UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q/A




Amendment No.
1




(Mark
      One)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
from  to




Commission
File Number: 1-32362




OTELCO
INC.




(Exact
name of registrant as specified in its charter)




Delaware
            
            52-2126395(State
      or other jurisdiction of incorporation or
            
            (I.R.S.
      Employer Identification No.)organization)505
      Third Avenue East, Oneonta, Alabama
            
            35121(Address
      of Principal Executive Offices)
            
            (Zip
      Code)


(205)
625-3574


(Registrant’s
telephone number, including area code)




N/A


(Former
name, former address and former fiscal year, if changed since last
report)




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  o
            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.




Large accelerated
      filero
            Accelerated
      filerx
            Non-accelerated
      filero
            Smaller reporting
      companyo




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




Yes  o
            No  x




APPLICABLE
ONLY TO CORPORATE ISSUERS:




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
            
            Outstanding
      at November 6, 2009Class
      A Common Stock ($0.01 par value per share)
            
            12,676,733Class
      B Common Stock ($0.01 par value per share)
            
            544,671







OTELCO
INC.


FORM
10-Q


For
the three month period ended September 30, 2009


TABLE
OF CONTENTS


PagePART
      I  FINANCIAL INFORMATION
                
                2Item
      1.
                Financial
      Statements
                
                2Consolidated Balance
      Sheets as of December 31, 2008 and September 30,
      2009
                
                2Consolidated
      Statements of Operations for the Three Months and Nine Months Ended
      September 30, 2008 and 2009
                
                3Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
      2009
                
                4Notes to Consolidated
      Financial Statements
                
                5Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                16Item
      3.
                Quantitative and
      Qualitative Disclosures About Market Risk
                
                26Item
      4.
                Controls and
      Procedures
                
                26PART
      II  OTHER INFORMATION
                
                27Item
      6.
                Exhibits
                
                27




Explanatory
Note
  On
February 17, 2010, we provided notification that our interim financial
statements for the quarters ended March 31, 2009, June 30, 2009 and September
30, 2009 could not be relied upon due to an accounting error.  This
Form 10-Q/A reflects the correction of such accounting error. Except as
required to reflect the effects of the correction of such accounting error in
this Form 10-Q/A, we have not modified or updated disclosures presented in the
original quarterly report on Form 10-Q.  Accordingly, this Form 10-Q/A
does not reflect events occurring after the filing of our original Form 10-Q or
modify or update those disclosures affected by subsequent events, except as
specifically referenced herein.  Information not affected by the
restatement is unchanged and reflects the disclosures made at the time of the
original filing of the Form 10-Q.  Accordingly, this Form 10-Q/A
should be read in conjunction with our periodic filings made with
the Securitites and Exchange Commission subsequent to the date of the
original filing, including any amendments to those filings, as well as any
Current Reports filed on Form 8-K subsequent to the date of the original filing.
The following items have been amended as a result of the
restatement:
  Part
1 - Item 1 - Financial Statements
  Part
1 - Item 2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
    Part
1 - Item 4 - Controls and Procedures
  In
addition, in accordance with applicable Securities and Exchange
Commission rules, this amended Quarterly Report on Form 10-Q/A includes
updated certifications from our Chief Executive Officer and Chief Financial
Officer.


i




Unless
the context otherwise requires, the words “we,” “us,” “our,” “the Company” and
“Otelco” refer to Otelco Inc., a Delaware corporation, and its consolidated
subsidiaries as of September 30, 2009.




FORWARD-LOOKING
STATEMENTS




This
report contains forward-looking statements that are subject to risks and
uncertainties.  Forward-looking statements give our current
expectations relating to our financial condition, results of operations, plans,
objectives, future performance and business.  These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,”
“intend,” “believe” and other words and terms of similar meaning in connection
with any discussion of the timing or nature of future operating or financial
performance or other events.  These forward-looking statements are
based on assumptions that we have made in light of our experience in the
industry in which we operate, as well as our perceptions of historical trends,
current conditions, expected future developments and other factors we believe
are appropriate under the circumstances.  Although we believe that
these forward-looking statements are based on reasonable assumptions, you should
be aware that many factors could affect our actual financial condition or
results of operations and cause actual results to differ materially from those
in the forward-looking statements.


1




PART I  FINANCIAL INFORMATION




Item
1.Financial
Statements




OTELCO
      INC.CONSOLIDATED BALANCE SHEETSDecember
      31,
              
              
              September
      30,2008
              
              
              2009Assets
              
              
              
              
              (unaudited)Current
      assetsCash
      and cash equivalents
              
              $
              13,542,255
              
              
              $
              16,717,829Accounts
      receivable:Due
      from subscribers, net of allowance for doubtful accounts of $318,446 and
      $365,076, respectively
              
              
              5,207,731
              
              
              
              4,707,292Unbilled receivables
              
              
              2,567,730
              
              
              
              2,488,917Other
              
              
              4,348,044
              
              
              
              3,327,553Materials
      and supplies
              
              
              2,305,755
              
              
              
              2,092,842Prepaid
      expenses
              
              
              1,141,908
              
              
              
              1,052,704Income
      tax receivable
              
              
              181,644
              
              
              
              6,000Deferred
      income taxes
              
              
              827,686
              
              
              
              827,686Total
      Current Assets
              
              
              30,122,753
              
              
              
              31,220,823Property
      and equipment, net
              
              
              75,407,062
              
              
              
              70,057,795Goodwill
              
              
              189,334,837
              
              
              
              188,190,078Intangible
      assets, net
              
              
              44,390,644
              
              
              
              36,261,961Investments
              
              
              2,015,583
              
              
              
              1,996,451Deferred
      financing costs
              
              
              8,315,921
              
              
              
              7,301,991Deferred
      income taxes
              
              
              5,897,382
              
              
              
              6,123,703Interest
      rate cap
              
              
              7,765
              
              
              
              -Other
      assets
              
              
              49,540
              
              
              
              203,233Total
      Assets
              
              $
              355,541,487
              
              
              $
              341,356,035Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesAccounts
      payable
              
              $
              2,312,920
              
              
              $
              2,304,996Accrued
      expenses
              
              
              6,632,287
              
              
              
              5,853,988Advance
      billings and payments
              
              
              2,024,123
              
              
              
              1,660,142Customer
      deposits
              
              
              180,582
              
              
              
              191,324Total
      Current Liabilities
              
              
              11,149,912
              
              
              
              10,010,450Deferred
      income taxes
              
              
              45,962,402
              
              
              
              45,328,310Interest
      rate swaps
              
              
              -
              
              
              
              1,318,608Advance
      billings and payments
              
              
              739,736
              
              
              
              708,698Other
      liabilities
              
              
              188,346
              
              
              
              158,387Long-term
      notes payable
              
              
              278,799,513
              
              
              
              273,738,754Total
      Liabilities
              
              
              336,839,909
              
              
              
              331,263,207Derivative
      liability
              
              
              238,054
              
              
              
              89,318Class B common convertible to senior subordinated notes
              
              
              4,085,033
              
              
              
              4,085,033
 Stockholders’
      EquityClass
      A Common Stock, $.01 par value-authorized 20,000,000
      shares;Issued and outstanding 12,676,733 shares
              
              
              126,767
              
              
              
              126,767Class
      B Common Stock, $.01 par value-authorized 800,000 shares; issuedand
      outstanding 544,671 shares
              
              
              5,447
              
              
              
              5,447Additional
      paid in capital
              
              
              19,277,959
              
              
              
              12,575,136Retained
      deficit
              
              
              (3,870,923
              )
              
              
              (6,788,873
              )Accumulated
      other comprehensive loss
              
              
              (1,160,759
              )
              
              
              -Total
      stockholders’ equity
              
              
              14,378,491
              
              
              
              5,918,477Total
      liabilities and stockholders’ equity
              
              $
              355,541,487
              
              
              $
              341,356,035
 The
accompanying notes are an integral part of these consolidated financial
statements.
 2


OTELCO
      INC.CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)Three
      months ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2008
            
            
            2009
            
            
            2008
            
            
            2009RevenuesLocal
      services
            
            $
            6,678,826
            
            
            $
            12,396,806
            
            
            $
            20,116,902
            
            
            $
            36,315,205Network
      access
            
            
            6,694,486
            
            
            
            8,517,512
            
            
            
            19,237,269
            
            
            
            24,876,708Cable
      television
            
            
            601,025
            
            
            
            614,114
            
            
            
            1,713,457
            
            
            
            1,833,164Internet
            
            
            3,028,963
            
            
            
            3,500,870
            
            
            
            9,060,822
            
            
            
            10,542,696Transport
      services
            
            
            1,234,274
            
            
            
            1,373,832
            
            
            
            3,637,276
            
            
            
            4,132,208Total
      revenues
            
            
            18,237,574
            
            
            
            26,403,134
            
            
            
            53,765,726
            
            
            
            77,699,981Operating
      expensesCost
      of services and products
            
            
            6,654,860
            
            
            
            10,445,442
            
            
            
            20,052,583
            
            
            
            31,245,153Selling,
      general and administrative expenses
            
            
            2,777,411
            
            
            
            3,222,825
            
            
            
            7,998,818
            
            
            
            10,142,354Depreciation
      and amortization
            
            
            3,140,688
            
            
            
            6,525,796
            
            
            
            9,903,702
            
            
            
            19,922,383Total
      operating expenses
            
            
            12,572,959
            
            
            
            20,194,063
            
            
            
            37,955,103
            
            
            
            61,309,890Income
      from operations
            
            
            5,664,615
            
            
            
            6,209,071
            
            
            
            15,810,623
            
            
            
            16,390,091Other
      income (expense)Interest
      expense
            
            
            (4,773,647
            )
            
            
            (6,468,875
            )
            
            
            (14,229,727
            )
            
            
            (19,514,730
            )Change
      in fair value of derivatives
            
            
            173,842
            
            
            
            (1,508,601
            )
            
            
            99,787
            
            
            
            (1,169,872
            )Other
      income
            
            
            188,160
            
            
            
            29,540
            
            
            
            618,785
            
            
            
            267,911Total
      other expenses
            
            
            (4,411,645
            )
            
            
            (7,947,936
            )
            
            
            (13,511,155
            )
            
            
            (20,416,691
            )Income
      (loss) before income tax
            
            
            1,252,970
            
            
            
            (1,738,865
            )
            
            
            2,299,468
            
            
            
            (4,026,600
            )Income
      tax (expense) benefit
            
            
            (463,727
            )
            
            
            144,251
            
            
            
            (696,049
            )
            
            
            1,108,652Net
      income (loss) available to common stockholders
            
            $
            789,243
            
            
            $
            (1,594,614
            )
            
            $
            1,603,419
            
            
            $
            (2,917,948
            )Weighted
      average shares outstanding:Basic
            
            
            12,676,733
            
            
            
            12,676,733
            
            
            
            12,676,733
            
            
            
            12,676,733Diluted
            
            
            13,221,404
            
            
            
            13,221,404
            
            
            
            13,221,404
            
            
            
            13,221,404Basic
      net income (loss) per share
            
            $
            0.06
            
            
            $
            (0.13
            )
            
            $
            0.13
            
            
            $
            (0.23
            )Diluted
      net income (loss) per share
            
            $
            0.04
            
            
            $
            (0.13
            )
            
            $
            0.10
            
            
            $
            (0.23
            )Dividends
      declared per share
            
            $
            0.18
            
            
            $
            0.18
            
            
            $
            0.53
            
            
            $
            0.53





The
accompanying notes are an integral part of these consolidated financial
statements.


3




OTELCO
      INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)
  Nine
      months endedSeptember
      30,2008
              
              
              2009Cash
      flows from operating activities:Net
      income (loss)
              
              $
              1,603,419
              
              
              $
              (2,917,948
              )Adjustments
      to reconcile net income to cash flows from operating
      activities:Depreciation
              
              
              8,275,580
              
              
              
              10,594,257Amortization
              
              
              1,628,122
              
              
              
              9,328,126Interest
      rate caplet
              
              
              722,527
              
              
              
              1,168,521Amortization
      of debt premium
              
              
              (54,117
              )
              
              
              (60,759
              )Amortization
      of loan costs
              
              
              1,118,481
              
              
              
              1,013,930Change
      in fair value of derivatives
              
              
              (99,787
              )
              
              
              1,169,872Provision
      for deferred income taxes
              
              
              -
              
              
              
              114,171Provision
      for uncollectible revenue
              
              
              229,404
              
              
              
              271,536Gain
      on early lease termination
              
              
              (121,124
              )
              
              
              -Changes
      in assets and liabilities; net of assets and liabilities
      acquired:Accounts
      receivables
              
              
              (582,528
              )
              
              
              1,147,822Material
      and supplies
              
              
              (268,213
              )
              
              
              212,913Prepaid
      expenses and other assets
              
              
              601,101
              
              
              
              89,204Income
      tax receivable
              
              
              255,106
              
              
              
              175,644Accounts
      payable and accrued liabilities
              
              
              (1,302,625
              )
              
              
              (616,048
              )Advance
      billings and payments
              
              
              (181,015
              )
              
              
              (395,019
              )Other
      liabilities
              
              
              5,539
              
              
              
              (19,216
              )Net
      cash from operating activities
              
              
              14,435,120
              
              
              
              21,277,006Cash
      flows from investing activities:Acquisition
      and construction of property and equipment
              
              
              (6,848,799
              )
              
              
              (6,392,058
              )Deferred
      charges
              
              
              (533,098
              )
              
              
              (6,551
              )Net
      cash used in investing activities
              
              
              (7,381,897
              )
              
              
              (6,398,609
              )Cash
      flows from financing activities:Cash
      dividends paid
              
              
              (6,702,822
              )
              
              
              (6,702,823
              )Repayment
      of long-term notes payable
              
              
              -
              
              
              
              (5,000,000
              )Net
      cash used in financing activities
              
              
              (6,702,822
              )
              
              
              (11,702,823
              )Net
      increase in cash and cash equivalents
              
              
              350,401
              
              
              
              3,175,574Cash
      and cash equivalents, beginning of period
              
              
              12,810,497
              
              
              
              13,542,255Cash
      and cash equivalents, end of period
              
              $
              13,160,898
              
              
              $
              16,717,829
 Supplemental
      disclosures of cash flow information:Interest
      paid
              
              $
              12,705,214
              
              
              $
              17,763,703Income
      taxes paid (received)
              
              $
              (122,606
              )
              
              $
              53,658Non-cash
      gain on early lease termination
              
              $
              (121,124
              )
              
              $
              -
 The
accompanying notes are an integral part of these consolidated financial
statements.
 4





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




1.       
    Organization and Basis of Financial
Reporting




Basis
of Presentation and Principles of Consolidation




The consolidated financial
statements include the accounts of Otelco Inc. (the “Company”) and its
subsidiaries, all of which are wholly owned. These include:  Otelco
Telecommunications LLC (“OTC”); Otelco Telephone LLC (“OTP”); Hopper Holding
Company, Inc. (“HHC”) and its wholly owned subsidiary, Hopper Telecommunications
Company, Inc. (“HTC”); Brindlee Holdings LLC (“BH”) and its wholly owned
subsidiary Brindlee Mountain Telephone Company, Inc. (“BMTC”); Page & Kiser
Communications, Inc. (“PKC”) and its wholly owned subsidiary Blountsville
Telephone Company, Inc. (“BTC”); Mid-Missouri Holding Corporation (“MMH”) and
its wholly owned subsidiary Mid-Missouri Telephone Company (“MMT”) and its
wholly owned subsidiary Imagination, Inc.; Mid-Maine Communications, Inc.
(“MMeT” or “Mid-Maine”) and its wholly owned subsidiaries Mid-Maine Telecom,
Inc. (“MMTI”) and Mid-Maine TelPlus (“MMTP”); Granby Holdings, Inc. (“GH”) and
its wholly owned subsidiary The Granby Telephone & Telegraph Co. of
Massachusetts (“GTT”); War Holdings, Inc. (“WH”) and its wholly owned subsidiary
War Acquisition Corporation (“WT”); and Pine Tree Holdings, Inc. (“PTH”) and its
wholly owned subsidiaries The Pine Tree Telephone and Telegraph Company (“PTT”),
Saco River Telegraph and Telephone Company (“SRT”), CRC Communications of Maine,
Inc. (“PTN”), and Communications Design Acquisition Corporation (“CDAC”).




GH, WH
and PTH (collectively, the “CR Companies”) were acquired on October 31, 2008
from Country Road Communications LLC (“CRC”).




The accompanying
consolidated financial statements include the accounts of the Company and all of
the aforesaid subsidiaries after elimination of all material intercompany
balances and transactions.  The unaudited operating results for the
three months and nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.




The consolidated financial
statements and notes included in this Form 10-Q should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31,
2008.  The interim consolidated financial information herein is
unaudited.  The information reflects all adjustments (which include
only normal recurring adjustments), which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the periods included in the report.




Certain prior year amounts
have been reclassified to conform with the current year presentation.




Cash
and Cash Equivalents




Cash
equivalents are stated at cost plus accrued interest, which approximates fair
value.  Cash equivalents are high-quality, short-term money market
instruments and highly liquid debt instruments with an original maturity of
three months or less when purchased.  The cash equivalents are readily
convertible to known amounts of cash and are so near maturity that they present
insignificant risk of changes in value because of changes in interest
rates.




Recently
Adopted Accounting Pronouncements




In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting
Standards Codification (“ASC”) 105, Generally
Accepted Accounting Principles.  ASC 105 established the FASB
Standards Accounting Codification (“Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied to nongovernmental entities, other than guidance
issued by the Securities and Exchange Commission (“SEC”).  The
Codification reorganized existing U.S. accounting standards issued by the FASB
and other related standard setters into a single source of authoritative
accounting principles arranged by topic.  The guidance is effective
for financial statements issued for interim reporting periods ending after
September 15, 2009.  The adoption of the Codification changed the
Company’s references to U.S. GAAP accounting standards but did not impact our
consolidated financial statements.




5




In
December 2007, the FASB issued revised guidance for the accounting for business
combinations.  The revised guidance, which is now part of ASC 805,
Business
Combinations, establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree.  This topic provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  The revised guidance is effective for financial
statements issued for fiscal years beginning on or after December 15,
2008.  Accordingly, any business combinations the Company engaged in
prior to January 1, 2009 are recorded and disclosed following generally accepted
accounting principles as in effect on December 31, 2008.  The adoption
of ASC 805 will have an impact on the consolidated financial statements but the
nature and magnitude of the specific effects will depend on the nature, terms,
and size of acquisitions the Company consummates after the effective
date.




Effective
January 1, 2008, the Company adopted new guidance, which is now part of ASC 820,
Fair
Value Measurements and Disclosure. The guidance defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. Valuation techniques used to measure fair value under
ASC 820 must maximize the use of observable inputs. The guidance describes a
fair value hierarchy utilizing three levels of input. The first two levels are
considered observable and the third, unobservable:




Level 1 –
Quoted prices in active markets for identical assets or
liabilities.




Level 2 –
Inputs other than Level 1 that are directly or indirectly observable, such as
quoted prices for similar assets or liabilities or quoted prices in markets
which are not active. The inputs are generally observable or can be corroborated
in observable markets.




Level 3 –
Unobservable inputs where there is little or no market activity to support
valuation.




The
adoption of this guidance did not have a material impact on our consolidated
financial statements.




In March
2008, the FASB issued guidance, which is now part of ASC 815, Derivatives
and Hedges, or ASC
815.  This guidance expands quarterly disclosure
requirements about an entity’s derivative instruments and hedging
activities.  The guidance is effective for fiscal years beginning
after November 15, 2008.  The adoption of this guidance did not have a
material impact on our consolidated financial statements.




In April
2009, the FASB issued guidance, which is now part of ASC 825, Financial
Instruments.This guidance requires disclosures about fair
value of financial instruments for interim reporting periods and is effective
for interim reporting periods ending after June 15, 2009.  The
adoption of this guidance did not have a material impact on our consolidated
financial statements.




In April
2009, the FASB issued guidance, which is now part of ASC 820, Fair
Value Measurement and Disclosure.This guidance provides for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased.  This guidance is effective
for interim reporting periods ending after June 15, 2009.  The
adoption of this guidance did not have a material impact on our consolidated
financial statements.




In April
2009, the FASB issued guidance, which is now part of ASC 320, Investments
– Debt and Equity Securities.This guidance amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  This guidance is effective for interim reporting periods
ending after June 15, 2009.  The adoption of this guidance did not
have a material impact on our consolidated financial statements.




In April
2009, the FASB issued revised guidance, which is now part of ASC 805, Business
Combinations.  The revised guidance addresses the initial
recognition, measurement and subsequent accounting for assets and liabilities
arising from contingencies in a business combination, and requires that such
assets acquired or liabilities assumed be initially recognized at fair value at
the acquisition date if fair value can be determined during the measurement
period.  If the acquisition-date fair value cannot be determined, the
asset acquired or liability assumed arising from a contingency is recognized
only if certain criteria are met.  The revised guidance also requires
that a systematic and rational basis for subsequently measuring and accounting
for the assets or liabilities be developed depending on their
nature.  This guidance is effective for assets or liabilities arising
from contingencies in business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.  The adoption of this guidance did not have a
material impact on our consolidated financial statements.




6




In May
2009, the FASB issued guidance, which is now part of ASC 855, Subsequent
Events.  The guidance establishes general standards for
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are available to be issued (“subsequent
events”).  More specifically, the guidance sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition in the
financial statements, identifies the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures that should be made about events or
transactions that occur after the balance sheet date.  ASC 855
provides largely the same guidance on subsequent events which previously existed
only in auditing literature.  The guidance is effective for interim
reporting periods ending after June 15, 2009.  The adoption of ASC 855
required additional disclosures but did not have an impact on our consolidated
financial statements.  The Company evaluated significant subsequent
events through November 6, 2009, the date the Company issued these financial
statements.




In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring
Liabilities at Fair Value, or ASU 2009-05, an update to ASC 820, Fair
Value Measurements and Disclosures.  ASU 2009-05 provides
amendments to reduce potential ambiguity in financial reporting when measuring
the fair value of liabilities.  Among other provisions, this update
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the valuation techniques
described in the update.  ASU 2009-05 is effective for interim
reporting periods ending after August 2009.  The adoption of this
update did not have a material impact on our consolidated financial
statements.




Recent
Accounting Prouncements




In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable
Revenue Arrangements – a consensus of the FASB Emerging Issues Task
Force, or ASU 2009-13, an update to ASC 605, Revenue
Recognition.  ASU 2009-13 provides application guidance on
whether multiple deliverables exist, how the deliverables should be separated,
and how the consideration should be allocated to one or more units of
accounting.  ASU 2009-13 establishes a selling price hierarchy for
determining the selling price of a deliverable.  The selling price
used for each deliverable will be based on vendor-specific objective evidence,
if available, third-party evidence if vendor-specific evidence is not available,
or estimated selling price if neither vendor-specific or third-party evidence is
available.  The Company will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified for
the fiscal year beginning on or after June 15, 2010; however earlier application
is permitted.  The Company has not determined the impact that this
update may have on its consolidated financial statements.




2.          
 Commitments and Contingencies




From time
to time, we may be involved in various claims, legal actions and regulatory
proceedings incidental to and in the ordinary course of business, including
administrative hearings of the Alabama, Maine, Missouri, Massachusetts, New
Hampshire, and West Virginia Public Service Commissions relating primarily to
rate making.  Currently, none of the legal proceedings are expected to
have a material adverse effect on our business.




3.         
  Derivative and Hedge Activities




An
interest rate cap was purchased on December 21, 2004, coincident with the
closing of our initial public offering and the recapitalization of our senior
notes payable. The interest rate cap was purchased to mitigate the risk of
rising interest rates to limit or cap the rate at 3% for the three month LIBOR
index plus the applicable margin on $80 million in senior debt for five years.
On July 5, 2007, the Company repaid $55,353,032 in debt, reducing its senior
debt below the level of the rate cap. The cap was considered an effective hedge
for the remaining senior debt as all critical terms of the interest rate cap are
identical to the underlying debt it hedges. The balance of the cap at that time
was considered as an investment and adjustments were made to accumulated other
comprehensive income to reflect this change. On October 31, 2008, the Company
implemented its second amended and restated credit agreement, increasing senior
debt to $173.5 million in conjunction with the acquisition of the CR Companies.
The full $80 million rate cap is accounted for as an effective hedge from that
date forward. Changes
in the fair value of the effective portion of the interest
rate cap are not included in earnings but are reported as a
component of accumulated other comprehensive income.




The
second amended and restated credit agreement requires that the Company acquire
interest rate protection for at least half of the $173.5 million senior debt
through at least October 31, 2010. In addition to the existing rate cap hedge,
the Company has completed two interest rate swaps with approved counterparties.
The first swap has a notional amount of $90 million with the Company paying a
fixed rate of 1.85% and the counterparty paying a variable rate based upon the
three month LIBOR interest rate. It is effective from February 9, 2009 through
February 8, 2012. The second swap has a notional amount of $60 million with the
Company paying a fixed rate of 2.0475% and the counterparty paying a variable
rate based upon the three month
LIBOR interest rate. It is effective from February 9, 2010 through February 8,
2012. From an
accounting perspective, the documentation for both swaps does not meet the
technical requirements of ASC 815 to allow the swaps to be considered highly
effective as hedging instruments and therefore the swaps do not qualify for
hedge accounting. The change in the fair value of the swaps is charged or
credited to income as a change in fair value of derivatives. Over the life of
the swaps, the cumulative change in value will be
zero.




