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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 March 31, 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 May 2, 2014 was 6,088,347.

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Index to Form 10-Q

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Part I — Financial Information

Item 1.  Financial Statements

ALTEVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

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

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ALTEVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands)

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

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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.

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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.

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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 VoIP hosted Microsoft Communication Services, fixed mobile convergence and advanced voice applications for a broad customer base including, medium and large-sized business customers.  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, with 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.  Operating results and cash flows for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the entire year.  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 Amended 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 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.

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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 is 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 2% and 7% of the Company’s consolidated revenues for the three months ended March 31, 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.

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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 annually on October 1, or whenever events or circumstances indicate that there may be an impairment.  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 UC reporting unit included $9.0 million of goodwill as of March 31, 2014. The Company recorded $9.1 million as a result of the acquisition of certain assets and certain liabilities of Alteva, LLC in 2011.  In the third quarter of 2013, as a result of the disposal and business restructuring of its Syracuse, New York operations, the Company allocated $0.1 million of its goodwill to the disposal group and wrote it off as part of the sale.  The Company is not aware of any events or circumstances that occurred during the quarter ended March 31, 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 principally arising from its O-P put (see Note 5), 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

There were no new accounting pronouncements adopted during the three months ended March 31, 2014.

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:

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The components of other intangible assets are as follows:

NOTE 4: SEVERANCE

On March 31, 2014, David J. Cuthbert was terminated as President and Chief Executive Officer of Alteva.  The Company notified Mr. Cuthbert that his termination was for “cause” and, as such, Mr. Cuthbert was not entitled to any of the benefits provided for under his employment agreement dated March 5, 2013, including cash severance and the acceleration of vesting on any unvested equity instruments.

Mr. Cuthbert has disputed the Company’s basis for termination and claimed that he is due his full severance benefits.  The Company strongly believes the termination for “cause” was appropriate and intends to vigorously defend its position.

The maximum cash severance payments called for under Mr. Cuthbert’s employment agreement in the case of a termination not for cause total $0.8 million. At the time of his termination, Mr. Cuthbert held outstanding unvested restricted stock awards and unvested stock options of 101,235 and 6,175, respectively, previously granted under the long-term incentive plan (see Note 9).  These awards, which had unrecognized compensation cost of approximately $1.2 million, were cancelled as of his termination.

The Company accrued $100,000 during the three months ended March 31, 2014, in connection with the potential exposure for this matter based upon the current facts and circumstances. The Company will continually monitor the status of this matter to determine the potential impact and any required adjustment to the accrual.

On May 21, 2013, the Company announced a reduction in workforce of its Warwick, New York facility of approximately 17% due to the decline in work associated with the Telephone segment.  Total expense recognized in selling general and administrative expenses during the second quarter of 2013 related to this reduction was $0.3 million.  As of March 31, 2014 and December 31, 2013, the liability associated with this workforce reduction was reported in other accrued expenses was $0.2 million, which the Company expects to pay-out through August 2014.

NOTE 5:  ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP

The Company is a limited partner in the Orange County-Poughkeepsie Limited Partnership (“O-P”) and has an 8.108% limited partnership interest as of March 31, 2014 and 2013, which is 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 provides that the Company will receive cash distributions equal to its ownership share percentage of the approved total distributions by the O-P. The 4G Agreement also gives 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.  The Company 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 (see Note 6).  The Company expects the remaining gross proceeds to be used to pay taxes on the related gain, fund working capital needs and support growth initiatives.

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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 six 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.

The following summarizes the income statement (unaudited) for the three months ended March 31, 2014 and 2013 that O-P provided to the Company:

The following summarizes the balance sheet as of March 31, 2014 (unaudited) and December 31, 2013 that O-P provided to the Company:

NOTE 6: DEBT OBLIGATIONS

Debt obligations consisted of the following at March 31, 2014 and December 31, 2013:

On March 11, 2013, the Company entered into a new 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 become due and payable on June 30, 2014. The TriState borrowings incur 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.   As of March 31 2014, the Company had $6.5 million available under the Credit Agreement.

Under the terms of the Credit Agreement, the Company is required to comply with certain loan covenants, which include, but are not limited to, the achievement of certain financial ratios and certain financial reporting requirements. The Company must maintain a consolidated liquidity ratio, as defined in the Credit Agreement, in excess of 1.0 to 1.0, including the value of the Put calculated in accordance with the 4G Agreement, until April 30, 2014.  The Company is required to obtain 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 are secured by all of the Company’s asset and guaranteed by all of the Company’s wholly-owned subsidiaries except for the Company’s ILEC subsidiary.  The ILEC subsidiary entered into a 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.

