31,2016andDecember31,2015,statedat$4.25pershare 1,271,506 500 500 1,274,133 (1,272,506) 1,274,133

Treasurystock,12,627ClassAshares,statedatcost ‐ ‐ ‐ (1,721,337) ‐ (1,721,337)Treasurystock,65,669ClassBshares,statedatcost ‐ ‐ ‐ (9,941,758) ‐ (9,941,758)Accumulatedothercomprehensiveloss,netofincome

taxbenefit (8,697,772) ‐ ‐ (6,099,219) 6,099,219 (8,697,772)Additionalpaid‐incapital 74,353,492 9,015,483 ‐ 131,993,687 (142,171,789) 73,190,873Retainedearnings(deficit) 40,095,152 (8,607,598) ‐ (86,992,698) 29,913,813 (25,591,331)

‐Totalstockholders'equity 107,446,214 408,385 500 28,936,644 (107,855,099) 28,936,644

Totalliabilitiesandstockholders'equity 206,740,095$ 409,685$ 39,443$ 112,000,429$ (124,840,764)$ 194,348,888$

HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATINGSTATEMENTOFINCOMEDETAIL

36


OPERATINGREVENUESWireline 19,201,098$ ‐$ ‐$ ‐$ (171,340)$ 19,029,758$Internet 4,302,387 ‐ ‐ ‐ ‐ 4,302,387Video 4,377,520 ‐ ‐ ‐ ‐ 4,377,520Fibertransport 27,396,545 ‐ ‐ ‐ ‐ 27,396,545Othernonregulated 2,685,634 ‐ ‐ ‐ ‐ 2,685,634Uncollectibles (413,636) ‐ ‐ ‐ ‐ (413,636)

Totalnetoperatingrevenues 57,549,548 ‐ ‐ ‐ (171,340) 57,378,208

OPERATINGEXPENSESPlantspecificoperations 5,267,817 ‐ ‐ ‐ ‐ 5,267,817Plantnonspecificoperations 2,220,407 ‐ ‐ ‐ ‐ 2,220,407Depreciation 5,953,718 ‐ ‐ ‐ ‐ 5,953,718Customeroperations 1,667,094 ‐ ‐ ‐ ‐ 1,667,094Corporateoperations 4,114,008 ‐ ‐ 95,895 (158,123) 4,051,780Otheroperatingtaxes 204,125 ‐ ‐ ‐ ‐ 204,125Nonregulated

Fibertransport 13,670,663 ‐ ‐ ‐ ‐ 13,670,663Video 3,722,111 ‐ ‐ ‐ ‐ 3,722,111Other 1,259,991 ‐ ‐ ‐ (13,217) 1,246,774Depreciation 9,631,762 ‐ ‐ ‐ ‐ 9,631,762

Totaloperatingexpenses 47,711,696 ‐ ‐ 95,895 (171,340) 47,636,251

Operatingincome 9,837,852 ‐ ‐ (95,895) ‐ 9,741,957

NONOPERATINGINCOME(EXPENSE)Interestincome 3,867 ‐ ‐ ‐ ‐ 3,867Allowanceforfundsusedduringconstruction ‐ ‐ ‐ 54,218 ‐ 54,218Dividendincome ‐ ‐ ‐ 1,783,343 ‐ 1,783,343Interestexpense ‐ ‐ ‐ (4,389,321) ‐ (4,389,321)Othernonoperatingexpense (23,285) ‐ ‐ ‐ ‐ (23,285)Lossonabandonedconstruction (125,014) ‐ ‐ ‐ ‐ (125,014)Subsidiaryincome ‐ ‐ ‐ 6,301,506 (6,301,506) ‐

Totalnonoperatingexpense (144,432) ‐ ‐ 3,749,746 (6,301,506) (2,696,192)

Incomebeforeincometaxes 9,693,420 ‐ ‐ 3,653,851 (6,301,506) 7,045,765

INCOMETAX(EXPENSE)BENEFIT (3,391,914) ‐ ‐ 891,070 ‐ (2,500,844)

Netincome 6,301,506$ ‐$ ‐$ 4,544,921$ (6,301,506)$ 4,544,921$

HORIZONTELCOM,INC.ANDSUBSIDIARIESCONSOLIDATINGSTATEMENTOFCASHFLOWSDETAIL

37

ChillicotheTelephone

HorizonTechnology HorizonServices HorizonTelcom Eliminations Consolidated

Cashflowsfromoperatingactivities:Netincome(loss) 6,301,506$ ‐$ ‐$ 4,544,921$ (6,301,506)$ 4,544,921$Adjustmentstoreconcilenetincometonetcashfrom

operatingactivities:Depreciationandamortization 15,585,480 ‐ ‐ ‐ 15,585,480Deferredincometaxexpense(benefit) 2,135,287 ‐ ‐ 302,068 ‐ 2,437,355Deferredcompensationrelatedtostockoptionplan ‐ ‐ ‐ 57,713 ‐ 57,713Amortizationofdeferredloancosts ‐ ‐ ‐ 268,986 ‐ 268,986Provisionforbaddebtexpense 413,636 ‐ ‐ ‐ ‐ 413,636Allowanceforfundsusedduringconstruction ‐ ‐ ‐ (54,218) ‐ (54,218)Lossonabandonedconstruction 125,014 ‐ ‐ ‐ ‐ 125,014Changeinassetsandliabilities:

