** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

## ***FORM 10-Q***

 
| **(Mark One)** | ** ** | ** **                                                                                                                                                                                                               |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                               |
| **ý**     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                       |
| ** **     | ** ** | ** **                                                                                                                                                                                                               |
| ** **     | ** ** | **For the quarterly period ended March 31,  2005 **                                                                                                                                                            |
| ** **     | ** ** | ** **                                                                                                                                                                                                               |
| ** **     | ** ** | **or**                                                                                                                                                                                                                   |
| ** **     | ** ** | ** **                                                                                                                                                                                                               |
| ** ̈**     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                      |
| ** **     | ** ** | ** **                                                                                                                                                                                                               |
| ** **     | ** ** | **For the transition period from               to               ** |

 

**CommissionFile Number: 1-32362**

 

# **OTELCO INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**(205) 625-3574**

(Registrant’s telephonenumber, including area code)

 

**N/A**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý   No   ̈

 

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

 

Yes   ̈   No  ý

 

**APPLICABLEONLY TO CORPORATE USERS:**

 

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

 
| **Class**                                         | ** ** | **Outstanding  at May 6, 2005** |
|---------------------------------------------------|------------|---------------------------------|
| Class  A Common Stock ($0.01 par value per share) |       | 9,676,733                       |
| Class  B Common Stock ($0.01 par value per share) |       | 544,671                         |

 

 

----

 

**OTELCO INC.**

**FORM 10-Q**

**For thequarterly period ended March 31, 2005**

**TABLE OFCONTENTS**

 
| **PART  I FINANCIAL INFORMATION** |   |
|-----------------------------------|--------|
| Item 1.                           |   | Financial  Statements |   |
|                              |   | Consolidated Balance Sheets  as of December 31, 2004 and March 31, 2005 |   |
|                              |   | Consolidated  Statements of Income for the three months ended March 31, 2004 and 2005 |   |
|                              |   | Consolidated  Statements of Cash Flows for the three months ended March 31, 2004 and  2005 |   |
|                              |   | Notes to  Consolidated Financial Statements |   |
| Item 2.                           |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                           |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                           |   | Controls  and Procedures |   |
|                              |   |   |   |
| **PART II OTHER INFORMATION**     |   |
| Item 6.                           |   | Exhibits |   |

 

2

----

 

*Unless the context otherwiserequires, the words “we”, “us”, “our”, “the company” and “Otelco” refer toOtelco Inc., a Delaware corporation.*

 

# **FORWARD-LOOKING STATEMENTS**

 

The report containsforward-looking statements that are subject to risks and uncertainties.  Forward-looking statements give our currentexpectations 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 similarmeaning in connection with any discussion of the timing or nature of futureoperating or financial performance or other events.  These forward-looking statements are based onassumptions that we have made in light of our experience in the industry inwhich we operate, as well as our perceptions of historical trends, currentconditions, expected future developments and other factors we believe areappropriate under the circumstances. Although we believe that these forward-looking statements are based onreasonable assumptions, you should be aware that many factors could affect ouractual financial condition or results of operations and cause actual results todiffer materially from those in the forward-looking statements.

 

3

----

 

**PART 1**

**FINANCIALINFORMATION**

 

**Item 1.**  ***Financial Statements***

 

**OTELCO INC.**

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                   | ** ** | **December 31,  2004** | ** **  | **March 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|--------------------------|------------|
| ** **                                                                                                   | ** ** | ** **                  | ** **  | **(unaudited)**          | ** ** |
| **Assets**                                                                                                   | ** ** | ** **                  | ** **  | ** **               | ** ** |
| Current  assets                                                                                              |       |                        |        |                     |       |
| Cash and  cash equivalents                                                                                   |       | $                           | 5,406,545   |                     | $          | 4,773,075 |   |
| Accounts  receivable:                                                                                        |       |                        |        |                     |       |
| Due from  subscribers, net of allowance for doubtful accounts of $160,270 and $170,515  respectively.        |       | 1,179,074                   |        | 1,067,556                |       |
| Unbilled  receivables                                                                                        |       | 1,884,405                   |        | 1,857,272                |       |
| Other                                                                                                        |       | 1,522,945                   |        | 1,357,974                |       |
| Materials  and supplies                                                                                      |       | 1,039,910                   |        | 1,122,232                |       |
| Prepaid  expenses                                                                                            |       | 537,784                     |        | 505,729                  |       |
| Deferred  income taxes                                                                                       |       | 652,625                     |        | 652,625                  |       |
| Total  current assets                                                                                        |       | 12,223,288                  |        | 11,336,463               |       |
|                                                                                                         |       |                        |        |                     |       |
| Property and  equipment, net                                                                                 |       | 48,195,568                  |        | 47,414,865               |       |
| Goodwill                                                                                                     |       | 119,714,094                 |        | 119,714,094              |       |
| Intangible  assets, net                                                                                      |       | 2,050,943                   |        | 1,935,227                |       |
| Investments                                                                                                  |       | 1,298,852                   |        | 1,253,696                |       |
| Deferred  financing costs                                                                                    |       | 8,020,743                   |        | 7,722,543                |       |
| Interest  rate cap                                                                                           |       | 4,723,135                   |        | 5,505,170                |       |
| Total assets                                                                                                 |       | $                           | 196,226,623 |                     | $          | 194,882,058 |   |
|                                                                                                         |       |                        |        |                     |       |
| **Liabilities  and Stockholders’ Equity**                                                               | ** ** | ** **                  | ** **  | ** **               | ** ** |
| Current  liabilities                                                                                         |       |                        |        |                     |       |
| Accounts  payable                                                                                            |       | 2,690,351                   |        | 1,593,341                |       |
| Accrued  expenses                                                                                            |       | 1,862,604                   |        | 1,797,669                |       |
| Advance  billings and payments                                                                               |       | 1,141,013                   |        | 1,187,583                |       |
| Customer  deposits                                                                                           |       | 220,209                     |        | 234,379                  |       |
| Current  portion of long-term notes payable                                                                  |       | —                      |        | —                   |       |
| Total  Current Liabilities                                                                                   |       | 5,914,177                   |        | 4,812,972                |       |
|                                                                                                         |       |                        |        |                     |       |
| Deferred  income taxes                                                                                       |       | 13,053,226                  |        | 13,053,226               |       |
| Other  liabilities                                                                                           |       | 196,644                     |        | 193,514                  |       |
| Total  deferred tax and other liabilities                                                                    |       | 13,249,870                  |        | 13,246,740               |       |
|                                                                                                         |       |                        |        |                     |       |
| Long-term  notes payable, net of current portion                                                             |       | 161,075,498                 |        | 161,075,498              |       |
| Derivative  liability                                                                                        |       | 2,788,716                   |        | 2,510,933                |       |
| Class B  common convertible to senior subordinated notes                                                     |       | 3,212,528                   |        | 3,323,260                |       |
|                                                                                                         |       |                        |        |                     |       |
| Stockholders’  Equity                                                                                   |       |                        |        |                     |       |
| Class A  Common Stock, $.01 par value-authorized 20,000,000 shares; issued and  outstanding 9,676,733 shares |       | 96,767                      |        | 96,767                   |       |
| Class B  Common Stock, $.01 par value-authorized 800,000 shares; issued and  outstanding 544,671 shares      |       | 5,447                       |        | 5,447                    |       |
| Additional  paid in capital                                                                                  |       | 12,435,800                  |        | 10,730,276               |       |
| Retained deficit                                                                                             |       | (2,597,315                  | )           | (1,768,103               | )          |
| Accumulated  other comprehensive income                                                                      |       | 45,135                      |        | 848,268                  |       |
| Total  stockholders’ equity                                                                             |       | 9,985,834                   |        | 9,912,655                |       |
|                                                                                                         |       |                        |        |                     |       |
| Total  liabilities and stockholders’ equity                                                             |       | $                           | 196,226,623 |                     | $          | 194,882,058 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