The Company sold its ownership interest in the O-P on April 30, 2014 (see Note 5) and a portion of the proceeds was used to repay all of the outstanding borrowings under the TriState credit facility, allowing $17.0 million to remain available under the credit facility.

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NOTE 7:  INCOME TAXES

The effective tax rate for the three months ended March 31, 2014, and March 31, 2013 was 18.9% and 43.0%, 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 March 31, 2014, and does not include the estimated tax effects of the O-P gain on the put exercise, which is being treated as a discrete item in the second quarter.

As of March 31, 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 accounting standard regarding accounting for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities, unless expected to be paid within one year.  As of March 31, 2014 and December 31, 2013, the Company has no liability for unrecognized tax benefits.  The Company recognizes interest accrued related to unrecognized tax benefits in interest expense.  For the three months ended March 31, 2014 and 2013, there was no interest expense relating to unrecognized tax benefits.

NOTE 8:  PENSION AND POSTRETIREMENT OBLIGATIONS

The components of net periodic cost (benefit) for the three months ended March 31, 2014 and 2013 are as follows:

For the three months ended March 31, 2014 and March 31, 2013, the Company has contributed $0.1 million and $0.2 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 9:    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 March 31, 2014 and December 31, 2013, 246,511 and 57,923 shares 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 $0.3 million and $0.2 million for the three months ended March 31, 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.

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The following table summarizes the restricted common stock activity for the three months ended March 31, 2014:

The total fair value of restricted stock vested for the three months ended March 31, 2014 was $1.5 million.  As of March 31, 2014, $1.5 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.

Stock Options

The following tables summarize stock option activity for the three months ended March 31, 2014, along with stock options exercisable at the end of the period:

The fair value of the stock-based awards was estimated using the Black-Scholes model.  No options were granted in the first quarter 2014. Effective the third quarter 2013, the Company’s dividend yield is zero as it has discontinued its dividends on common stock.

As of March 31, 2014, $0.1 million of total unrecognized compensation expense related to stock options awards is expected to be recognized over a weighted average period of approximately 2 years.

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock granted to employees that are included in the Company’s consolidated statements of income for the three months ended March 31, 2014 and 2013:

NOTE 10:  EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) applicable to common stock by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings (loss) per share is computed by dividing net income (loss) applicable to common stock by the weighted average number of shares of common stock adjusted to include the effect of potentially dilutive securities.  Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and shares of unvested restricted stock.  Diluted earnings (loss) per share exclude all dilutive securities if their effect is anti-dilutive.

The Company’s restricted stock awards are considered “participating securities” because they contain non-forfeitable rights to dividends. Under the two-class method, earnings per share (“EPS”) is computed by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-class method,

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earnings are allocated to both shares of common stock and participating securities based on their respective weighted-average shares outstanding for the period.

For the three months ended March 31, 2014 and 2013, the Company experienced a net loss.  As a result, the effect of participating securities was excluded from the computation of basic and diluted EPS.  The net losses were not allocated because the restricted stockholders are not required to fund losses.

The weighted average number of shares of common stock used in basic and diluted earnings per share for the three months ended March 31, 2014 and 2013 is as follows:

(1)         For the three months ended March 31, 2014 and 2013, the Company had 0.4 million and 0.4 million in nonvested participating securities, respectively.  As the participating securities do not participate in losses, there was no allocation of loss for the three months ended March 31, 2014 and 2013.

(2)   For the three months ended March 31, 2014 and 2013, potentially dilutive shares related to out of the money common stock options that were excluded from EPS, as their effect was anti-dilutive, were nominal.

NOTE 11:  SHAREHOLDERS’ EQUITY

A summary of the changes to shareholders’ equity for the three months ended March 31, 2014 and 2013 is provided below:

NOTE 12:  SEGMENT INFORMATION

The Company’s two segments, UC and Telephone, are strategic business units that offer different products and services.  The Company evaluates the performance of its two segments based upon factors such as revenue growth, expense containment, market share and operating results.

The UC segment is a premier provider of hosted Unified Communications as a Service (UCaaS) including VoIP, hosted Microsoft communication services, fixed mobile convergence and advanced voice applications for a broad customer base including, medium and large-sized businesses and enterprise business customers.

The Telephone segment operates as an ILEC in southern Orange County, New York and northern New Jersey.  The Telephone segment consists of providing local and toll telephone service, high-speed broadband and fiber Internet access services and satellite video services to residential and business customers.  The ILEC service areas are primarily rural and have an estimated population of 50,000.  We also operate as a CLEC in in Middletown, New York, Scotchtown, New York and Vernon, New Jersey.

The segment results presented below are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.  All intersegment transactions are shown net of eliminations.

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Segment statement of operations information for the three months ended March 31, 2014 and 2013 is set forth below: