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Item 1.01.
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Entry into a Material Definitive Agreement.
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On November 2, 2017
(the “Effective Date”), Otelco Inc. (the “Company”) entered into a Credit Agreement (the “Credit
Agreement”) by and among itself, as borrower, each subsidiary of the Company listed as a guarantor on the signature pages
thereto, as guarantors, the lenders from time to time party thereto, as lenders, and CoBank, ACB, as administrative agent (the
“Administrative Agent”), as issuer of letters of credit and as provider of the swing line commitment.
The credit facilities under
the Credit Agreement are comprised of:
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a term loan facility in an aggregate principal amount of $87,000,000;
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a revolving credit facility in an aggregate principal amount of up to $5,000,000, which includes
the following subfacilities:
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swing line loans in an aggregate principal amount not exceeding $1,000,000 at any time; and
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letters of credit in an aggregate stated amount not exceeding $1,000,000 at any time; and
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an incremental term loan facility in an aggregate principal amount of up to $20,000,000, subject
to the satisfaction of certain conditions and lender participation.
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The term loan facility
was fully drawn on the Effective Date. As of the date of this Current Report on Form 8-K, no amounts have been drawn under the
incremental term loan facility or the revolving credit facility. Amounts drawn under the term loan facility and the incremental
term loan facility that are subsequently repaid or prepaid may not be re-borrowed. Amounts drawn under the revolving credit facility
may generally be borrowed, repaid and re-borrowed until the five-year anniversary of the Effective Date (the “Maturity Date”).
Swing line loans and letters of credit will reduce the availability under the revolving credit facility on a dollar-for-dollar
basis. The Company may, upon notice to the Administrative Agent, terminate or reduce, in increments of $500,000, the total commitments
under the revolving credit facility, subject to prepayment of the revolving loans, the outstanding unused commitment fees relating
thereto (as described below) and the full amount of interest accrued on the principal sum to be prepaid.
The proceeds of the
term loan facility were used by the Company to refinance its existing indebtedness under that certain Loan Agreement (the
“Prior Senior Agreement”), dated as of January 25, 2016, by and among the Company as borrower, each subsidiary of
the Company listed as a guarantor on the signature pages thereto, as guarantors, the lenders from time to time party thereto,
as lenders, and Cerberus Business Finance, LLC, as collateral agent and administrative agent, and that certain Subordinated
Loan Agreement (the “Prior Subordinated Agreement” and, together with the Prior Senior Agreement, the
“Prior Credit Agreements”), dated as of January 25, 2016, by and among the Company and the subsidiaries of the
Company set forth on Appendix I thereto, as borrowers, the investors from time to time party thereto, as lenders, and
NewSpring Mezzanine Capital III, L.P., as collateral agent and an investor, as amended on February 17, 2016, and to pay fees
and expenses in connection with the transactions contemplated by the Credit Agreement. The proceeds of loans to be made under
the revolving credit facility will be used by the Company to fund working capital and for general corporate purposes of the
Company and its subsidiaries. The proceeds of loans to be made under the incremental term loan facility will be used as
specified in the applicable incremental term loan funding agreement.
The Company may prepay
any of the loans under the Credit Agreement, from time to time, in its discretion, without premium or penalty, provided that voluntary
prepayments are subject to customary requirements with respect to minimum payment amount, prior written notice and payment of certain
costs and expenses.
Principal amounts
outstanding under the term loan facility will amortize at a rate equal to 5% per annum, with the Company being required to
repay the aggregate principal balance under the term loan facility in quarterly principal payments equal to $1,087,500 on the
last business day of each calendar quarter. The Credit Agreement also provides that, following the year ending December 31,
2018, and each calendar year thereafter, so long as the ratio of the Company’s total debt to Consolidated EBITDA (as
defined in the Credit Agreement) for the four most recent fiscal quarters (the “Total Leverage Ratio”) is equal
to or exceeds 2.50:1.00, the Company must prepay principal under the term loan facility in an aggregate amount equal to 50%
of Excess Cash Flow (as defined in the Credit Agreement) for the immediately preceding fiscal year, subject to credit for
voluntary prepayments made during that fiscal year. In addition, the Credit Agreement provides that, subject to certain
exceptions, upon the receipt by the Company or its subsidiaries of the net cash proceeds from: (i) any issuance or incurrence
of debt, other than certain permitted indebtedness; (ii) any issuance of equity interests in any of the Company or its
subsidiaries; (iii) certain asset sales; and (iv) any casualty event under any insurance maintained by the Company or its
subsidiaries, the Company must use those net cash proceeds to prepay principal under the Credit Agreement loans, provided
that, in case of clauses (iii) and (iv) above, the net cash proceeds need not be used to make prepayments if within 180 days
of the receipt by the Company or its subsidiaries of such net cash proceeds, such net cash proceeds are applied to purchase
assets used or useful in the business of the Company or its subsidiaries. Under the Credit Agreement, any
mandatory prepayments will be applied first to any outstanding revolving loan overadvances, second to any outstanding term
loans and incremental term loans until paid in full, and then to any loans outstanding under the revolving credit facility,
in which case that prepayment will also permanently reduce the total revolving credit commitment by a corresponding amount.