4

----

 

**OTELCO INC.**

CONSOLIDATED STATEMENTSOF INCOME

(Unaudited)

 
| ** **                                                                                        | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Revenues                                                                                          |       |                                   |       |   |   |
| Local  service                                                                                    |       | $                                      | 3,417,387  |   | $ | 3,643,645 |   |
| Network  access                                                                                   |       | 4,112,923                              |       | 5,729,307 |   |
| Long  distance and other telephone services                                                       |       | 678,669                                |       | 784,980 |   |
| Cable  television                                                                                 |       | 437,929                                |       | 496,118 |   |
| Internet                                                                                          |       | 480,331                                |       | 1,373,045 |   |
| Total  revenues                                                                                   |       | 9,127,239                              |       | 12,027,095 |   |
| Operating  expenses                                                                               |       |                                   |       |   |   |
| Cost of  services and products                                                                    |       | 1,969,392                              |       | 3,055,324 |   |
| Selling,  general and administrative expenses                                                     |       | 1,630,512                              |       | 1,813,170 |   |
| Depreciation  and amortization                                                                    |       | 1,553,691                              |       | 2,365,206 |   |
| Total  operating expenses                                                                         |       | 5,153,595                              |       | 7,233,700 |   |
|                                                                                              |       |                                   |       |   |   |
| Income from  operations                                                                           |       | 3,973,644                              |       | 4,793,395 |   |
|                                                                                              |       |                                   |       |   |   |
| Other income  (expense)                                                                           |       |                                   |       |   |   |
| Interest  expense                                                                                 |       | (837,820                               | )          | (3,977,791 | ) |
| Change in  fair value of derivative associated with Class B common convertible to Class  A common |       | —                                 |       | 277,783 |   |
| Other income                                                                                      |       | 47,639                                 |       | 273,477 |   |
| Total other  expense                                                                              |       | (790,181                               | )          | (3,426,531 | ) |
|                                                                                              |       |                                   |       |   |   |
| Income  before income taxes                                                                       |       | 3,183,463                              |       | 1,366,864 |   |
|                                                                                              |       |                                   |       |   |   |
| Income tax  expense                                                                               |       | (1,126,946                             | )          | (426,920 | ) |
|                                                                                              |       |                                   |       |   |   |
| Income  before accretion expense                                                                  |       | 2,056,517                              |       | 939,944 |   |
|                                                                                              |       |                                   |       |   |   |
| Accretion of  Class B common convertible to senior subordinated notes                             |       | —                                 |       | (110,732 | ) |
| Net income  available to common stockholders                                                      |       | 2,056,517                              |       | 829,212 |   |
|                                                                                              |       |                                   |       |   |   |
| Weighted  average shares outstanding:                                                             |       |                                   |       |   |   |
| Basic                                                                                             |       | 8,054,841                              |       | 9,676,733 |   |
| Diluted                                                                                           |       | 8,557,304                              |       | 10,221,404 |   |
|                                                                                              |       |                                   |       |   |   |
| Basic net  income per share                                                                       |       | $                                      | 0.26       |   | $ | 0.09 |   |
|                                                                                              |       |                                   |       |   |   |
| Diluted net  income per share                                                                     |       | $                                      | 0.24       |   | $ | 0.06 |   |
|                                                                                              |       |                                   |       |   |   |
| Dividends  declared per share                                                                     |       | $                                      | —     |   | $ | 0.18 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

----

 