7




The cost
of the effective portion of the interest rate cap is expensed as interest over
the effective life of the hedge in accordance with the quarterly value of the
caplets as determined at the date of inception.  The expense related
to the ineffective portion of the interest rate cap in 2008 is reflected in the
change in fair value of derivative.  For the three months ended
September 30, 2008 and 2009, the cost of the effective portion of the interest
rate cap was $252,507 and $369,355 respectively.  For the nine months
ended September 30, 2008 and 2009, the cost of the effective portion of the
interest rate cap was $722,527 and $1,168,521 respectively.




4.         
  Income (Loss) per Common Share and Potential Common
Share




Basic
income per common share is computed by dividing net income (loss) by the
weighted-average number of shares outstanding for the period.  Diluted
income (loss) per common share reflects the potential dilution that could occur
if the Class B common stock were exercised into Income Deposit Securities
(“IDS”) units.  Class B common stock is convertible on a one-for-one
basis into IDS units, each of which includes a Class A common
share.




A
reconciliation of the common shares for the Company’s basic and diluted income
(loss) per common share calculation is as follows:


Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September
      30,2008
              
              
              2009
              
              
              2008
              
              
              2009Weighted
      average common shares-basic
              
              
              12,676,733
              
              
              
              12,676,733
              
              
              
              12,676,733
              
              
              
              12,676,733Effect
      of dilutive securities
              
              
              544,671
              
              
              
              544,671
              
              
              
              544,671
              
              
              
              544,671Weighted-average
      common shares and potential common shares-diluted
              
              
              13,221,404
              
              
              
              13,221,404
              
              
              
              13,221,404
              
              
              
              13,221,404Net
      income (loss) available to common stockholdes
              
              $
              789,243
              
              
              
              (1,594,614
              )
              
              $
              1,603,419
              
              
              $
              (2,917,948
              )Net
      income (loss) per basic share
              
              $
              0.06
              
              
              $
              (0.13
              )
              
              $
              0.13
              
              
              $
              (0.23
              )Net
      income (loss) available to common stockholders
              
              $
              789,243
              
              
              $
              (1,594,614
              )
              
              $
              1,603,419
              
              
              $
              (2,917,948
              )Less:
      Change in fair value of B share derivative
              
              
              (201,655
              )
              
              
              (74,274
              )
              
              
              (297,893
              )
              
              
              (148,736
              )Net
      income (loss) available for diluted shares
              
              $
              587,588
              
              
              $
              (1,668,888
              )
              
              $
              1,305,526
              
              
              $
              (3,066,684
              )Net
      income (loss) per diluted share
              
              $
              0.04
              
              
              $
              (0.13
              )
              
              $
              0.10
              
              
              $
              (0.23
              )
  8





5.           
Fair Value Measurements




In
accordance with ASC 820, the following table represents the Company’s fair value
hierarchy for its financial assets and liabilities as of September 30,
2009:


September
      30, 2009Fair
      Value
              
              
              Level 1(1)
              
              
              Level 2(2)
              
              
              Level 3(3)AssetsCash
      and cash equivalents
              
              $
              16,717,829
              
              
              $
              16,717,829
              
              
              $
              -
              
              
              $
              -Interest
      rate cap
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Co-operative
      patronage shares
              
              
              1,541,410
              
              
              
              -
              
              
              
              -
              
              
              
              1,541,410Total
      assets
              
              $
              18,259,239
              
              
              $
              16,717,829
              
              
              $
              -
              
              
              $
              1,541,410LiabilitiesInterest
      rate swaps
              
              $
              1,318,608
              
              
              $
              -
              
              
              $
              1,318,608
              
              
              $
              -Class
      B derivative liability
              
              
              89,318
              
              
              
              -
              
              
              
              -
              
              
              
              89,318Total
      liabilities
              
              $
              1,407,926
              
              
              $
              -
              
              
              $
              1,318,608
              
              
              $
              89,318


(1)
            Quoted
      prices in active markets for identical
assets.


(2)
            Significant
      other observable inputs.


(3)
            Significant
      unobservable inputs.




The
Company retains its cash and cash equivalents in short-term interest bearing
instruments whose value is observable on a daily basis. Its interest rate cap is
valued at the end of each quarter by market experts in that business based on
similar transactions in the same financial market on the day of
valuation.  Patronage shares have been issued primarily by one of our
lenders which operates as a co-operative.  The Company does not pay
for these shares but receives them as a non-cash dividend. The market for these
shares is limited to the issuing organization and subject to uncertainty of
future redemption for cash. These shares are valued at approximately 55% of
their originally issued value. While the issuer and the Company expect these
shares to be worth their issued value, the current valuation recognizes some
uncertainty of their future redemption value.




The
interest rate swaps are valued at the end of the quarter by market experts in
that business based on similar transactions and rates in an active financial
market.




The
interest rate cap matures on December 31, 2009.  The interest rate cap
is valued by market experts at the end of each quarter.  It had a zero
value at September 30, 2009.




The Class
B derivative is valued at the end of each quarter utilizing current observable
factors and a market based model developed by a company whose business includes
the provision of valuation expertise.  Annually, the Company evaluates
the probability of its Class B shares converting to IDS units in advance of
their unrestricted December 2009 conversion date.  This estimate, as
well as current market conditions, impacts the quarterly valuation of the B
share derivative liability.   This liability is extinguished once
the Class B shares can be converted into IDS units.  This conversion
can occur without any financial test after 2009.




6.         
  Acquisitions




On
October 31, 2008, the Company acquired 100% of the outstanding common stock of
the CR Companies from CRC.  GH owns 100% of its operating subsidiary
GTT. WH owns 100% of its operating subsidiary WT. PTH owns 100% of its operating
subsidiaries, PTT, SRT, PTN, and CDAC. These operating subsidiaries provide
telecommunications solutions, including voice, data and Internet services, to
residential and business customers in portions of Massachusetts, Maine and West
Virginia and extend the Company’s presence in the New England
market.  The acquisition added over 24,000 retail access line
equivalents to the Company’s presence in Maine; almost 5,000 retail access line
equivalents in Massachusetts and West Virginia; and a wholesale business in New
England.




9




The
acquisition agreement relating to the CR Companies provided for cash
consideration of $101,329,000 subject to adjustment as provided in the
acquisition agreement, plus transaction costs.  The purchase price was
$108,832,865, including transaction costs.  The excess of the purchase
price over the market value of assets and liabilities is reflected as goodwill
of $53,619,643.  The goodwill related to the acquisition is not
deductible for tax purposes.  The aggregate consideration paid for the
acquisition was as follows:


Cash
      received
              
              $
              (20,167
              )Additional
      senior debt notes payable
              
              
              108,853,032Purchase
      price
              
              $
              108,832,865


The
allocation of the net purchase price for the CR Companies acquisition was as
follows:


October
      31, 2008Cash
              
              $
              247,285Other
      current assets
              
              
              4,602,298Property
      and equipment
              
              
              24,034,722Intangible
      assets
              
              
              37,800,000Goodwill
              
              
              53,619,643Other
      assets
              
              
              6,142,596Current
      liabilities
              
              
              (2,744,832
              )Deferred
      income tax liabilities
              
              
              (14,844,479
              )Other
      liabilities
              
              
              (24,368
              )Purchase
      price
              
              $
              108,832,865


Property
and equipment at the time of acquisition had a fair value of $24.0 million and
remaining lives of five to 40 years which is consistent with current
policy.  The intangible assets at the time of acquisition included
regulated and unregulated customer based assets at fair value of $17 million
which had remaining lives of six to nine years and a non-competition agreement
fair valued at $1.2 million which had a remaining life of one
year.  Unregulated contract based assets had a fair value of $19.6
million at the time of acquisition and remaining lives of seven
years.




Prior to
the closing of the acquisition, the Company entered into a second amended and
restated credit agreement, dated as of October 20, 2008, to amend and restate
the amended and restated credit agreement, dated as of July 3, 2006, as amended
on July 13, 2007, by and among the Company and the other credit parties to the
agreement and General Electric Capital Corporation, as a lender and agent for
the lenders, and other lenders from time to time party thereto.  The
credit facilities under the amended and restated credit agreement are comprised
of:




●
            Term
      loans of $173.5 million due October 31, 2013, consisting of an original
      term loan of $64.6 million, and an additional term loan of $108.9 million,
      used to finance the acquisition and related transaction costs and to
      provide working capital for the Company and its subsidiaries and for other
      corporate purposes; and




●
            A
      revolving loan commitment of up to $15
million.




The term
loan facility was fully drawn concurrent with closing.  Interest rates
applicable to the term loan and any revolving loans were an index rate plus
3.00% or LIBOR plus 4.00%.  In addition, there are fees associated
with undrawn revolver balances and certain annual fees.




The
acquisition was accounted for using the purchase method of accounting and
accordingly, the accompanying financial statements include the financial
position and results of operations from the date of acquisition.




The
following unaudited pro forma information presents the combined results of
operations of the Company as though the acquisition of the CR Companies had
occurred at the beginning of the preceding year.  The results include
certain adjustments, including increased interest expense on notes payable and
increased amortization expense related to intangible assets.  The pro
forma financial information does not necessarily reflect the results of
operations had the acquisition been completed at the beginning of the period or
those which may be obtained in the future.




10


Three
      months ended
                September
      30, 2008
              
              Nine
      months ended
                September
      30, 2008(unaudited)
              
              (unaudited)Revenues
              
              $
              26,698,825
              
              $
              78,179,476Income
      from operations
              
              
              5,297,848
              
              
              13,880,321Net
      loss
              
              
              (729,195
              )
              
              (3,267,604
              )Basic
      net loss per share
              
              $
              (0.06
              )
              $
              (0.26
              )Diluted
      net loss per share
              
              $
              (0.06
              )
              $
              (0.26
              )
  7.
              Subsidiary
      GuaranteesThe
      Company has no independent assets or operations separate from its
      operating subsidiaries. The guarantees of its senior subordinated notes by
      12 of its 14 operating subsidiaries are full and unconditional, joint and
      several. The operating subsidiaries have no independent long-term notes
      payable. There are no significant restrictions on the ability of the
      Company to obtain funds from its operating subsidiaries by dividend or
      loan. The condensed consolidated financial information is provided for the
      guarantor entities.The
      following tables present condensed consolidating balance sheets as of
      December 31, 2008 and September 30, 2009, condensed consolidating
      statements of operations for the three months ended September 30, 2008 and
      2009, condensed consolidating statements of operations for the nine months
      ended September 30, 2008 and 2009; and condensed consolidating statements
      of cash flows for the nine months ended September 30, 2008 and
      2009.
  Otelco
Inc.
 Condensed
Consolidating Balance Sheet
 December
31, 2008
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              -
              
              
              $
              13,521,138
              
              
              $
              21,117
              
              
              $
              -
              
              
              $
              13,542,255Accounts
      receivable, net
              
              
              -
              
              
              
              10,869,233
              
              
              
              1,254,272
              
              
              
              -
              
              
              
              12,123,505Materials
      and supplies
              
              
              -
              
              
              
              1,029,214
              
              
              
              1,276,541
              
              
              
              -
              
              
              
              2,305,755Prepaid
      and other current assets
              
              
              66,560
              
              
              
              994,500
              
              
              
              80,848
              
              
              
              -
              
              
              
              1,141,908Income
      tax receivables
              
              
              181,644
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              181,644Deferred
      income taxes
              
              
              827,686
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              827,686Investment
      in subsidiaries
              
              
              99,481,692
              
              
              
              -
              
              
              
              -
              
              
              
              (99,481,692
              )
              
              
              -Intercompany
      receivable
              
              
              155,535,369
              
              
              
              -
              
              
              
              -
              
              
              
              (155,535,369
              )
              
              
              -Total
      current assets
              
              
              256,092,951
              
              
              
              26,414,085
              
              
              
              2,632,778
              
              
              
              (255,017,061
              )
              
              
              30,122,753Property
      and equipment, net
              
              
              -
              
              
              
              62,507,141
              
              
              
              12,899,921
              
              
              
              -
              
              
              
              75,407,062Goodwill
              
              
              -
              
              
              
              191,271,477
              
              
              
              (1,936,640
              )
              
              
              -
              
              
              
              189,334,837Intangibles
      assets, net
              
              
              -
              
              
              
              41,286,088
              
              
              
              3,104,556
              
              
              
              -
              
              
              