Accountsreceivable (1,020,391) ‐ ‐ (1,337,507) ‐ (2,357,898)Incometaxesreceivable ‐ ‐ ‐ 24,700 ‐ 24,700Inventories (779,485) ‐ ‐ ‐ ‐ (779,485)Prepaidexpensesandothercurrentassets (102,085) ‐ ‐ ‐ ‐ (102,085)Accountspayable 364,525 ‐ ‐ ‐ ‐ 364,525Accruedliabilities (2,759,423) ‐ ‐ (9,033) ‐ (2,768,456)Accruedpensioncosts (210,262) ‐ ‐ ‐ ‐ (210,262)Postretirementbenefitobligation (187,768) ‐ ‐ ‐ ‐ (187,768)

Changeinintercompany(receivables)payables (5,895,494) ‐ ‐ 5,895,494 ‐ ‐Changeinotherassetsandliabilities,net (6,029,735) ‐ ‐ (445,836) ‐ (6,475,571)

Netcashfromoperatingactivities 7,940,805 ‐ ‐ 9,247,288 (6,301,506) 10,886,587

Cashflowsfrominvestingactivities:Capitalexpenditures,net (7,619,328) ‐ ‐ 54,218 (7,565,110)Proceedsonsaleofassets,netofcostofremoval 8,366 ‐ ‐ ‐ 8,366Investmentinconsolidatingsubsidiaries ‐ ‐ ‐ (6,301,506) 6,301,506 ‐

Netcashfrominvestingactivities (7,610,962) ‐ ‐ (6,247,288) 6,301,506 (7,556,744)

Cashflowsfromfinancingactivities:Paymentsonlong‐termdebt ‐ ‐ ‐ (3,000,000) ‐ (3,000,000)

Netcashfromfinancingactivities ‐ ‐ ‐ (3,000,000) ‐ (3,000,000)

Netchangeincashandcashequivalents 329,843 ‐ ‐ ‐ ‐ 329,843

Cashandcashequivalents,beginningofyear 6,668,623 ‐ ‐ ‐ ‐ 6,668,623

Cashandcashequivalents,endofyear 6,998,466$ ‐$ ‐$ ‐$ ‐$ 6,998,466$

HORIZONTELCOM,INC.ANDSUBSIDIARIESBUSINESSUNITOPERATINGINCOMEDETAIL

38

ILEC Fiber Consolidated ILEC Fiber Consolidated

OPERATINGREVENUESEndUserVoice 9,058,120$ ‐$ 9,058,120$ 9,802,771$ ‐$ 9,802,771$EndUserVideo 4,341,504 ‐ 4,341,504 4,445,277 ‐ 4,445,277EndUserInternet 4,338,402 ‐ 4,338,402 4,068,964 ‐ 4,068,964Enduserdiscounts (1,775,007) ‐ (1,775,007) (1,734,042) ‐ (1,734,042)

EndUsertotal 15,963,019 ‐ 15,963,019 16,582,970 ‐ 16,582,970

UniversalServiceSupport 8,432,269 ‐ 8,432,269 8,960,287 ‐ 8,960,287Intercarrierrevenue 3,314,377 ‐ 3,314,377 3,777,371 ‐ 3,777,371Otherrevenues 2,685,634 ‐ 2,685,634 2,827,637 ‐ 2,827,637

TotalILECbeforeuncollectibles 30,395,299 ‐ 30,395,299 32,148,265 ‐ 32,148,265

FiberTransportFibertoCellTower ‐ 12,765,743 12,765,743 ‐ 6,788,774 6,788,769FibertoCellTower‐InstallationCharges ‐ 1,002,064 1,002,064 ‐ 863,428 863,428Enterprise ‐ 7,111,254 7,111,254 ‐ 5,816,744 5,816,744Enterprise‐InstallationCharges ‐ 471,465 471,465 ‐ 250,753 250,753IndefeasibleRighttoUse(IRU)‐RecurringLeaseandMaintenance ‐ 445,303 445,303 ‐ 469,057 469,057AmortizationofgrantandIRUrevenue ‐ 5,600,716 5,600,716 ‐ 5,598,784 5,598,784

Totalfibertransportbeforeuncollectibles ‐ 27,396,545 27,396,545 ‐ 19,787,540 19,787,535

LESS:Uncollectibles (403,626) (10,010) (413,636) (328,693) 41,210 (287,483)

Totaloperatingrevenue 29,991,673 27,386,535 57,378,208 31,819,572 19,828,750 51,648,317

OPERATINGEXPENSESPayrollexpense 6,368,172 2,738,848 9,107,020 6,389,652 2,623,616 9,013,268Benefitsexpense 3,142,326 728,269 3,870,595 3,062,568 678,307 3,740,875Directnon‐laborexpenses 9,592,784 10,392,563 19,985,347 11,003,166 6,234,492 17,237,658Capitalizedallother(clearings) (773,164) (189,016) (962,180) (741,294) (220,720) (962,014)Specialterminationbenefits 49,989 ‐ 49,989 142,256 ‐ 142,256SharedServicesanddirectcosts (957,066) 957,066 ‐ (1,058,346) 1,058,346 ‐

Totaloperatingexpensebeforedepreciation 17,423,041 14,627,730 32,050,771 18,798,002 10,374,041 29,172,043

Operatingincomebeforedepreciation 12,568,632 12,758,805 25,327,437 13,021,570 9,454,709 22,476,274

Depreciationexpense 7,096,976 8,488,504 15,585,480 7,700,524 7,797,324 15,497,848

Operatingincome 5,471,656$ 4,270,301$ 9,741,957$ 5,321,046$ 1,657,385$ 6,978,426$

2016 2015

Documents

Horizon Telcom, Inc. and Subsidiaries Horizon Telcom...stockholders' equity, december 31, 2016 423,836$ 1,274,133$ (11,663,095 ... horizon telcom, inc. and subsidiaries notes to consolidated