**OTELCO INC.**

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Cash flows  from operating activities:                                        |       |                                   |       |   |   |
| Net income                                                                    |       | $                                      | 2,056,517  |   | $ | 829,212 |   |
| Adjustments  to reconcile net income to cash flows from operating activities: |       |                                   |       |   |   |
| Depreciation                                                                  |       | 1,454,250                              |       | 1,920,757 |   |
| Amortization                                                                  |       | 99,441                                 |       | 444,449 |   |
| Interest  rate caplet                                                         |       | —                                 |       | 21,097 |   |
| Accretion  expense                                                            |       | —                                 |       | 110,732 |   |
| Change in  fair value of derivative liability                                 |       | —                                 |       | (277,783 | ) |
| Provision  for uncollectible revenue                                          |       | 19,479                                 |       | 28,902 |   |
| Changes in  assets and liabilities, net of assets and liabilities acquired:   |       |                                   |       |   |   |
| Accounts  receivables                                                         |       | 169,427                                |       | 274,720 |   |
| Material and  supplies                                                        |       | (14,247                                | )          | (82,322 | ) |
| Prepaid  expenses and other assets                                            |       | 208,358                                |       | 32,058 |   |
| Accounts  payable and accrued liabilities                                     |       | 1,216,659                              |       | (1,161,947 | ) |
| Advance  billings and payments                                                |       | 9,111                                  |       | 46,570 |   |
| Other  liabilities                                                            |       | 10,220                                 |       | 11,040 |   |
| Net cash  from operating activities                                           |       | 5,229,215                              |       | 2,197,485 |   |
|                                                                          |       |                                   |       |   |   |
| Cash flows  from investing activities:                                        |       |                                   |       |   |   |
| Acquisition  and construction of property and equipment                       |       | (952,254                               | )          | (1,133,676 | ) |
| Proceeds  from retirement of investment                                       |       | —                                 |       | 38,778 |   |
| Net cash  from investing activities                                           |       | (952,254                               | )          | (1,094,898 | ) |
|                                                                          |       |                                   |       |   |   |
| Cash flows  from financing activities:                                        |       |                                   |       |   |   |
| Cash  dividends paid                                                          |       | —                                 |       | (1,705,524 | ) |
| Loan  origination cost and transaction cost                                   |       | (36,174                                | )          | (30,533 | ) |
| Repayment of  long-term notes payable                                         |       | (1,892,616                             | )          | — |   |
| Net cash  from financing activities                                           |       | (1,928,790                             | )          | (1,736,057 | ) |
|                                                                          |       |                                   |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                         |       | 2,348,171                              |       | (633,470 | ) |
| Cash and  cash equivalents, beginning of period                               |       | 1,650,307                              |       | 5,406,545 |   |
|                                                                          |       |                                   |       |   |   |
| Cash and  cash equivalents, end of period                                     |       | $                                      | 3,998,478  |   | $ | 4,773,075 |   |
|                                                                          |       |                                   |       |   |   |
| Supplemental  disclosures of cash flow information:                           |       |                                   |       |   |   |
|                                                                          |       |                                   |       |   |   |
| Interest  paid                                                                |       | $                                      | 553,753    |   | $ | 4,279,963 |   |
|                                                                          |       |                                   |       |   |   |
| Income taxes  paid                                                            |       | $                                      | 452,000    |   | $ | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

6

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(unaudited)**

 

**1.****                                      Organizationand Basis of Financial Reporting**

 

***Basis ofPresentation and Principles of Consolidation***

The consolidated financial statements include theaccounts of Otelco Inc. (the “Company”), its wholly owned subsidiaries OtelcoTelecommunications LLC (“OTC”), Otelco Telephone LLC (“OTP”), Hopper HoldingCompany, Inc. (“HHC”), Brindlee Holdings LLC (“BH”), Page & KiserCommunications, Inc. (“PKC”), and Mid-Missouri Holding Corp. (“MMH”).  HHC’s wholly owned subsidiary is HopperTelecommunications Company, Inc. (“HTC”). BH’s owned subsidiary is Brindlee Mountain Telephone Company, Inc. (“BMTC”).  PKC’s wholly owned subsidiary is BlountsvilleTelephone Company, Inc. (“BTC”).  On December 21,2004, the Company acquired MMH.  MMH’swholly owned subsidiary is Mid-Missouri Telephone Company (“MMT”).  MMT is the sole stockholder of Imagination,Inc., which provides internet services in certain locations in Missouri.  The accompanying consolidated financialstatements include the accounts of the Company and all of its subsidiariesafter elimination of all material intercompany balances and transactions.

 

The consolidated financial statements andfootnotes included in this Form 10-Q should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2004.  The interim consolidated financial informationherein is unaudited.  The informationreflects all adjustments (which include only normal reoccurring adjustments),which are, in the opinion of management, necessary for a fair presentation ofthe financial position and results of operations for the periods included inthe report.

 

***2.******                                     ******Commitment andContingencies***

 

From time to time, we may be involved invarious claims, legal actions and regulatory proceedings incidental to and inthe ordinary course of business, including administrative hearings of theAlabama and Missouri Public Service Commissions related primarily to ratemaking.  Currently, none of the legalproceedings are expected to have a material adverse effect on our business.

 

**3.****                                      Acquisitions**

 

On December 21, 2004, the Companyacquired 100% of the outstanding common stock of MMH.  MMH owns 100% of MMT.  MMT is a local exchange carrier in centralMissouri.  The implicit purchase price ofthe acquisition was $30,540,774 including assumed notes payable.  The excess of the total purchase price overthe assigned value of the identifiable net assets is reflected as goodwill andintangible assets in the amount of $17,858,806 and $1,800,000,respectively.  The goodwill related tothe acquisition is not deductible for tax purposes.