              44,390,644Investments
              
              
              1,000
              
              
              
              1,686,908
              
              
              
              327,675
              
              
              
              -
              
              
              
              2,015,583Deferred
      income taxes
              
              
              5,897,382
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,897,382Other
      long-term assets
              
              
              8,879,424
              
              
              
              (506,198
              )
              
              
              -
              
              
              
              -
              
              
              
              8,373,226Total
      assets
              
              $
              270,870,757
              
              
              $
              322,659,501
              
              
              $
              17,028,290
              
              
              $
              (255,017,061
              )
              
              $
              355,541,487LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
              
              $
              3,316,323
              
              
              $
              4,543,542
              
              
              $
              1,085,342
              
              
              $
              -
              
              
              $
              8,945,207Intercompany
      payables
              
              
              -
              
              
              
              146,585,645
              
              
              
              8,949,724
              
              
              
              (155,535,369
              )
              
              
              -Other
      current liabilities
              
              
              -
              
              
              
              2,129,257
              
              
              
              75,448
              
              
              
              -
              
              
              
              2,204,705Total
      current liabilities
              
              
              3,316,323
              
              
              
              153,258,444
              
              
              
              10,110,514
              
              
              
              (155,535,369
              )
              
              
              11,149,912Deferred
      income taxes
              
              
              10,316,819
              
              
              
              31,595,332
              
              
              
              4,050,251
              
              
              
              -
              
              
              
              45,962,402Other
      liabilities
              
              
              -
              
              
              
              928,082
              
              
              
              -
              
              
              
              -
              
              
              
              928,082Long-term
      notes payable
              
              
              238,536,037
              
              
              
              40,263,476
              
              
              
              -
              
              
              
              -
              
              
              
              278,799,513Derivative
      liability
              
              
              238,054
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              238,054Class
      B common convertible to senior subordinated notes
              
              
              4,085,033
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,085,033Stockholders’
      equity
              
              
              14,378,491
              
              
              
              96,614,167
              
              
              
              2,867,525
              
              
              
              (99,481,692
              )
              
              
              14,378,491Total
      liabilities and stockholders’ equity
              
              $
              270,870,757
              
              
              $
              322,659,501
              
              
              $
              17,028,290
              
              
              $
              (255,017,061
              )
              
              $
              355,541,487
  11
  Otelco
Inc.
 Condensed
Consolidating Balance Sheet
 September
30, 2009
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              -
              
              
              $
              16,597,834
              
              
              $
              119,995
              
              
              $
              -
              
              
              $
              16,717,829Accounts
      receivable, net
              
              
              -
              
              
              
              9,505,573
              
              
              
              1,018,189
              
              
              
              -
              
              
              
              10,523,762Materials
      and supplies
              
              
              -
              
              
              
              1,040,662
              
              
              
              1,052,180
              
              
              
              -
              
              
              
              2,092,842Prepaid
      and other current assets
              
              
              39,455
              
              
              
              970,239
              
              
              
              43,010
              
              
              
              -
              
              
              
              1,052,704Income
      tax receivable
              
              
              6,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,000Deferred
      income taxes
              
              
              827,686
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              827,686Investment
      in subsidiaries
              
              
              115,389,928
              
              
              
              -
              
              
              
              -
              
              
              
              (115,389,928
              )
              
              
              -Intercompany
      receivable
              
              
              125,282,787
              
              
              
              -
              
              
              
              -
              
              
              
              (125,282,787
              )
              
              
              -Total
      current assets
              
              
              241,545,856
              
              
              
              28,114,308
              
              
              
              2,233,374
              
              
              
              (240,672,715
              )
              
              
              31,220,823Property
      and equipment, net
              
              
              -
              
              
              
              58,195,186
              
              
              
              11,862,609
              
              
              
              -
              
              
              
              70,057,795Goodwill
              
              
              -
              
              
              
              190,126,718
              
              
              
              (1,936,640
              )
              
              
              -
              
              
              
              188,190,078Intangibles
      assets, net
              
              
              -
              
              
              
              33,343,678
              
              
              
              2,918,283
              
              
              
              -
              
              
              
              36,261,961Investments
              
              
              1,000
              
              
              
              1,667,776
              
              
              
              327,675
              
              
              
              -
              
              
              
              1,996,451Deferred
      Income taxes
              
              
              6,123,703
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,123,703Other
      long-term assets
              
              
              7,857,729
              
              
              
              (352,505
              )
              
              
              -
              
              
              
              -
              
              
              
              7,505,224Total
      assets
              
              $
              255,528,288
              
              
              $
              311,095,161
              
              
              $
              15,405,301
              
              
              $
              (240,672,715
              )
              
              $
              341,356,035LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
              
              $
              958,847
              
              
              $
              5,863,597
              
              
              $
              1,336,540
              
              
              $
              -
              
              
              $
              8,158,984Intercompany
      payables
              
              
              -
              
              
              
              120,740,218
              
              
              
              4,542,569
              
              
              
              (125,282,787
              )
              
              
              -Other
      current liabilities
              
              
              -
              
              
              
              1,762,130
              
              
              
              89,336
              
              
              
              -
              
              
              
              1,851,466Total
      current liabilities
              
              
              958,847
              
              
              
              128,365,945
              
              
              
              5,968,445
              
              
              
              (125,282,787
              )
              
              
              10,010,450Deferred
      income taxes
              
              
              9,682,727
              
              
              
              31,595,332
              
              
              
              4,050,251
              
              
              
              -
              
              
              
              45,328,310Other
      liabilities
              
              
              1,318,608
              
              
              
              867,085
              
              
              
              -
              
              
              
              -
              
              
              
              2,185,693Long-term
      notes payable
              
              
              233,475,278
              
              
              
              40,263,476
              
              
              
              -
              
              
              
              -
              
              
              
              273,738,754Derivative
      liability
              
              
              89,318
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              89,318Class
      B common convertible to senior subordinated notes
              
              
              4,085,033
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,085,033Stockholders’
      equity
              
              
              5,918,477
              
              
              
              110,003,323
              
              
              
              5,386,605
              
              
              
              (115,389,928
              )
              
              
              5,918,477Total
      liabilities and stockholders’ equity
              
              $
              255,528,288
              
              
              $
              311,095,161
              
              
              $
              15,405,301
              
              
              $
              (240,672,715
              )
              
              $
              341,356,035
  Otelco
Inc.
 Condensed
Consolidating Statement of Operations
 For
the Three Months Ended September 30, 2008
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedRevenues
              
              $
              813,891
              
              
              $
              16,533,991
              
              
              $
              3,250,425
              
              
              $
              (2,360,733
              )
              
              $
              18,237,574Operating
      expenses
              
              
              (813,891
              )
              
              
              (11,711,478
              )
              
              
              (2,408,323
              )
              
              
              2,360,733
              
              
              
              (12,572,959
              )Income
      from operations
              
              
              —
              
              
              
              4,822,513
              
              
              
              842,102
              
              
              
              —
              
              
              
              5,664,615Other
      income (expense)
              
              
              (4,410,341
              )
              
              
              (1,253
              )
              
              
              (51
              )
              
              
              —
              
              
              
              (4,411,645
              )Earnings
      from subsidiaries
              
              
              5,663,311
              
              
              
              —
              
              
              
              —
              
              
              
              (5,663,311
              )
              
              
              —Income
      before income tax
              
              
              1,252,970
              
              
              
              4,821,260
              
              
              
              842,051
              
              
              
              (5,663,311
              )
              
              
              1,252,970Income
      tax expense
              
              
              (463,727
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (463,727
              )Net
      income (loss) to common stockholders
              
              $
              789,243
              
              
              $
              4,821,260
              
              
              $
              842,051
              
              
              $
              (5,663,311
              )
              
              $
              789,243
  12
  Otelco
Inc.
 Condensed
Consolidated Statement of Operations
 For
the Three Months Ended September 30, 2009
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedRevenues
              
              $
              651,922
              
              
              $
              25,512,149
              
              
              $
              2,931,113
              
              
              $
              (2,692,050
              )
              
              $
              26,403,134Operating
      expenses
              
              
              (651,922
              )
              
              
              (20,202,597
              )
              
              
              (2,031,594
              )
              
              
              2,692,050
              
              
              
              (20,194,063
              )Income
      from operations
              
              
              -
              
              
              
              5,309,552
              
              
              
              899,519
              
              
              
              -
              
              
              
              6,209,071Other
      income (expense)
              
              
              (7,849,796
              )
              
              
              (98,139
              )
              
              
              (1
              )
              
              
              -
              
              
              
              (7,947,936
              )Earnings
      from subsidiaries
              
              
              6,110,931
              
              
              
              -
              
              
              
              -
              
              
              
              (6,110,931
              )
              
              
              -Income
      (loss) before income tax
              
              
              (1,738,865
              )
              
              
              5,211,413
              
              
              
              899,518
              
              
              
              (6,110,931
              )
              
              
              (1,738,865
              )Income
      tax benefit
              
              
              144,251
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              144,251Net
      income (loss) to common stockholders
              
              $
              (1,594,614
              )
              
              $
              5,211,413
              
              
              $
              899,518
              
              
              $
              (6,110,931
              )
              
              $
              (1,594,614
              )
 
 Otelco
Inc.
 Condensed
Consolidating Statement of Operations
 For
the Nine Months Ended September 30, 2008
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedRevenues
              
              $
              2,273,659
              
              
              $
              48,924,931
              
              
              $
              9,376,845
              
              
              $
              (6,809,709
              )
              
              $
              53,765,726Operating
      expenses
              
              
              (2,273,659
              )
              
              
              (35,121,133
              )
              
              
              (7,370,020
              )
              
              
              6,809,709
              
              
              
              (37,955,103
              )Income
      from operations
              
              
              -
              
              
              
              13,803,798
              
              
              
              2,006,825
              
              
              
              -
              
              
              
              15,810,623Other
      income (expense)
              
              
              (13,275,232
              )
              
              
              (235,954
              )
              
              
              31
              
              
              
              -
              
              
              
              (13,511,155
              )Earnings
      from subsidiaries
              
              
              15,574,700
              
              
              
              -
              
              
              
              -
              
              
              
              (15,574,700
              )
              
              
              -Income
      before income tax
              
              
              2,299,468
              
              
              
              13,567,844
              
              
              
              2,006,856
              
              
              
              (15,574,700
              )
              
              
              2,299,468Income
      tax expense
              
              
              (696,049
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (696,049
              )Net
      income (loss) to common stockholders
              
              $
              1,603,419
              
              
              $
              13,567,844
              
              
              $
              2,006,856
              
              
              $
              (15,574,700
              )
              
              $
              1,603,419  Otelco
Inc.
 Condensed
Consolidating Statement of Operations
 For
the Nine Months Ended September 30, 2009
  Parent
                
                
                Guarantor
                  Subsidiaries
                
                
                Non-Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedRevenues
                
                $
                2,186,352
                
                
                $
                74,938,358
                
                
                $
                8,773,453
                
                
                $
                (8,198,182
                )
                
                $
                77,699,981Operating
      expenses
                
                
                (2,186,352
                )
                
                
                (61,065,868
                )
                
                
                (6,255,852
                )
                
                
                8,198,182
                
                
                
                (61,309,890
                )Income
      from operations
                
                
                -
                
                
                
                13,872,490
                
                
                
                2,517,601
                
                
                
                -
                
                
                
                16,390,091Other
      income (expense)
                
                
                (20,105,014
                )
                
                
                (313,157
                )
                
                
                1,480
                
                
                
                -
                
                
                
                (20,416,691
                )Earnings
      from subsidiaries
                
                
                16,078,414
                
                
                
                -
                
                
                
                -
                
                
                
                (16,078,414
                )
                
                
                -Income
      (loss) before income tax
                
                
                (4,026,600
                )
                
                
                13,559,333
                
                
                
                2,519,081
                
                
                
                (16,078,414
                )
                
                
                (4,026,600
                )Income
      tax benefit
                
                
                1,108,652
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,108,652Net
      income (loss) to common stockholders
                
                $
                (2,917,948
                )
                
                $
                13,559,333
                
                
                $
                2,519,081
                
                
                $
                (16,078,414
                )
                
                $
                (2,917,948
                )
  13
  Otelco
Inc.
 Condensed
Consolidating Statement of Cash Flows
 For
the Nine Months Ended September 30, 2008
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      income (loss)
              
              $
              1,603,419
              
              
              $
              13,567,845
              
              
              $
              2,006,856
              
              
              $
              (15,574,701
              )
              
              $
              1,603,419Adjustment
      to reconcile net income (loss) to cash flows from operating
      activities
              
              
              1,687,104
              
              
              
              6,984,658
              
              
              
              3,027,324
              
              
              
              -
              
              
              
              11,699,086Changes
      in assets and liabilities, net of assets and liabilities
      acquired
              
              
              19,464,090
              
              
              
              (13,931,795
              )
              
              
              (4,399,680
              )
              
              
              -
              
              
              
              1,132,615Net
      cash provided by operating activities
              
              
              22,754,613
              
              
              
              6,620,708
              
              
              
              634,500
              
              
              
              (15,574,701
              )
              
              
              14,435,120Cash
      flows used in investing activities
              
              
              (477,090
              )
              
              
              (6,207,910
              )
              
              
              (696,897
              )
              
              
              -
              
              
              
              (7,381,897
              )Cash
      flows used in financing activities
              
              
              (22,277,523
              )
              
              
              -
              
              
              
              -
              
              
              
              15,574,701
              
              
              
              (6,702,822
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              -
              
              
              
              412,798
              
              
              
              (62,397
              )
              
              
              -
              
              
              
              350,401Cash
      and cash equivalents, beginning of period
              
              
              -
              
              
              
              12,707,674
              
              
              
              102,823
              
              
              
              -
              
              
              
              12,810,497Cash
      and cash equivalents, end of period
              
              $
              -
              
              
              $
              13,120,472
              
              
              $
              40,426
              
              
              $
              -
              
              
              $
              13,160,898
 
 Otelco
Inc.
 Condensed
Consolidating Statement of Cash Flows
 For
the Nine Months Ended September 30, 2009
 Parent
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      income (loss)
              
              $
              (2,917,948
              )
              
              $
              13,559,333
              
              
              $
              2,519,081
              
              
              $
              (16,078,414
              )
              
              $
              (2,917,948
              )Adjustment
      to reconcile net income (loss) to cash flows from operating
      activities
              
              
              2,431,151
              
              
              
              18,803,471
              
              
              
              2,365,032
              
              
              
              -
              
              
              
              23,599,654Changes
      in assets and liabilities, net of assets and liabilities
      acquired
              
              
              28,268,034
              
              
              
              (23,946,905
              )
              
              
              (3,725,829
              )
              
              
              -
              
              
              
              595,300Net
      cash provided by operating activities
              
              
              27,781,237
              
              
              
              8,415,899
              
              
              
              1,158,284
              
              
              
              (16,078,414
              )
              
              
              21,277,006Cash
      flows used in investing activities
              
              
              -
              
              
              
              (5,339,203
              )
              
              
              (1,059,406
              )
              
              
              -
              
              
              
              (6,398,609
              )Cash
      flows used in financing activities
              
              
              (27,781,237
              )
              
              
              -
              
              
              
              -
              
              
              
              16,078,414
              
              
              
              (11,702,823
              )Net
      increase in cash and cash equivalents
              
              
              -
              
              
              
              3,076,696
              
              
              
              98,878
              
              
              
              -
              
              
              
              3,175,574Cash
      and cash equivalents, beginning of period
              
              
              -
              
              
              
              13,521,138
              
              
              
              21,117
              
              
              
              -
              
              
              
              13,542,255Cash
      and cash equivalents, end of period
              
              $
              -
              
              
              $
              16,597,834
              
              
              $
              119,995
              
              
              $
              -
              
              
              $
              16,717,829
  8.
              Revenue
      ConcentrationsRevenues
      for interstate access services are based on reimbursement of costs and an
      allowed rate of return. Revenues of this nature are received from the
      National Exchange Carrier Association in the form of monthly settlements.
      Such revenues amounted to 14.1% and 10.4% of the Company’s total revenues
      from continuing operations for the nine months ended September 30, 2008
      and 2009, respectively.The
      Company acquired a multi-year contract with a large multiple system
      operator for the provision of wholesale network connections to its
      customers in Maine and New Hampshire. Associated with closing the
      acquisition of the CR Companies, various terms of the agreement were
      amended, including extending the contract through 2012. The customer
      represented approximately 12.7% of the consolidated revenue for the nine
      months ended September 30, 2009.9.
              Subsequent
      EventsFairPoint
      Communications, Inc. (“FairPoint”) is the primary local exchange carrier
      in Maine. On October 26, 2009, Fairpoint filed voluntary petitions for
      reorganization under Chapter 11 of Title 11 of the United States Code (the
      “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern
      District of New York.In
      anticipation of the Chapter 11 cases, the debtors entered into a Plan
      Support Agreement (the “Support Agreement”), dated as of October 25, 2009,
      with secured lenders. Pursuant to the Support Agreement, Fairpoint is
      required to file a Chapter 11 plan of reorganization within 45 days after
      filing of the Chapter 11 cases.
  14
  The
      Company’s subsidiaries in Maine are customers of and suppliers to
      FairPoint in the normal course of business, exchanging traffic originating
      from and terminating to each company’s telecommunications subscribers and
      providing other telecommunications services to each other under tariffs
      and/or interconnection agreements. All accounts between the two companies
      are currently operating on a normal business basis. However, due to the
      bankruptcy filing, the court will have final determination over whether
      any obligations of FairPoint to the Company will not be fulfilled. This
      could include payment for services provided to FairPoint prior to the
      bankruptcy filing, whether paid by or due from
  FairPoint.The
      Company billed FairPoint $1,189,000 and $3,704,000 for services rendered
      during the three months and nine months ended September 30, 2009,
      respectively. In the consolidated list of creditors filed with the
      bankruptcy court, PTN is listed with an amount of claim of $582,192.13 as
      of October 26,2009. It is not feasible to predict or determine the
      ultimate outcome of the Bankruptcy Court’s decisions and therefore the
      Company’s risk exposure cannot be determined at this
  time.
  15
  Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  Overview
  General
  Since
1999, we have acquired and operate ten rural local exchange carriers (“RLEC”)
serving subscribers in north central Alabama, central Maine, western
Massachusetts, central Missouri and southern West Virginia. We are the sole
wireline telephone services provider for many of the rural communities we serve.
We also operate competitive local exchange carriers (“CLEC”) serving subscribers
throughout the states of Maine and New Hampshire. Our services include local and
long distance telephone services, network access, other telephone related
services, cable television (in some markets) and Internet access. We view,
manage and evaluate the results of operations from the various
telecommunications services as one company and therefore have identified one
reporting segment as it relates to providing segment information. As of
September 30, 2009, we operated approximately 100,232 access line equivalents
and supply an additional 127,317 wholesale network connections.
  Our
core businesses are local and long distance telecommunications services,
wholesale access to the local and long distance network, and the provision of
network access to other wireline, long distance and wireless carriers for calls
originated or terminated on our network. Our core businesses generated
approximately 79.2% of our total revenues in the third quarter of 2009. We also
provide cable and satellite television service in some markets and digital
high-speed data lines and dial-up Internet access in all of our
markets.
  The
following discussion and analysis should be read in conjunction with our
financial statements and the related notes included in Item 1 of Part I and
other financial information appearing elsewhere in this report. The following
discussion and analysis addresses our financial condition and results of
operations on a consolidated basis, including the acquisition of Pine Tree
Holdings, Inc., Granby Holdings, Inc. and War Holdings, Inc. (collectively, the
“CR Companies”) from Country Road Communications LLC as of October 31,
2008.
  Revenue
Sources
  We
derive our revenues from five sources:
 ●
              Local
      services. We receive revenues from providing local exchange
      telecommunications services in our ten rural territories, from the
      wholesale network services in New England, and on a competitive basis
      throughout Maine and New Hampshire. These revenues include monthly
      subscription charges for basic service, calling beyond the local territory
      on a fixed price and on a per minute basis, local private line services
      and enhanced calling features, such as voicemail, caller identification,
      call waiting and call forwarding. We also provide billing and collections
      services for other carriers under contract and receive revenues from
      directory advertising. A growing portion of our rural subscribers take
      bundled service plans which include multiple services, including unlimited
      domestic calling, for a flat monthly fee.●
              Network
      access. We receive revenues from charges established to compensate
      us for the origination, transport and termination of calls of long
      distance and other interexchange carriers. These include subscriber line
      charges imposed on end users and switched and special access charges paid
      by carriers. Switched access charges for long distance services within
      Alabama, Massachusetts, Maine, Missouri, the New Hampshire and West
      Virginia are based on rates approved by the Alabama Public Service
      Commission, the Massachusetts Department of Telecommunications and Cable,
      the Maine Public Utilities Commission (“MPUC”), the Missouri Public
      Service Commission, the New Hampshire Public Utilities Commission
      (“NHPUC”) and the West Virginia Public Service Commission, respectively,
      where appropriate. Switched and special access charges for interstate and
      international services are based on rates approved by the Federal
      Communications Commission.●
              Cable
      television. We offer basic, digital, high-definition, digital video
      recording and pay per view cable television services to a portion of our
      telephone service territory in both Alabama and Missouri, including
      Internet Protocol television (“IPTV”) in Alabama. We are a reseller of
      satellite services for DirecTV.●
              Internet.
      We receive revenues from monthly recurring charges for digital high-speed
      data lines, dial-up Internet access and ancillary services such as web
      hosting and computer virus protection.●
              Transport
      services. We receive monthly recurring revenues for the rental of
      fiber to transport data and other telecommunications services in
      Maine.
  16
  Voice
and Data Access Line Trends
  The
number of access lines served is a fundamental factor in determining revenue
stability for a telecommunications provider. Reflecting a general trend in the
RLEC industry, the number of rural voice access lines we serve has been
decreasing gradually when normalized for territory acquisitions. We expect that
this trend will continue, and may be potentially impacted by the effect of the
economy on our customers. These trends will be offset by the growth of data
access lines, also called digital high-speed Internet access service. Our
competitive carrier voice and data access lines have grown as we continue to
further penetrate our chosen markets. Our ability to continue this growth and
our response to the rural trends will have an important impact on our future
revenues. Our primary strategy consists of leveraging our strong incumbent
market position, selling additional services to our rural customer base and
providing better service and support levels than the incumbent carrier to our
competitive customer base.
 Year
      Ended December 31,
              
              March
      31,

                2009(2)
              
              June
      30,

                2009(2)
              
              September
      30,

                2009(2)Key
      Operating Statistics
              
              2007
              
              2008(2)RLEC
      access lines:Voice
      lines
              
              
              36,687
              
              
              51,530
              
              
              50,807
              
              
              50,078
              
              
              48,998Data
      lines
              
              
              12,160
              
              
              18,709
              
              
              19,365
              
              
              19,596
              
              
              19,784RLEC access line
      equivalents(1)
              
              
              48,847
              
              
              70,239
              
              
              70,172
              
              
              69,674
              
              
              68,782CLEC
      access lines:Voice
      lines
              
              
              16,973
              
              
              26,558
              
              
              26,744
              
              
              27,110
              
              
              28,153Data
      lines
              
              
              2,571
              
              
              3,246
              
              
              3,228
              
              
              3,298
              
              
              3,297CLEC access line
      equivalents(1)
              
              
              19,544
              
              
              29,804
              
              
              29,972
              
              
              30,408
              
              
              31,450Otelco access line
      equivalents(1)
              
              
              68,391
              
              
              100,043
              
              
              100,144
              
              
              100,082
              
              
              100,232Wholesale
      network connections
              
              
              -
              
              
              98,187
              
              
              113,855
              
              
              122,471
              
              
              127,317Cable
      television customers
              
              
              4,169
              
              
              4,082
              
              
              4,132
              
              
              4,114
              
              
              4,126Dial-up
      Internet customers
              
              
              15,249
              
              
              11,864
              
              
              10,885
              
              
              10,165
              
              
              9,651
  (1)
              We
      define access line equivalents as voice access lines and data access lines
      (including cable modems, digital subscriber lines, and dedicated data
      access trunks).(2)
              We
      acquired the CR Companies effective October 31,
  2008.
  In
our RLEC territories, access line equivalents decreased by 892 during third
quarter 2009, or 1.3%, compared to June 30, 2009. Voice access lines declined
2.2% while data access lines increased 1.0% during the period. We offer location
specific bundled service packages, many including unlimited domestic calling,
tailored to the telecommunications requirements of our customers.
  In
our Maine CLEC operations, access line equivalents increased by 1,042 during
third quarter 2009, or 3.4%, compared to June 30, 2009. Voice access lines
increased 3.8% and data access lines remained constant during the period.
Virtually all of our competitive customers are businesses, with service bundles
tailored to their specific business requirements. The Company continues to be
impacted by delays in processing orders by FairPoint Communications, which
provides the last mile connectivity for a large portion of our CLEC customers in
Maine.
  Competitive
pricing and bundling of services have led Otelco’s long distance service to be
the choice of the majority of the long distance customers in the rural markets
we serve. Over 90% of our Maine CLEC customers have selected us as their long
distance carrier. Our cable television customers increased 0.3% from June 30,
2009 to 4,126 as of September 30, 2009. Included in this number are 74 customers
who have upgraded to our digital high-definition offer and 25 new IPTV customers
during third quarter 2009. Dial-up Internet customers decreased 5.1% to 9,651 on
September 30, 2009 compared to June 30, 2009. This also includes the subscribers
we service outside of our telephone service area throughout Missouri and Maine,
reflecting the shift to digital high-speed Internet services. In Missouri, we
are expanding our data access lines for digital high-speed Internet in selected
areas outside of our telephone service territory. Approximately 20% of the 9,651
dial-up Internet customers now have high-speed data capability from
Otelco.
  17
 
 Our
Rate and Pricing Structure
  Our
CLEC pricing is based on market requirements. We combine varying services to
meet individual customer requirements, including technical support and provide
multi-year contracts which are both market sensitive for the customer and
profitable for us. The MPUC and the NHPUC impose certain requirements on all
CLECs operating in their markets for reporting and for interactions with the
various incumbent local exchange and interexchange carriers. These requirements
provide wide latitude in pricing services.
  Our
RLECs operate in five states and are regulated in varying degrees by the
respective state regulatory authorities. The impact on pricing flexibility
varies by state. In Maine, our Saco River Telegraph and Telephone Company and
Pine Tree Telephone and Telegraph Company subsidiaries have obtained authority
to implement pricing flexibility while remaining under rate-of-return
regulation. Our rates for other services we provide, including cable,
long-distance, and dial-up and high-speed Internet access, are not price
regulated. The market for competitive services, such as wireless, also impacts
the ability to adjust prices. With the increase of bundled services offerings,
including unlimited long distance, pricing for individual services takes on
reduced importance to revenue stability. We expect this trend to continue into
the immediate future.
  Categories
of Operating Expenses
  Our
operating expenses are categorized as cost of services and products; selling,
general and administrative expenses; and depreciation and
amortization.
  Cost
of services and products. This includes expenses for salaries, wages and
benefits relating to plant operation, maintenance, sales and customer service;
other plant operations, maintenance and administrative costs; network access
costs; and costs of services for long distance, cable television, Internet and
directory services.
  Selling,
general and administrative expenses. This includes expenses for salaries,
wages and benefits and contract service payments (e.g., legal fees) relating to
engineering, financial, human resources and corporate operations; information
management expenses, including billing; allowance for uncollectible revenue;
expenses for travel, lodging and meals; internal and external communications
costs; insurance premiums; stock exchange and banking fees; and
postage.
  Depreciation
and amortization. This includes depreciation of our telecommunications,
cable and Internet networks and equipment, and amortization of intangible
assets. Certain of these amortization expenses continue to be deductible for tax
purposes.
  Our
Ability to Control Operating Expenses
  We
strive to control expenses in order to maintain our strong operating margins. As
our revenue shifts to non-regulated services and CLEC customers, operating
margins decrease reflecting the lower margins associated with these services. We
expect to control expenses while we continue to grow our business.
  Results
of Operations
  The
following table sets forth our results of operations as a percentage of total
revenues for the periods indicated.
  18
  Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2008
              
              
              2009
              
              
              2008
              
              
              2009RevenuesLocal
      services
              
              
              36.6
              %
              
              
              47.0
              %
              
              
              37.4
              %
              
              
              46.7
              %Network
      access
              
              
              36.7
              
              
              
              32.2
              
              
              
              35.8
              
              
              
              32.0Cable
      television
              
              
              3.3
              
              
              
              2.3
              
              
              
              3.2
              
              
              
              2.4Internet
              
              
              16.6
              
              
              
              13.3
              
              
              
              16.8
              
              
              
              13.6Transport
      services
              
              
              6.8
              
              
              
              5.2
              
              
              
              6.8
              
              
              
              5.3Total
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Operating
      expensesCost
      of services and products
              
              
              36.5
              %
              
              
              39.6
              %
              
              
              37.3
              %
              
              
              40.2
              %Selling,
      general and administrative expenses
              
              
              15.2
              
              
              
              12.2
              
              
              
              14.9
              
              
              
              13.1Depreciation
      and amortization
              
              
              17.2
              
              
              
              24.7
              
              
              
              18.4
              
              
              
              25.6Total
      operating expenses
              
              
              68.9
              
              
              
              76.5
              
              
              
              70.6
              
              
              
              78.9Income
      from operations
              
              
              31.1
              
              
              
              23.5
              
              
              
              29.4
              
              
              
              21.1Other
      income (expense)Interest
      expense
              
              
              (26.2
              )
              
              
              (24.5
              )
              
              
              (26.5
              )
              
              
              (25.1
              )Change
      in fair value of derivatives
              
              
              1.0
              
              
              
              (5.7
              )
              
              
              0.2
              
              
              
              (1.5
              )Other
      income
              
              
              1.0
              
              
              
              0.1
              
              
              
              1.2
              
              
              
              0.3Total
      other expenses
              
              
              (24.2
              )
              
              
              (30.1
              )
              
              
              (25.1
              )
              
              
              (26.3
              )Income
      (loss) before income taxes
              
              
              6.9
              
              
              
              (6.6
              )
              
              
              4.3
              
              
              
              (5.2
              )Income
      tax (expense) benefit
              
              
              (2.6
              )
              
              
              0.6
              
              
              
              (1.3
              )
              
              
              1.4Net
      income (loss) available to common stockholders
              
              
              4.3
              %
              
              
              (6.0
              )%
              
              
              3.0
              %
              
              
              (3.8
              )%
  Three
Months and Nine Months Ended September 30, 2009 Compared to Three Months and
Nine Months Ended September 30, 2008
  Total
revenues. Total revenues increased 44.8% in the three months ended
September 30, 2009 to $26.4 million from $18.2 million in the three months ended
September 30, 2008. Total revenues increased 44.5% in the nine months ended
September 30, 2009 to $77.7 million from $53.8 million in the nine months ended
September 30, 2008. The primary reason for the increase is the acquisition of
the CR Companies. The tables below provide the components of our revenues for
the three months and nine months ended September 30, 2009 compared to the same
periods of 2008.
  For
the three months ended September 30, 2009 and 2008
 Three
      Months Ended
                September
      30,
              
              Change2008
              
              2009
              
              Amount
              
              Percent(dollars
      in thousands)Local
      services
              
              $
              6,679
              
              $
              12,397
              
              $
              5,718
              
              
              85.6
              %Network
      access
              
              
              6,694
              
              
              8,517
              
              
              1,823
              
              
              27.2Cable
      television
              
              
              601
              
              
              614
              
              
              13
              
              
              2.2Internet
              
              
              3,029
              
              
              3,501
              
              
              472
              
              
              15.6Transport
      services
              
              
              1,235
              
              
              1,374
              
              
              139
              
              
              11.3Total
              
              $
              18,238
              
              $
              26,403
              
              $
              8,165
              
              
              44.8
  Local
services. Local services revenue increased 85.6% to $12.4 million in the
three months ended September 30, 2009 from $6.7 million in the three months
ended September 30, 2008. The acquisition of the CR Companies and growth in CLEC
revenue accounted for an increase of $6.0 million. RLEC revenue, including
bundled services such as long distance, decreased $0.2 million reflecting the
decline in RLEC access lines. Billing and collecting services and directory
advertising decreased $0.1 million.
  19
  Network
access. Network access revenue increased 27.2% to $8.5 million in the
three months ended September 30, 2009 from $6.7 million in the three months
ended September 30, 2008. The acquisition of the CR Companies accounted for an
increase of $2.9 million. RLEC switched and special access, universal service
fund and customer related charges decreased $0.8 million, $0.2 million and $0.1
million, respectively.
  Cable
television. Cable television revenue increased 2.2% to just over $0.6
million in the three months ended September 30, 2009 from $0.6 million in the
three months ended September 30, 2008. Growth in high-definition television and
IPTV fees in Alabama and satellite television services in Missouri accounted for
the increase.
  Internet.
Internet revenue increased 15.6% to $3.5 million in the three months ended
September 30, 2009 from $3.0 million in the three months ended September 30,
2008. The acquisition of the CR Companies accounted for an increase of $0.6
million. For the balance of the Company, the growth in new digital data access
lines, including related equipment rental, offset all but $0.1 million of the
decline of dial-up Internet customers associated with the conversion to digital
data access lines, including those customers in Maine and Missouri that are
outside of our local service areas.
  Transport
services. Transport services revenue increased 11.3% to $1.4 million in
the three months ended September 30, 2009 from $1.2 million in the three months
ended September 30, 2008. The continued growth in Wide Area Network revenue from
CLEC customers in Maine drove this increase.
  For
the nine months ended September 30, 2009 and 2008
 Nine
      Months Ended
                September
      30,
              
              Change2008
              
              2009
              
              Amount
              
              Percent(dollars
      in thousands)Local
      services
              
              $
              20,117
              
              $
              36,315
              
              $
              16,198
              
              
              80.5
              %Network
      access
              
              
              19,237
              
              
              24,877
              
              
              5,640
              
              
              29.3Cable
      television
              
              
              1,714
              
              
              1,833
              
              
              119
              
              
              6.9Internet
              
              
              9,061
              
              
              10,543
              
              
              1,482
              
              
              16.4Transport
      services
              
              
              3,637
              
              
              4,132
              
              
              495
              
              
              13.6Total
              
              $
              53,766
              
              $
              77,700
              
              $
              23,934
              
              
              44.5
  Local services. Local services revenue
increased 80.5% to $36.3 million in the nine months ended September 30, 2009
from $20.1 million in the nine months ended September 30, 2008. The acquisition
of the CR Companies and growth in CLEC revenue accounted for an increase of
$17.2 million. RLEC revenue, including bundled services such as long distance,
decreased $0.6 million reflecting the decline in RLEC access lines. Billing and
collecting services decreased $0.3 million and directory advertising decreased
$0.1 million.
  Network access services. Network
access revenue increased 29.3% to $24.9 million in the nine months ended
September 30, 2009 from $19.2 million in the nine months ended September 30,
2008. The acquisition of the CR Companies accounted for an increase of $8.3
million. RLEC switched and special access, universal service fund and customer
related charges decreased $1.7 million, $0.6 million and $0.3 million,
respectively.
  Cable television services. Cable
television revenue increased 6.9% to $1.8 million in the nine months ended
September 30, 2009 from $1.7 million in the nine months ended September 30,
2008. Growth in high-definition television, pay per view and IPTV fees in
Alabama and satellite television services in Missouri accounted for the
increase.
  Internet services. Internet revenue
increased 16.4% to $10.5 million in the nine months ended September 30, 2009
from $9.1 million in the nine months ended September 30, 2008. The acquisition
of the CR Companies accounted for an increase of $1.7 million. For the balance
of the Company, the growth in new digital data access lines, including related
equipment rental, offset all but $0.2 million of the decline of dial-up Internet
customers associated with the conversion to digital data access lines, including
those customers in Maine and Missouri that are outside of our local service
areas.
  Transport services. Transport services
revenue increased 13.6% to $4.1 million in the nine months ended September 30,
2009 from $3.6 million in the nine months ended September 30, 2008. The
continued growth in Wide Area Network and wholesale revenue from CLEC customers
in Maine drove this increase.
  20
 
 Operating
expenses.Operating expenses in the three months ended September 30, 2009
increased 60.6% to $20.2 million from $12.6 million in the three months ended
September 30, 2008. Operating expenses in the nine months ended September 30,
2009 increased 61.5% to $61.3 million from $38.0 million in the nine months
ended September 30, 2008. The primary reason for the increase is the acquisition
of the CR Companies. The tables below provide the components of our operating
expenses for the three months and nine months ended September 30, 2009 compared
to the same periods of 2008.
  For
the three months ended September 30, 2009 and 2008
 Three
      Months Ended
                September
      30,
              
              Change2008
              
              2009
              
              Amount
              
              Percent(dollars
      in thousands)Cost
      of services and products
              
              $
              6,655
              
              $
              10,445
              
              $
              3,790
              
              56.9
              %Selling,
      general and administrative expenses
              
              
              2,777
              
              
              3,223
              
              
              446
              
              16.1Depreciation
      and amortization
              
              
              3,141
              
              
              6,526
              
              
              3,385
              
              107.8Total
              
              $
              12,573
              
              $
              20,194
              
              $
              7,621
              
              60.6
  Cost
of services and products. Cost of services and products increased 56.9%
to $10.4 million in the three months ended September 30, 2009 from
$6.7 million in the three months ended September 30, 2008. The acquisition
of the CR Companies accounted for the increase of $3.8 million. The
combination of increased toll cost in Missouri; higher digital television
programming costs in Alabama; and increased pole attachment expense were offset
by reduced directory costs; network synergies and unbundled loop expense in
Maine; and other outside plant operational efficiencies.
  Selling,
general and administrative expenses. Selling, general and administrative
expenses increased 16.1% to $3.2 million in the three months ended September 30,
2009 from $2.8 million in the three months ended September 30, 2008. The
acquisition of the CR Companies accounted for an increase of $0.8 million. One
time increases in employee costs incurred in 2008 but not incurred in 2009 and
lower external relations expenses generated a reduction of $0.4
million.
  Depreciation
and amortization. Depreciation and amortization increased 107.8% to $6.5
million in the three months ended September 30, 2009 from $3.1 million in the
three months ended September 30, 2008. The acquisition of the CR Companies
accounted for an increase of $3.6 million, including $2.5 million in
amortization of intangible assets such as non-competition agreements and the
value of customer lists and contracts. The legacy business had a decrease of
$0.2 million, reflecting lower depreciation expense.
  For
the nine months ended September 30, 2009 and 2008
 Nine
      Months Ended
                September
      30,
              
              Change2008
              
              2009
              
              Amount
              
              Percent(dollars
      in thousands)Cost
      of services and products
              
              $
              20,052
              
              $
              31,245
              
              $
              11,193
              
              
              55.8
              %Selling,
      general and administrative expenses
              
              
              7,999
              
              
              10,142
              
              
              2,143
              
              
              26.8Depreciation
      and amortization
              
              
              9,904
              
              
              19,923
              
              
              10,019
              
              
              101.2Total
              
              $
              37,955
              
              $
              61,310
              
              $
              23,355
              
              
              61.5
  Cost
of services and products. Cost of services and products increased 55.8%
to $31.2 million in the nine months ended September 30, 2009 from
$20.1 million in the nine months ended September 30, 2008. The acquisition
of the CR Companies accounted for an increase of $11.5 million. The
combination of increased pole attachment expense; higher digital television
programming costs; and increased cost to provision wireless data access lines
were more than offset by reduced directory costs; network synergies in Maine;
and other outside plant operational efficiencies for a decrease in costs by $0.3
million.
  Selling,
general and administrative expenses. Selling, general and administrative
expenses increased 26.8% to $10.1 million in the nine months ended September 30,
2009 from $8.0 million in the nine months ended September 30, 2008. The
acquisition of the CR Companies accounted for the increase of $2.5 million. One
time increases in employee costs incurred in 2008 but not incurred in 2009 and
lower insurance and rental expense more than offset higher legal expenses for a
net reduction of $0.3 million.
  21
  Depreciation
and amortization. Depreciation and amortization increased 101.2% to $19.9
million in the nine months ended September 30, 2009 from $9.9 million in the
nine months ended September 30, 2008. The acquisition of the CR Companies
accounted for an increase of $10.8 million, including $7.5 million in
amortization of intangible assets such as non-competition agreements and the
value of customer lists and contracts. The legacy business had a decrease of
$0.8 million, reflecting lower depreciation expense of $0.3 million and lower
amortization expense for a non-competition agreement of $0.5
million.
  For
the three months ended September 30, 2009 and 2008
 Three
      Months Ended
                September
      30,
              
              Change2008
              
              2009
              
              Amount
              
              Percent(dollars
      in thousands)Interest
      expense
              
              $
              (4,774
              )
              $
              (6,469
              )
              $
              1,695
              
              
              35.5
              %Change
      in fair value of derivatives
              
              
              174
              
              
              (1,509
              )
              
              (1,683
              )
              
              NMOther
      income
              
              
              188
              
              
              30
              
              
              (158
              )
              
              (84.0
              )Income
      tax (expense) benefit
              
              
              (464
              )
              
              144
              
              
              608
              
              
              (131.0
              )
  Interest
expense.Interest expense increased 35.5% to $6.5 million in the three
months ended September 30, 2009 from $4.8 million in the three months ended
September 30, 2008. Our senior credit facility was increased by $108.9 million
in October 2008 to $173.5 million associated with the acquisition of the CR
Companies. In August 2009, we made a $5.0 million voluntary prepayment on the
senior credit facility, lowering it to $168.5 million. The increased borrowing
under the amended credit facility, including interest rate swap hedging
contracts, accounted for $1.5 million of the increase. The balance of $0.2
million reflects the increased amortization expenses associated with the
interest rate cap purchased in 2004.
  Change
in fair value of derivatives.The derivative value associated with the
conversion option for our Class B common stock must be fair valued each quarter
until such conversion no longer requires a financial test (December 30, 2009).
The change in value of the Class B derivative liability decreased by $0.1
million in the three months ended September 30, 2009 when compared with the
three months ended September 30, 2008.
  
 
 Other
income.Other income decreased 84.0% to less than $0.1 million in the
three months ended September 30, 2009 from $0.2 million in the three months
ended September 30, 2008, reflecting a one-time gain on a lease termination in
third quarter 2008.
  Income
taxes.Provision for income taxes was a benefit of $0.1 million in the
three months ended September 30, 2009 compared to an expense of $0.5 million in
the three months ended September 30, 2008.
  Net
income.As a result of the foregoing, there was net loss of  $1.6
million in the three months ended September 30, 2009 and net income of $0.8
million in the three months ended September 30, 2008.
  For
the nine months ended September 30, 2009 and 2008
 Nine
      Months Ended
                September
      30,
              
              Change2008
              
              2009
              
              Amount
              
              Percent(dollars
      in thousands)Interest
      expense
              
              $
              (14,230
              )
              $
              (19,515
              )
              $
              5,285
              
              
              37.1
              %Change
      in fair value of derivatives
              
              
              100
              
              
              (1,170
              )
              
              (1,270
              )
              
              NMOther
      income
              
              
              619
              
              
              268
              
              
              (351
              )
              
              (56.7
              )Income
      tax (expense) benefit
              
              
              (696
              )
              
              1,109
              
              
              1,805
              
              
              (259.3
              )
  Interest
expense.Interest expense increased 37.1% to $19.5 million in the nine
months ended September 30, 2009 from $14.2 million in the nine months ended
September 30, 2008. Our senior credit facility was increased by $108.9 million
in October 2008 to $173.5 million associated with the acquisition of the CR
Companies. In August 2009, we made a $5.0 million voluntary prepayment on the
senior credit facility, lowering it to $168.5 million. The increased borrowing
under the amended credit facility accounted for $5.0 million of the increase.
Increased amortization expenses associated with the interest rate cap purchased
in 2004 accounted for $0.2 million of the increase. Lower amortization of loan
costs reduced interest expense by $0.1 million.
  22
  Change
in fair value of derivatives.The derivative value associated with the
conversion option for our Class B common stock must be fair valued each quarter
until such conversion no longer requires a financial test (December 30, 2009).
The change in value of the Class B derivative liability was essentially the
same for the nine months ended September 30, 2009 and 2008.
  We have two interest rate swap
agreements to hedge our exposure to changes in interest rate costs associated
with our senior credit facility. From an accounting perspective, the
documentation for both swaps does not meet the technical requirements to allow
the swaps to be considered highly effective hedging instruments and therefore
the swaps do not qualify for hedge accounting. These swap agreements must be
considered investments and the decrease in value of $1.2 million for the nine
months ended September 30, 2009 is reflected as a change in fair value of
derivatives. Over the life of the swaps, the cumulative change in value will be
zero. See – Liquidity and
Capital Resources below for additional explanation.
  Other
income.Other income decreased 56.7% to $0.3 million in the nine months
ended September 30, 2009 from $0.6 million in the nine months ended September
30, 2008. The decrease was the result of $0.2 million in lower interest
associated with short term investing of our cash balances and three one-time
2008 items – an additional distribution associated with the Rural Telephone Bank
dissolution, the gain on a lease termination and gain associated with the
ineffective portion of the rate cap. These impacts were partially offset by a
gain of less than $0.1 million associated with increased CoBank
dividends.
  Income
taxes.Provision for income taxes was a benefit of $1.1 million in the
nine months ended September 30, 2009 compared to an expense of $0.7 million in
the nine months ended September 30, 2008.
  Net
income.As a result of the foregoing, there was net loss of $2.9 million
in the nine months ended September 30, 2009 and net income of $1.6 million in
the nine months ended September 30, 2008.
  Liquidity
and Capital Resources
  Our
liquidity needs arise primarily from: (i) interest payments related to our
credit facility and our senior subordinated notes; (ii) capital expenditures;
(iii) working capital requirements; (iv) dividend payments on our Class A common
stock; and (v) potential acquisitions.
  Historically,
we satisfy our operating cash requirements from the cash generated by our
business and utilize borrowings under our credit facility to facilitate
acquisitions. For the nine months ended September 30, 2009, we generated cash
from our business to invest in additional property and equipment, make a
voluntary prepayment of $5.0 million to reduce our senior credit facility, pay
interest on our senior debt, pay interest associated with the subordinated debt
inherent in our IDS units, and fund dividends on our Class A common stock (as
declared by our board of directors) that are included in our IDS units. After
meeting all of these needs of our business, cash grew from $13.5 million at
December 31, 2008 to $16.7 million at September 30, 2009. The Company has as its
current policy to return a high percentage of its available cash to its IDS unit
holders. We may also, from time to time, make additional payments on our
outstanding indebtedness.
  Cash
flows from operating activities for the first nine months of 2009 amounted to
$21.3 million compared to $14.4 million for the first nine months of 2008, an
increase of $6.9 million.
  Cash
flows used in investing activities in the first nine months of 2009 were $6.4
million compared to $7.4 million in the first nine months of 2008. The
lower rate of capital expenditures in 2009 for property and equipment and the
lower amount of deferred charges in 2009 each accounted for a $0.5 million
reduction.
  Cash
flows used in financing activities for the first nine months of 2009 and 2008
reflects $6.7 million in each period for the payment of dividends to
stockholders in both periods. The dividend was $0.17625 per share per quarter in
both periods. We have paid nineteen consecutive dividends at this rate since the
Company went public in December 2004. The dividends paid in 2008 were treated as
a return of capital for tax purposes and it is anticipated that dividends paid
in 2009 will also be treated as a return of capital for tax purposes. The
difference of $5.0 million in cash flows used in financing activities reflects
the voluntary prepayment made in August 2009 to reduce our senior credit
facility to $168.5 million.
  We
do not invest in financial instruments as part of our business strategy. At
September 30, 2009, the Company had an $80 million interest rate cap at 3% LIBOR
through December 2009. The rate cap is considered an effective hedge and
qualifies for hedge accounting. In addition, we have a $90 million notional
amount interest rate swap with the Company paying 1.85% and the counterparty
paying a variable rate based upon the 3 month LIBOR for three years beginning
February 9, 2009 and a $60 million notional amount interest rate swap with the
Company paying 2.0475% and the counterparty paying a variable rate based upon
the 3 month LIBOR for two years beginning February 9, 2010. From an
accounting perspective, the documentation for both swaps does not meet the
technical requirements of Accounting Standard Codification (“ASC”) 815, Derivatives and Hedges, or
ASC 815, to allow the swaps to be considered highly effective as hedging
instruments and therefore the swaps do not qualify for hedge
accounting.
 The
following table discloses aggregate information about our contractual
obligations as of September 30, 2009, including scheduled interest and principal
for the periods in which payments are due (in millions). The Company’s senior
credit facility had an outstanding balance of $168.5 million at September 30,
2009, reflecting a voluntary prepayment of $5.0 million made in August
2009.
  23
  Total
              
              
              Less
      than 1
                year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than 5
                yearsSecond
      amended and restated credit facility Term
              
              $
              168.5
              
              
              $
              -
              
              
              $
              -
              
              
              $
              168.5
              
              
              $
              -Revolver
      (1)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Senior
      subordinated notes (2)
              
              
              107.7
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              107.7Expected
      interest expense (3)
              
              
              185.4
              
              
              
              23.7
              
              
              
              49.5
              
              
              
              38.8
              
              
              