The entire outstanding principal balance under the term loan and incremental term loan facilities, as well as any outstanding
borrowings under the revolving loan facility, will be due and payable in full on the Maturity Date.
Interest rates
applicable to the term loans, incremental term loans and the revolving loans (other than the swing line loans) are set at a
margin over an adjusted LIBOR rate (which is defined as LIBOR multiplied by the statutory reserve rate) or a base rate (which
is defined as the highest of (a) the prime rate, (b) the federal funds effective rate plus 0.50% per annum and (c) the
adjusted LIBOR rate for an interest period of one month plus 1.00% per annum), at the Company’s option. Interest rates
applicable to the swing line loans are set at a margin over the above-mentioned base rate. The applicable margin under the
adjusted LIBOR rate option ranges from 4.00% to 4.75% per annum based on the Total Leverage Ratio then in effect and the
applicable margin under the base rate option ranges from 3.00% to 3.75% per annum based on the Total Leverage Ratio then in
effect.
During the term of the
revolving credit facility, the Company must pay the Administrative Agent a nonrefundable unused commitment fee based on the daily
average unused portion of the revolving credit facility at the applicable unused commitment fee rate, which ranges from 0.250%
to 0.625% per annum based on the Total Leverage Ratio then in effect. The unused commitment fees are payable quarterly in arrears
on each interest payment date. The Company is required to pay certain other costs and fees in connection with the Credit Agreement.
In addition, the Credit Agreement
contains, among other things:
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customary representations and warranties;
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customary affirmative covenants;
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customary negative covenants, including, without limitation, limits on the ability of the Company
and its subsidiaries to:
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incur additional indebtedness;
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wind up, liquidate, merge, or consolidate with any other person or transfer or dispose of certain
properties or assets;
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change the nature of its business;
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make certain types of restricted payments, including dividends on the Company’s common stock,
investments and acquisitions, provided that, beginning in 2018, the Company will be permitted to pay cash dividends and redeem
its common stock, subject to the limits, and as long as it is in compliance with the conditions, described below;
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enter into specified transactions with affiliates;
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enter into sale and leaseback transactions; and
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make capital expenditures; and
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customary financial covenants, including:
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a minimum ratio of Consolidated EBITDA to fixed charges; and
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a minimum Total Leverage Ratio.
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As referenced above, the
Credit Agreement provides that, in both 2018 and 2019, the Company will be permitted to declare and pay cash dividends and redeem
its common stock in an aggregate amount not to exceed $1,250,000 per year, so long as the Company is in compliance with all covenants
contained in, and is not in default under, the Credit Agreement, and the Company has at least $4,500,000 of cash and cash equivalents
after giving effect to the applicable dividend or redemption. In addition, the Credit Agreement provides that, in 2020 and each
calendar year thereafter, the Company will be permitted to declare and pay cash dividends and redeem its common stock in an aggregate
amount up to 50% of its Consolidated EBITDA, minus the sum of debt service, taxes paid in cash, capital expenditures and other
non-recurring or unusual cash charges, expenses or losses, so long as the Company is in compliance with all covenants contained
in, and is not in default under, the Credit Agreement, the Company’s Total Leverage Ratio is less than 2.50:1.00 and the
Company has at least $4,500,000 of cash and cash equivalents after giving effect to the applicable dividend or redemption.
The Credit Agreement also
contains customary events of default. Upon the occurrence of an event of default, the interest rate on all outstanding loans will
generally be increased by 2.0% per annum above the rate of interest otherwise applicable. Further, upon the occurrence of an event
of default caused by the insolvency, bankruptcy or dissolution of the Company and/or its subsidiaries, (i) all commitments
under the term loan facility, the incremental term loan facility and the revolving credit facility will automatically terminate
and (ii) all principal and interest outstanding on all outstanding loans, together with all unpaid fees and all other indebtedness
of the Company to the lenders, will automatically become due and payable. Upon the occurrence of all other events of default, the
Administrative Agent may, or will at the request of a majority of the lenders under the Credit Agreement: (a) terminate or
reduce all commitments under the term loan facility, the incremental term loan facility and the revolving credit facility; (b) accelerate
the maturity date of all outstanding loans and other indebtedness and demand the immediate prepayment of the principal and interest
outstanding on all outstanding loans and other indebtedness, together with any unpaid fees; and (c) require the Company to cash
collateralize all outstanding letters of credit.
The Credit Agreement is
unconditionally guaranteed by all of the Company’s subsidiaries other than War Telephone LLC, and is secured by first priority
security interests in substantially all of the Company’s and the Company’s subsidiaries’ equity interests and
tangible and intangible assets, other than the equity interests and tangible and intangible assets of War Telephone LLC.
The foregoing description
of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Credit
Agreement, a copy of which is attached hereto as Exhibit 10.1 and is incorporated herein by reference.