 

7

----

 

The allocationof the net purchase price for the MMH acquisition is as follows:

 
| ** **              | ** ** | **2004**    | ** ** |
|-------------------------|------------|-------------|------------|
| ** **              | ** ** | ** **  | ** ** |
| Current  assets         |       | $           | 1,158,957  |   |
| Property and  equipment |       | 12,900,823  |       |
| Intangible  assets      |       | 1,800,000   |       |
| Goodwill                |       | 17,858,806  |       |
| Other assets            |       | 422,680     |       |
| Current  liabilities    |       | (1,144,674  | )          |
| Notes  payable          |       | (16,714,140 | )          |
| Other  liabilities      |       | (2,455,818  | )          |
|                    |       |        |       |
| Net purchase  price     |       | $           | 13,826,634 |   |

 

The Company issued856,234 shares of Class A common stock ($8,562 par value) underlying the856,234 IDSs and 53,413 shares of Class B common stock ($534 par value) inconnection with the acquisition of MMHC based on an exchange ratio of 0.14126IDSs and 0.00881 shares of Class B common stock for each share of MMHC.  The issuance of Class A common stockrepresented by Income Deposit Securities (“IDSs”), Class B common stock andClass A common stock associated with the conversion of options resulted in anincrease in paid-in capital of $7,222,120. Each IDS represents one share of Class A common stock and a 13.0% seniorsubordinated note with a $7.50 principal amount.  The number of IDSs and shares of Class Bcommon stock received upon exchange of each outstanding option to acquireshares of Mid-Missouri Holding were equal to the number of IDSs and shares ofClass B common stock that a holder would have received in the exchange had theholder exercised the option on a “cashless basis.”  The embedded exchange feature of the Class Bcommon stock is accounted for separately as a derivative liability.  We recorded $273,475 for the value of theexchange feature to the derivative liability with an offsetting entry toadditional paid-in capital.

 

The followingunaudited pro forma information presents the combined results of operations ofthe Company as though the acquisition of MMH, completed in 2004, occurred atthe beginning of the year.  The resultsinclude certain adjustments, including increased interest expense on notespayable related to the acquisition.  Thepro forma financial information does not necessarily reflect the results ofoperations had the acquisition been completed at the beginning of 2004 or thosewhich may be obtained in the future.

 
| ** **                    | ** ** | **Unaudited  For the three months ended  March 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|
|                          |       |                                                           |       |
| Revenues                      |       | $                                                              | 11,814,712 |   |
| Income from  operations       |       | 4,728,266                                                      |       |
| Net income                    |       | 2,271,864                                                      |       |
|                          |       |                                                           |       |
| Basic net  income per share   |       | $                                                              | 0.28       |   |
| Diluted net  income per share |       | $                                                              | 0.27       |   |

 

The acquisition was accounted for using thepurchase method of accounting and accordingly, the accompanying financialstatements include the financial position and results of operation from thedate of acquisition.

 

8

----

 

**4.****                                      Derivativeand Hedge Activities**

 

The interestrate cap was purchased on December 21, 2004, coincident with the closingof our initial public offering and the recapitalization of our senior notespayable.  The interest rate cap waspurchased to mitigate the risk of rising interest rates to limit or cap therate at 7%. It is considered an effective hedge as all critical terms of theinterest rate cap are identical to the underlying debt it hedges.  Changes in the fair value of the interestrate cap are not included in earnings but are reported as a component ofaccumulated other comprehensive income. For the three months ended March 31, 2005 the change in the fairvalue of the interest rate cap was $803,132. The cost of the interest rate cap is expensed as interest over theeffective life of the hedge in accordance with its quarterly future value atthe date of inception.  For the threemonths ended March 31, 2005, the cost of the interest rate cap was$21,097.

 

**5.****                                     ****Income per Common Share andPotential Common Share**

 

Basic income per common share is computed bydividing net income by the weighted-average number of shares outstanding forthe period.  Diluted income per commonshare reflects the potential dilution that could occur if the Class B commonstock were exercised into IDSs.  Class Bcommon stock is convertible on a one-for-one basis into IDSs, each of whichincludes a Class A common share.  Forperiods prior to our conversion, membership units were treated on an as ifconverted basis into Class A and Class B common shares.

 

A reconciliation of the common shares and net incomefor the Company’s basic and diluted income per common share calculation is asfollows:

 

9

----

 
| ** **                                                                                                                                                   | ** ** | **For the three months  ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2004**                                       | ** ** | **2005** | ** ** |
|                                                                                                                                                         |       |                                           |       |   |   |
| Weighted  average common shares at conversion                                                                                                                |       | 8,054,841                                      |       | 8,054,841 |   |
| Purchase of  Mid-Missouri Holding Corp., sale of common shares by Company, and buy-back of  common shares by Company (12/21/04)                              |       | —                                         |       | 1,621,892 |   |
| Weighted  average common shares-basic                                                                                                                        |       | 8,054,841                                      |       | 9,676,733 |   |
|                                                                                                                                                         |       |                                           |       |   |   |
| Effect of  Class B shares at conversion                                                                                                                      |       | 502,463                                        |       | 502,463 |   |
| Effect on  Class B shares from purchse of Mid Missouri-Holding Corp., sale of common  shares by Company, and buy-back of common shares by Company (12/21/04) |       | —                                         |       | 42,208 |   |
| Effect of  dilutive securities                                                                                                                               |       | 502,463                                        |       | 544,671 |   |
| Weighted-average  common shares and potential common shares-diluted                                                                                          |       | 8,557,304                                      |       | 10,221,404 |   |
|                                                                                                                                                         |       |                                           |       |   |   |
| Net income  available to common stockholders                                                                                                                 |       | $                                              | 2,056,517  |   | $ | 829,212 |   |
|                                                                                                                                                         |       |                                           |       |   |   |
| Net income  per basic share                                                                                                                                  |       | $                                              | 0.26       |   | $ | 0.09 |   |
|                                                                                                                                                         |       |                                           |       |   |   |
| Net income  available to common stockholders                                                                                                                 |       | $                                              | 2,056,517  |   | $ | 829,212 |   |
| Plus: Accretion  expense of Class B common convertible to senior subordinated notes                                                                          |       | —                                         |       | 110,732 |   |
| Less: Change  in fair value of derivative associated with Class B common                                                                                     |       | —                                         |       | (277,783 | ) |
| Net income  available for diluted shares                                                                                                                     |       | $                                              | 2,056,517  |   | $ | 662,161 |   |
|                                                                                                                                                         |       |                                           |       |   |   |
| Net income  per diluted share                                                                                                                                |       | $                                              | 0.24       |   | $ | 0.06 |   |

 

**6.****                                     ****Other comprehensive income**

 

The components of other comprehensive income consistof:

 
| ** **                  | ** ** | **For the three months  ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                       | ** ** | **2005** | ** ** |
|                        |       |                                           |       |   |   |
| Net income                  |       | $                                              | 2,056,517  |   | $ | 829,212 |   |
|                        |       |                                           |       |   |   |
| Hedge  accounting           |       | —                                         |       | 803,132 |   |
|                        |       |                                           |       |   |   |
| Total  comprehensive income |       | $                                              | 2,056,517  |   | $ | 1,632,344 |   |

 

10

----

 

**Item 2.****  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

**Overview**

 

***General***

 

Since 1999, we have acquired and operate five rurallocal exchange carriers serving twenty exchanges through four central officesand thirteen remote switches in approximately 1,540 square miles of northcentral Alabama and central Missouri.  Weare the sole wireline telephone services provider in the rural communities weserve.  Our services include localtelephone, network access, long distance and other telephone related services,cable television and Internet access.  Weview, manage and evaluate the results of operations from the various telephonyproducts and services as one company and therefore have identified onereporting segment as it relates to providing segment information.  As of March 31, 2005, we operatedapproximately 37,600 access line equivalents.

 

Our core businesses are local service and theprovision of network access to other wireline, long distance and wirelesscarriers for calls originated or terminated on our network.  Our core businesses generated approximately 77.9%of our total revenues in the first quarter of 2005.  We also provide long distance and othertelephone related services, cable television and dial-up and high-speedInternet access.

 

The following discussion and analysis should be readin conjunction with our financial statements and the related notes included inItem 1of Part 1 and other financial information appearing elsewhere in thisreport.  The following discussion andanalysis discusses our financial condition and results of operations on aconsolidated basis, including the acquisition (the “Mid-Missouri Acquisition”) ofMid-Missouri Holding Corp. (“MMH”) as of December 21, 2004.

 

***Revenue Sources***

 

We derive our revenues from five sources:

 

•                  *Local services.*  We receive revenues fromproviding local exchange telephone services. These revenues include monthly subscription charges for basic service,calling to adjacent communities on a per minute basis, local private lineservices and enhanced calling features, such as voicemail, calleridentification, call waiting and call forwarding.

•                  *Network access services.*  Wereceive revenues from charges established to compensate us for the origination,transport and termination of calls of long distance and other interexchangecarriers.  These include subscriber linecharges imposed on end users and switched and special access charges paid bycarriers.  Switched access charges forlong distance services within Alabama and Missouri are based on rates approvedby the Alabama Public Service Commission and Missouri Public Service Commissionrespectively.  Switched and specialaccess charges for interstate and international services are based on ratesapproved by the Federal Communications Commission.

•                  *Long distance and other telephone services*.  Wereceive revenues for providing long distance services to our customers.  We also provide billing and collectionsservices for other carriers under contract and receive revenues from directoryadvertising.

•                  *Cable television services.*  Weoffer basic, digital and pay per view cable television services to a portion ofour telephone service territory in both Alabama and Missouri.

•                  *Internet services.*  We receive revenues frommonthly recurring charges for dial-up and high-speed Internet access.

 

***Access Line and Customer Trends***

 

The number of access lines served is a fundamentalfactor in determining revenue stability for a telecommunications provider.  Reflecting a general trend in the rural localexchange carrier industry, the number of access lines we serve has beendecreasing gradually when normalized for territory acquisitions.  We expect that either this trend willcontinue or the number of access lines that we serve in the future will remainrelatively flat.  In addition to theimpact of the economy on our customers, the growth of our high-speed Internetaccess services will continue to have an impact on residential and smallbusiness customers’ requirements for second access lines.  Our response to this trend will have animportant impact on our future revenues. Our primary strategy consists of leveraging our strong incumbent marketposition to increase revenue per access line by selling additional services toour customer base.

 

11

----

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** | **Three Months  Ended  March 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2002**                         | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2005** | ** ** |
| Access line  equivalents (1):                |       |                             |       |                                    |       |   |   |   |   |
| Residential  access lines                    |       | 19,343                           |       | 22,100                                  |       | 25,237 |   | 25,314 |   |
| Business  access lines                       |       | 6,654                            |       | 7,355                                   |       | 8,414 |   | 8,310 |   |
| High-speed  lines                            |       | 1,361                            |       | 2,185                                   |       | 3,488 |   | 4,014 |   |
|                                         |       |                             |       |                                    |       |   |   |   |   |
| Total access  line equivalents               |       | 27,358                           |       | 31,640                                  |       | 37,139 |   | 37,638 |   |
|                                         |       |                             |       |                                    |       |   |   |   |   |
| Long  distance customers                     |       | 8,183                            |       | 11,374                                  |       | 13,641 |   | 14,039 |   |
| Cable  television customers                  |       | 3,442                            |       | 3,628                                   |       | 3,959 |   | 4,023 |   |
| Dial-up  Internet customers                  |       | 2,463                            |       | 2,331                                   |       | 15,348 |   | 14,693 |   |
|                                         |       |                             |       |                                    |       |   |   |   |   |
| Average  monthly revenue per access line (2) |       | $                                | 94.40      |                                    | $          | 101.45 |   | $ | 105.88 |   | $ | 112.66 |   |
|                                              |            |                                  |            |                                         |            |  |  |  |  |  |  |  |  |

 

----

(1)                                  We define access line equivalents as accesslines, cable modems and digital subscriber lines.