              73.4Total
      contractual cash obligations
              
              $
              461.6
              
              
              $
              23.7
              
              
              $
              49.5
              
              
              $
              207.3
              
              
              $
              181.1
  
 (1)
              We
      have a $15.0 million revolving credit facility with an October 2013
      maturity. No amounts were drawn on this facility as of September 30,
      2009 or during 2009. The company pays a commitment fee of 0.50% per annum,
      payable quarterly in arrears, on the unused portion of the revolver
      loan.(2)
              Includes
      $4.1 million liquidation value of Class B common stock
      convertible into senior subordinated notes and interest on those notes
      beginning December 30, 2009, the date they can be exchanged for IDSs
      on a one-for-one basis without passing a financial
test.(3)
              Expected
      interest payments to be made in future periods reflect anticipated
      interest payments related to our $168.5 million senior credit
      facility and our $107.7 million senior subordinated notes at 13.0%,
      including those associated with our IDSs and those sold separately.
      Interest on the senior credit facility reflects a LIBOR three month rate
      of 2.0% plus a margin of 4.0% through February 8, 2012, reflecting
      interest rate swaps currently in place, and 3.0% thereafter. We have
      assumed in the presentation above that we will hold the senior credit
      facility until maturity in October 2013 and the senior subordinated notes
      until maturity in 2019. No interest payment is included for the revolving
      credit facility because of the variability and timing of advances and
      repayments thereunder.
  We
also have received patronage shares, primarily from one of our lenders, over a
period of years for which there is a limited market to determine value until the
shares are redeemed by the issuing institution. Historically, these shares have
been redeemed at a value similar to their issued value. Due to the uncertainty
of this future value, these shares are carried at approximately 55% of their
issued value. The Class B derivative is valued based on an expert model
developed specifically for the valuation of this derivative which uses current
market factors to assess the B share derivative value at the end of each
quarter. This liability will be extinguished upon the conversion of the Class B
shares into IDS units. The specific value of these instruments is included in
the notes to the September 30, 2009 financial statements.
  We
anticipate that operating cash flow, together with borrowings under our credit
facility, will be adequate to meet our currently anticipated operating and
capital expenditure requirements for at least the next 12 months.
  Recently
Adopted Accounting Pronouncements
  In
June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB
Accounting Standards Codification (“ASC”) 105, Generally
Accepted Accounting Principles. ASC 105 established the FASB Standards
Accounting Codification (“Codification”) as the single source of authoritative
U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to
be applied to nongovernmental entities, other than guidance issued by the
Securities and Exchange Commission (“SEC”). The Codification reorganized
existing U.S. accounting standards issued by the FASB and other related standard
setters into a single source of authoritative accounting principles arranged by
topic. The guidance is effective for financial statements issued for interim
reporting periods ending after September 15, 2009. The adoption of the
Codification changed the Company’s references to U.S. GAAP accounting standards
but did not impact our consolidated financial statements.
  In
December 2007, the FASB issued revised guidance for the accounting for business
combinations. The revised guidance, which is now part of ASC 805, Business
Combinations, establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. This topic provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The revised
guidance is effective for financial statements issued for fiscal years beginning
on or after December 15, 2008. Accordingly, any business combinations the
Company engaged in prior to January 1, 2009 are recorded and disclosed following
generally accepted accounting principles as in effect on December 31, 2008. The
adoption of ASC 805 will have an impact on the consolidated financial statements
but the nature and magnitude of the specific effects will depend on the nature,
terms, and size of acquisitions the Company consummates after the effective
date.
  24
  Effective
January 1, 2008, the Company adopted new guidance, which is now part of ASC 820,
Fair
Value Measurements and Disclosure. The guidance defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. Valuation techniques used to measure fair value under
ASC 820 must maximize the use of observable inputs. The guidance describes a
fair value hierarchy utilizing three levels of input. The first two levels are
considered observable and the third, unobservable:
  Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.Level
      2 – Inputs other than Level 1 that are directly or indirectly observable,
      such as quoted prices for similar assets or liabilities or quoted prices
      in markets which are not active. The inputs are generally observable or
      can be corroborated in observable markets.Level
      3 – Unobservable inputs where there is little or no market activity to
      support valuation.
  The
adoption of this guidance did not have a material impact on our consolidated
financial statements.
  In
March 2008, the FASB issued guidance, which is now part of ASC 815. This
guidance expands quarterly disclosure requirements about an entity’s derivative
instruments and hedging activities. The guidance is effective for fiscal years
beginning after November 15, 2008. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
  In
April 2009, the FASB issued guidance, which is now part of ASC 825, Financial
Instruments.This guidance requires disclosures about fair value of
financial instruments for interim reporting periods and is effective for interim
reporting periods ending after June 15, 2009. The adoption of this guidance did
not have a material impact on our consolidated financial
statements.
  In
April 2009, the FASB issued guidance, which is now part of ASC 820, Fair
Value Measurement and Disclosure.This guidance provides for estimating
fair value when the volume and level of activity for the asset or liability have
significantly decreased. This guidance is effective for interim reporting
periods ending after June 15, 2009. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
  In
April 2009, the FASB issued guidance, which is now part of ASC 320, Investments
– Debt and Equity Securities.This guidance amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This guidance is effective for interim reporting periods ending
after June 15, 2009. The adoption of this guidance did not have a material
impact on our consolidated financial statements.
  In
April 2009, the FASB issued revised guidance, which is now part of ASC 805,
Business
Combinations. The revised guidance addresses the initial recognition,
measurement and subsequent accounting for assets and liabilities arising from
contingencies in a business combination, and requires that such assets acquired
or liabilities assumed be initially recognized at fair value at the acquisition
date if fair value can be determined during the measurement period. If the
acquisition-date fair value cannot be determined, the asset acquired or
liability assumed arising from a contingency is recognized only if certain
criteria are met. The revised guidance also requires that a systematic and
rational basis for subsequently measuring and accounting for the assets or
liabilities be developed depending on their nature. This guidance is effective
for assets or liabilities arising from contingencies in business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The adoption of this
guidance did not have a material impact on our consolidated financial
statements.
  In
May 2009, the FASB issued guidance, which is now part of ASC 855, Subsequent
Events. The guidance establishes general standards for accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued (“subsequent events”). More
specifically, the guidance sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition in the financial
statements, identifies the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that should be made about events or transactions
that occur after the balance sheet date. ASC 855 provides largely the same
guidance on subsequent events which previously existed only in auditing
literature. The guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of ASC 855 required additional disclosures but did
not have an impact on our consolidated financial statements. The Company
evaluated significant subsequent events through November 6, 2009, the date the
Company issued these financial statements.
  In
August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring
Liabilities at Fair Value, or ASU 2009-05, an update to ASC 820, Fair
Value Measurements and Disclosures. ASU 2009-05 provides amendments to
reduce potential ambiguity in financial reporting when measuring the fair value
of liabilities. Among other provisions, this update provides clarification that
in circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the valuation techniques described in the update. ASU
2009-05 is effective for interim reporting periods ending after August 2009. The
adoption of this update did not have a material impact on our consolidated
financial statements.
  25
  Recent
Accounting Pronouncements
  In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable
Revenue Arrangements – a consensus of the FASB Emerging Issues Task
Force, or ASU 2009-13, an update to ASC 605, Revenue
Recognition. ASU 2009-13 provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated, and how
the consideration should be allocated to one or more units of accounting. ASU
2009-13 establishes a selling price hierarchy for determining the selling price
of a deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence, if available, third-party evidence if
vendor-specific evidence is not available, or estimated selling price if neither
vendor-specific or third-party evidence is available. The Company will be
required to apply this guidance prospectively for revenue arrangements entered
into or materially modified for the fiscal year beginning on or after June 15,
2010; however earlier application is permitted. The Company has not determined
the impact that this update may have on its consolidated financial
statements.
  Subsequent
Events
  FairPoint
Communications, Inc. (“FairPoint”) is the primary local exchange carrier in
Maine. On October 26, 2009, Fairpoint filed voluntary petitions for
reorganization under Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern
District of New York.
  In
anticipation of the Chapter 11 cases, the debtors entered into a Plan Support
Agreement (the “Support Agreement”), dated as of October 25, 2009, with secured
lenders. Pursuant to the Support Agreement, Fairpoint is required to file a
Chapter 11 plan of reorganization within 45 days after filing of the Chapter 11
cases.
  The
Company’s subsidiaries in Maine are customers of and suppliers to FairPoint in
the normal course of business, exchanging traffic originating from and
terminating to each company’s telecommunications subscribers and providing other
telecommunications services to each other under tariffs and/or interconnection
agreements. All accounts between the two companies are currently operating on a
normal business basis. However, due to the bankruptcy filing, the court will
have final determination over whether any obligations of FairPoint to the
Company will not be fulfilled. This could include payment for services provided
to FairPoint prior to the bankruptcy filing, whether paid by or due from
FairPoint.
  The
Company billed FairPoint $1,189,000 and $3,704,000 for services rendered during
the three months and nine months ended September 30, 2009, respectively. In the
consolidated list of creditors filed with the bankruptcy court, CRC
Communications of Maine, Inc. is listed with an amount of claim of $582,192.13
as of October 26,2009. It is not feasible to predict or determine the ultimate
outcome of the Bankruptcy Court’s decisions and therefore the Company’s risk
exposure cannot be determined at this time.
  Item3. Quantitative and
Qualitative Disclosures About Market Risk
  Our short-term excess cash balance is invested in short-term commercial paper
and other bank guaranteed investments. We do not invest in any derivative or
commodity type instruments, although when a portion of our interest rate cap is
ineffective, it is considered an investment. The interest rate cap expires in
December 2009 and currently is carried at a zero value on our balance sheet.
Also, our two interest rate swap agreements are technically not effective hedges
and therefore do not qualify for hedge accounting. The change in the fair value
of the swaps is charged or credited to income as a change in fair value of
derivatives. Over the life of the swaps, the cumulative change in value will be
zero. Accordingly, we are subject to minimal market risk on our
investments.
  We
have the ability to borrow up to $15.0 million under a revolving loan facility.
The interest rate is variable and, accordingly, we would be exposed to interest
rate risk, primarily from a change in LIBOR or a base rate should the facility
be used. Currently, we have no loans drawn under this facility.
 
 Item
4.  Controls and Procedures
 Disclosure
controls and procedures are defined by the Securities and Exchange Commission as
those controls and other procedures that are designed to ensure that information
required to be disclosed in the Company’s filings under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated
the Company’s disclosure controls and procedures as of September 30, 2009, and,
based on the material weakness in our internal control over financial reporting
described below, have determined that such disclosure controls and procedures
were ineffective. In response to this material weakness, management performed
additional analysis and other procedures to ensure that our consolidated
financial statements included in this Form 10-Q/A were prepared in accordance
with generally accepted accounting principles. Accordingly, management,
including our Chief Executive Officer and Chief Financial Officer, believes that
the consolidated financial statements included in this Form 10-Q/A fairly
present in all material respects our financial condition, results of operations
and cash flows for the periods presented.
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect material
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with policies and
procedures may deteriorate.
 
 A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of the end of the period covered by this Form 10-Q/A, management
determined that its financial statements contained an error with respect to one
rule within ASC 815, formerly known as SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, or and that this
error arose from a material weakness in the Company’s internal control over
financial reporting. Specifically, the Company acquired two interest rate swap
contracts to hedge against changes in the interest rate associated with its
senior credit facility. These agreements were marked to market value on
September 30, 2009 and placed on the consolidated balance sheets of the Company.
Using ASC 815, the swaps were initially determined to be effective hedges
using the short-cut methodology and changes in their value were recorded as
other comprehensive income in stockholders’ equity on the consolidated balance
sheets. Subsequent review determined that, because the swaps had future start
dates when they were acquired, their value would not have been zero at the
effective date and therefore, the short-cut methodology could not be employed.
ASC 815 further requires that all documentation to determine the effectiveness
of hedging instruments be completed prior to their effective date, precluding
the subsequent use of another methodology available within the accounting
guidance to assess effectiveness. Therefore, the swaps may not be considered
effective for the period. The hedges must be considered investments and changes
in their fair value would flow through the statement of operations as change in
fair value of derivatives and net income would vary with the changes. Over the
two and three year lives of the two swaps, the cumulative value of these changes
will be zero. Therefore, the Company determined that it did not maintain
effective controls to ensure the proper application of ASC 815. To remediate
this material weakness, should any future interest rate hedging contracts be
used by the Company, an external hedge accounting expert will be employed to
validate that the Company has properly interpreted the guidance in accounting
for the contracts.
  While
the documentation did not support the original decision to account for changes
in the swaps as effective hedges, it did not impact operations of the business;
operations of the interest rate swaps; revenue and operating costs; or cash.
There was also no impact on any debt covenants.
  Other
than the changes referred to above, there has been no change in the Company’s
internal control over financial reporting during the quarter ended September 30,
2009, that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
   26
  PARTII OTHER
INFORMATION
  Item6.
Exhibits
  Exhibits
  See
Exhibit Index.
  27
  Signatures
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 Date:
      March 8, 2010
              OTELCO
      INC.By:
              /s/
      Curtis L. Garner, Jr.Curtis
      L. Garner, Jr.Chief
      Financial Officer
  28
  EXHIBIT
INDEX
 Exhibit
                No.
              
              Description31.1
              
              Certificate
      pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 1934 of the Chief Executive Officer31.2
              
              Certificate
      pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 1934 of the Chief Financial Officer32.1
              
              Certificate
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, of the Chief Executive
    Officer32.2
              
              Certificate
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, of the Chief Financial
    Officer
   29