TEXAS STATEWIDE TELEPHONE COOPERATIVE, INC. Accounting & Customer Service Conference – 2014 New Product Profit Projections – Is it a Good Deal? Presented by: Wade Wilson, C.P.A. Bolinger, Segars, Gilbert & Moss, L.L.P.

Steps for Evaluation in Product/Service Lines Identify and Define the Proposed New Product or Service. Is the New Product or Service Regulated? Identify Team and Potential Vendors and Advisors. Determine the Cost of New Equipment Required to Provide the New Product or Service. Determine How New Equipment Cost Will Be Financed. Identify Employees or Departments that Will Be Involved With the New Product or Service. Project Fixed and Variable Costs to Provide the New Product or Service. Determine the Projected Revenue from the New Product or Service. If the Service Is Not Regulated, What are Impacts on Support?

Steps for Evaluation in Product/Service Lines (Continued) Summary Accounting for Start-up Cost

Step 1 - Identify and Define the Proposed new Product or Service ILECs are currently considering providing VOIP service: VOIP services may be offered over DSL or fiber loop using IP technology using softswitches and IP gateway devices that can either augment the traditional switch or bypass them. The service may be deployed in one of 3 ways: Provide basic local service using VOIP technology; a combination of basic local service and DSL service that is provided by an entity other than the ILEC; the ILEC provides data-only DSL service over which a VOIP service is provided by an entity other than the ILEC.

Step 2 - Is the New Product or Service Regulated? How the Service is Deployed will Determine How the Service is Regulated. Where the ILEC is providing basic local exchange service to its end users in compliance with FCC rules and State law, the costs of providing such services qualify for pool reporting and universal service support regardless of the technology used.

Step 3 - Identify Team and Potential Vendors and Advisors. Indentify the ILEC’s key players in the decision making process. Research equipment vendors to determine quality and reliability of the equipment choices. Engage legal, cost and accounting consultants to identify issues that should be addressed as the new service is evaluated.

Step 4 - Determine the Cost of New Equipment Required to Provide the New Product or Service The ILEC’s OSP and COE managers should provide: Estimated material cost of new equipment. Estimated internal labor hours required to engineer and install the new equipment. If outside engineers are used, they may provide the installed cost of the new equipment.

Step 5 - Determine How New Equipment Cost Will Be Financed If the cost of the new equipment will be financed, the ILEC should estimate the future debt service obligation based on: Amount to be financed Estimated term of the note Estimated interest rate If the equipment is financed from general funds there is a lost opportunity cost equal to the return on investments.

Step 6 – Indentify Employees or Departments Involved Plant Managers, Installation, Maintenance Customer Service Billing, Customer Care Corporate Operations Manager, Accounting, Marketing

Step 7 - Project Fixed and Variable Costs

Step 7 - Project Fixed and Variable Costs (continued) Examples of Fixed and Incremental Costs: Depreciation on new equipment Debt service on financed cost Labor and related overhead costs of additional labor force (if needed)

Step 7 - Project Fixed and Variable Costs (continued) Examples of Variable Costs: Labor and related overhead costs of existing labor force (if needed) Advertising and Marketing New billing software and software modifications Software modifications for existing COE and circuit equipment. Customer Premises Equipment

Step 7 - Project Fixed and Variable Costs (continued) Identifying Labor and Related Overhead Cost: Labor may be estimated on individual employee basis, or a departmental basis. (i.e. {average labor rate for plant, customer services and corporate operations} x {the number hours required by department} )

Step 7 - Project Fixed and Variable Costs (continued) Identifying Labor and Related Overhead Cost: Identify labor overhead cost such as: Heath insurance (current and APBO) R&S cost Life and LTD insurance Employer Paid Payroll Taxes Overhead rate per labor hour (total overhead / total labor hours)

Step 8 - Project Revenue from the New Product or Service. If this service replaces the traditional POTS then there would not be any new revenue from the end user as the service would be billed at existing tariff rates. There may be additional support from NECA and FUSF due to increased plant investment.

Step 8 - Project Revenue From the New Product or Service. (continued) If this service replaces the traditional POTS coupled with DSL, total revenue may increase due to customers adopting the service plan who had not previously subscribed to DSL. In this case the ILEC will need to forecast revenue using a take rate for the new service offering and dropping the traditional POTS. Support revenue may increase due to increased plant investment.

Step 8 - Project Revenue from the New Product or Service. (continued) If access to VOIP is offered using naked DSL. The net additional revenue generated would be calculated as follows: New Revenue from DSL (less) Lost POTS Revenue

Step 9 - Loss of NECA & FUSF Support If the service is offered on a non- regulated basis the ILEC should consider lost support resulting from: A greater allocation of joint and common use assets to non-regulated. Shift of related labor and overhead from regulated to non-regulated.

Step 10 - Summary ? – Is this new service demanded by the customer base? ? – Will providing the service add to the “stickiness” of the customer? ? – Will the new service generate net new service revenue (i.e. new service revenue (less) loss of existing service revenues. Will the new service result in additional or lost NECA and FUSF revenue?

Step 10 – Summary (Continued) Forecast Financial Impact New Service Revenue $ XXX Lost Service Revenue (XXX) New Support Revenue Lost Support Revenue Net Revenue Impact New Depreciation Expense New Labor and Overhead New Billing Expenses New Corporate Operating Expenses New Operating Expenses Net Change in Income From Operations

Step 11 – Start-up Costs Costs of start-up activities and organization costs are to be expensed as incurred. Start-up activities are defined broadly as one- time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in a existing facility, or commencing some new operation.

Step 11 – Start-up Costs (continued) Examples of costs that are outside the scope of this guidance are as follows: Costs of acquiring or constructing long-lived assets and getting them ready for their intended uses. Costs of acquiring or producing inventory. Costs of acquiring intangible assets. Costs related to internally developed assets. Costs of raising capital. Costs of advertising.