 

(2)                                  We calculate average monthly revenue peraccess line as equal to (A) our average revenues for the period within ourtelephone territory divided by (B) the average of the number of access lines onthe first day and the last day of the period.

 

We will continue our strategy of increasing revenuesby cross-selling to our existing customer base, in the form of bundled servicepackages and individual additional services as they become available.  Our high-speed Internet customers continue togrow rapidly from to 3,488 customers at December 31, 2004, to 4,014 at March 31,2005. We expect continued revenue growth in this area of our business.  This growth in our high-speed Internetcustomers is expected to have a negative effect on our dial-up Internetcustomers as some customers migrate to high-speed Internet access.  In addition, we expect the growth in ourhigh-speed Internet access customers will have a negative effect on our accesslines as some customers will no longer have a need for second lines forpurposes of dial-up Internet access.  During first quarter 2005, we grew residentialaccess lines, offset by the loss of business data circuits while growinghigh-speed Internet customers 15% for the quarter.

 

Our long distance customers increased 398 to 14,039from December 31, 2004 to March 31, 2005, now representing 41.7% ofour access lines.  Our cable televisioncustomers grew 64 to 4,023 from December 31, 2004 to March 31, 2005.  While we have experienced annual increases inour cable television programming costs, and expect this trend to continue inthe future, we expect these increases will be offset by a correspondingincrease in the price that we charge our cable television customers for cabletelevision service offerings.  Dial-upinternet customers declined to 14,693, including the subscribers we serviceoutside of our telephone service area, reflecting the shift to high-speedInternet offerings.

 

Our average revenue per access line for the threemonths ended March 31, 2005 increased by 6.4% from 2004.  The primary contributor to our ability tomaintain our revenue stream during a time of flat to decreasing access lineshas been our success with cross-selling additional services to our existingcustomers. With the Mid-Missouri Acquisition on December 21, 2004, there wasan increase in average revenue per access line associated with theproportionately larger contribution from High Cost Loop support. Coupled withthe increase in high-speed access, long distance and cable subscribers, wecontinue to provide an increasingly valuable basket of services to oursubscribers.

 

***Categories of Operating Expenses***

Our operating expenses are categorized as cost ofservices; selling, general and administrative expenses; and depreciation andamortization.

 

12

----

 

*Cost of services. *This includes expense for salaries, wages and benefits relating toplant operation, maintenance and customer service; other plant operations,maintenance and administrative costs; network access costs; and costs of salesfor long distance, cable television, Internet and directory services.

 

*Selling, general andadministrative expenses. *This includes expenses for salaries, wagesand benefits and contract service payments (e.g., legal fees) relating toengineering, financial, human resources and corporate operations; informationmanagement expenses, including billing; allowance for uncollectibles; expensesfor travel, lodging and meals; internal and external communications costs;stock option compensation expense; insurance premiums; stock exchange andbanking fees; and postage.  Included inselling, general and administrative expenses historically are annual managementfees of approximately $1.0 million in 2004 payable to Seaport Capital PartnersII, L.P. and its affiliates, or Seaport Capital.  These fees were terminated on December 21,2004 in conjunction with our initial public offering.  The incremental selling, general andadministrative expenses associated with being a public company replace thesefees.

 

*Depreciation and amortization. *This includes depreciation of our telecommunications, cable andInternet networks and equipment, and amortization of intangible assets.

 

***Our Ability to Control OperatingExpenses***

 

We strive to control expenses in order to maintainour strong operating margins.  As ourrevenue shifts to non-regulated services, operating margins decrease reflectingthe lower margins associated with these more competitive services.  We expect to control expenses while wecontinue to grow our business.

 

***Results of Operations***

 

The following table sets forth our results ofoperations as a percentage of total revenues for the periods indicated.

 

13

----

 
| ** **                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                            | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| Revenues                                                                                              |       |                                  |       |   |   |
| Local  service                                                                                        |       | 37.4                                  | %          | 30.3 | % |
| Network  access                                                                                       |       | 45.1                                  |       | 47.6 |   |
| Long  distance and other telephone services                                                           |       | 7.4                                   |       | 6.5 |   |
| Cable  television                                                                                     |       | 4.8                                   |       | 4.1 |   |
| Internet                                                                                              |       | 5.3                                   |       | 11.4 |   |
| Total  revenues                                                                                       |       | 100.0                                 | %          | 100.0 | % |
| Operating  expenses                                                                                   |       |                                  |       |   |   |
| Cost of  services and products                                                                        |       | 21.6                                  | %          | 25.4 | % |
| Selling,  general and administrative expenses                                                         |       | 17.9                                  |       | 15.1 |   |
| Depreciation  and amortization                                                                        |       | 17.0                                  |       | 19.7 |   |
| Total  operating expenses                                                                             |       | 56.5                                  |       | 60.1 |   |
|                                                                                                  |       |                                  |       |   |   |
| Income from  operations                                                                               |       | 43.5                                  |       | 39.9 |   |
|                                                                                                  |       |                                  |       |   |   |
| Other income  (expense)                                                                               |       |                                  |       |   |   |
| Interest expense                                                                                      |       | (9.2                                  | )          | (33.1 | ) |
| Change in  fair value of derivative associated with the Class B common convertible to  Class A common |       | —                                |       | 2.3 |   |
| Other income                                                                                          |       | 0.5                                   |       | 2.3 |   |
| Total other  expense                                                                                  |       | (8.7                                  | )          | (28.5 | ) |
|                                                                                                  |       |                                  |       |   |   |
| Income  before income taxes                                                                           |       | 34.9                                  |       | 11.4 |   |
|                                                                                                  |       |                                  |       |   |   |
| Income tax  expense                                                                                   |       | (12.3                                 | )          | (3.5 | ) |
|                                                                                                  |       |                                  |       |   |   |
| Income  before accretion expense                                                                      |       | 22.5                                  |       | 7.8 |   |
|                                                                                                  |       |                                  |       |   |   |
| Accretion of  Class B common convertible to senior subordinated notes                                 |       | —                                |       | (0.9 | ) |
|                                                                                                  |       |                                  |       |   |   |
| Net income  available to common stockholders                                                          |       | 22.5                                  | %          | 6.9 | % |

 

***Three months ended March 31,2005 compared to three months ended March 31, 2004***

 

*Total Revenues. *Total revenues grew 31.8% in the first three months of 2005 to $12.0million from $9.1 million in the first three months of 2004.  The table below provides the components ofour revenues for the first three months of 2005 compared to the first threemonths of 2004.

 

14

----

 
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2004**                              | ** ** | **2005**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**            | ** ** |
| Local  service                              |       | $                                     | 3,417      |       | $          | 3,644 |   | $ | 227 |   | 6.6 | % |
| Network  access                             |       | 4,113                                 |       | 5,729      |       | 1,616 |   | 39.3 |   |
| Long  distance and other telephone services |       | 679                                   |       | 785        |       | 106 |   | 15.6 |   |
| Cable  television                           |       | 438                                   |       | 496        |       | 58 |   | 13.2 |   |
| Internet                                    |       | 480                                   |       | 1,373      |       | 893 |   | 186.0 |   |
| Total                                       |       | $                                     | 9,127      |       | $          | 12,027 |   | $ | 2,900 |   | 31.8 |   |

 

Local service. Local service revenue in the first three months of 2005 grew 6.6% to $3.6million from $3.4 million in the first three months of 2004.  This growth was attributable to an increaseof $0.1 million from the Mid-Missouri Acquisition and $0.1 million from anincrease in minutes of use on our various local calling arrangements.  Access lines increased 4,092 primarily fromthe Mid-Missouri Acquisition, partially offset by increased penetration of ourhigh-speed Internet service which resulted in the loss of some second accesslines used by customers for dial-up Internet access.

 

Network access. Network access revenue in the first three months of 2005 grew 39.3% to $5.7million from $4.1 million in the first three months of 2004.  This growth was primarily attributable to theMid-Missouri Acquisition and a small increase in the federal universal servicecharge rate.

 

Long distance and other telephone services.  Longdistance and other telephone services revenue in the first three months of 2005increased 15.6% to $0.8 million from $0.7 million in the first three months of 2004.  The Mid-Missouri Acquisition increasedrevenue by $0.2 million, offset by a reduction of $0.1 in other carrier billingand collection agreements and property rental income.

 

Cable television. Cable television revenue in the first three months of 2005 increased 13.2%to $0.5 million from $0.4 million in the first three months of 2004.  The increase was due to the impact of a $2.00per month increase in basic cable prices, and the addition of 370 customersassociated with the Mid-Missouri Acquisition.

 

Internet.  Internet revenue in the firstthree months of 2005 increased 186% to $1.4 million from $0.5 million in thefirst three months of 2004.  Of thisincrease, $0.2 million was attributable to the addition of almost 1,300 newhigh-speed Internet customers in Alabama and $0.7 million was attributable to theaddition of high-speed and dial-up Internet customers associated with the Mid-MissouriAcquisition.

 

*Operating expenses. *Operating expenses in the first three months of 2005 increased 40.4% to$7.2 million from $5.2 million the first three months of 2004.  The increase was primarily attributable tothe Mid-Missouri Acquisition, amortization of loan costs associated with ourinitial public offering and public company costs.

 
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2004**                              | ** ** | **2005**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**            | ** ** |
| Cost of  services                             |       | $                                     | 1,969      |       | $          | 3,055 |   | $ | 1,086 |   | 55.2 | % |
| Selling,  general and administrative expenses |       | 1,630                                 |       | 1,813      |       | 183 |   | 11.2 |   |
| Depreciation  and amortization                |       | 1,554                                 |       | 2,365      |       | 811 |   | 52.2 |   |
| Total                                         |       | $                                     | 5,153      |       | $          | 7,233 |   | $ | 2,080 |   | 40.4 |   |

 

Cost of services.  Thecost of services increased 55.2% to $3.1 million in the first three months of 2005from $2.0 million in the first three months of 2004.  The Mid-Missouri Acquisition accounted for$0.9

 

15

----

 

million of this increase.  The balance of the increase was attributableto the higher installation and service costs associated with the increase inInternet customers and higher cable programming fees.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased 11.2% to $1.8million in the first three months of 2005 from $1.6 million in the first threemonths of 2004.  Public company costs inthe period were higher than the elimination of management fees paid to arelated party in the previous year.

 

Depreciation and amortization.  Depreciationand amortization increased 52.2% to $2.4 million in the first three months of 2005from $1.6 million in the first three months of 2004.  The Mid-Missouri Acquisition accounted for$0.5 million and the amortization of loan costs associated with our initialpublic offering accounted for $0.3 million. The balance of the increase was associatedwith increased high-speed Internet equipment and amortization of intangibles.

 

*Interest expense. *Interest expense increased 374.8% to $4.0 million in the first threemonths of 2005 from $0.8 million in the first three months of 2004.  The new credit facility and the seniorsubordinated notes associated with our initial public offering in December 2004replaced existing variable rate term debt. Interest on the new credit facilityis capped at 7% for the five year term ending December 20, 2009. Intereston the senior subordinate notes is 13% for the 15 year term ending December 30,2019.

 

*Change in fair value of derivativeassociated with Class B common convertible to Class A common. *The derivative value associated with the conversion option for ourClass B common stock must be revalued each quarter until conversion occurs, notlater than December 21, 2009. The reduction in maximum time to conversionand the increase in the price of IDSs and the underlying Class A common stocksince the initial public offering combined to reduce the fair value of thisliability by $0.3 million at the end of the first three months of 2005.

 

*Other income. *Other income increased 474.1% to $0.3 million in the first three monthsof 2005 from $0.1 million in the first three months of 2004.  The increase was attributable to the increasedpatronage dividend income from CoBank.

 

*Income taxes. *Provision for income taxes in the first three months of 2005 declined 62.1%to $0.4 million from $1.1 million in the first three months of 2004.  This reflects the expected lower income generatedfrom the capital structure associated with our initial public offering in December 2004and the estimated higher tax rate for the full year.

 

*Accretion of Class B commonconvertible to senior subordinated notes. *Our Class Bcommon stock was issued to the existing equity holders coincident with ourinitial public offering on December 21, 2004.  These shares represent their retainedinterest in the company.  They do notreceive any dividends and will convert into IDSs not later than December 21,2009.  For the first two years aftertheir issuance, the present value discount on the portion of the shares relatedto the conversion to senior subordinated notes is being accrete as a non-cashexpense to the Company. For the first three months of 2005, this accretionexpense was $0.1 million.

 

*Net income. *As a result of the foregoing, net income in the first three months of 2005decreased 59.7% to $0.8 million from $2.1 million in the first three months of 2004.

 

**Liquidity and Capital Resources**

 

Having completed the transactions associated withour initial public offering, our liquidity needs will arise primarily from: (i)interest payments related to our credit facility and our senior subordinatednotes; (ii) capital expenditures, (iii) working capital requirements; (iv)dividend payments on our Class A common stock; and (v) potential acquisitions.

 

Cash flows provided by operating activities for thefirst three months of 2005 amounted to $2.2 million compared to $5.2 millionfor the first three months of 2004.  Thechanges in net income from higher

 

16

----

 

interestand accretion expense offset by the change in derivative liability and lowertaxes associated with our initial public offering; the increase in amortizationand depreciation from the Mid-Missouri Acquisition and our initial publicoffering; and the reduction in accounts payable primarily related to payment ofexpenses associated with the initial public offering and the elimination ofcompensation expenses associated with the terminated option plan, accounted forthe majority of this change. The balance is associated with advance paymentsfor dial-up Internet customers outside of our telephone service territory.

 

Cash flows used for investing activities for thefirst three months of 2005 amounted to $1.1 million compared to $1.0 millionfor the first three months of 2004.  The capitalexpenditures for the acquisition and construction of property and equipment associatedwith the Mid-Missouri Acquisition accounted for the increase.

 

Cash flows used for financing activities for thefirst three months of 2005 reflected the change in equity and debt structure ofthe company associated with our initial public offering.  The company distributed $1.7 million in cashdividends to stockholders in the first three months of 2005 compared to $1.9million for repayment of long-term notes payable in the first three months of2004, accounting for the change between periods.

 

We anticipate that operating cash flow, togetherwith borrowings under our credit facility, will be adequate to meet ourcurrently anticipated operating and capital expenditure requirements for atleast the next 12 months.

 

17

----

 

**Item 3.****  *Quantitativeand Qualitative Disclosures About Market Risk***

 

Our short-term excesscash balance is invested in short-term commercial paper.  We do not invest in any speculative derivativeor commodity type instruments. Accordingly, we are subject to minimal market risk on our investments.

 

We have the ability toborrow up to $15.0 million under a revolving loan facility.  The interest rate is variable and,accordingly, we are exposed to interest rate risk, primarily from the change inLIBOR or a base rate.  Currently, we haveno loans drawn under this facility.

 

***Item 4.******  Controls and Procedures***

 

With the participation ofthe Chief Executive Officer and the Chief Financial Officer, management hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of March 31, 2005.

 

With the completion ofour initial public offering on December 21, 2004, we are subject to thereporting requirements under Regulation S-K for the first time and anticipatebeing classified as an accelerated filer for the year ending December 31,2005.

 

There were no changes inour internal control over financial reporting (as defined in Rule 13a-15(f)under the Securities Exchange Act of 1934) during the first quarter of fiscal2005 that materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

18

----

 

**PART II  OTHERINFORMATION**

 

**Item. 6.  *Exhibits***

 

Exhibits

 

SeeExhibit Index.

 

19

----

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| Date: May 9, 2005 | **OTELCO INC.** |
|-------------------|-----------------|
|              |            |
|              |            |
|              | By:             | /s/ Michael D. Weaver |
|              |            | Michael D. Weaver |
|              |            | President and Chief Executive Officer |
|              |            |   |
|              |            |   |
| Date: May 9, 2005 |            |   |
|              |            |   |
|              |            |   |
|              | By:             | /s/ Curtis L. Garner, Jr. |
|              |            | Curtis L. Garner, Jr. |
|              |            | Chief Financial Officer |

 

20

----

 

**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                  |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1            |       | Certificate pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934 of the Chief Executive Officer                                  |
|            |       |                                                                                                                                                             |
| 31.2            |       | Certificate pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934 of the Chief Financial Officer                                  |
|            |       |                                                                                                                                                             |
| 32.1            |       | 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 Officer |
|            |       |                                                                                                                                                             |
| 32.2            |       | 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 |

 

21

----