(Mark
One)
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended June 30, 2006
or
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from to
|
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)
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Class
|
Outstanding
at August 9, 2006
|
|
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
|
PART
I FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets as of December 31, 2005 and June 30,
2006
|
||
Consolidated
Statements of Income for the three months and six months
ended
|
||
|
June
30, 2005 and 2006
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2005
and
2006
|
||
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
4.
|
Submission
of Matters to a vote of Security Holders
|
|
Item
6.
|
Exhibits
|
December
31,
|
June
30,
|
||||||
2005
|
|
2006
|
|||||
Assets
|
(unaudited)
|
||||||
Current
assets
|
|||||||
Cash
and cash equivalents
|
$
|
5,569,233
|
$
|
9,025,517
|
|||
Accounts
receivable:
|
|||||||
Due
from subscribers, net of allowance for doubtful
|
|||||||
accounts
of $163,028 and $158,496 respectively
|
1,212,909
|
1,204,558
|
|||||
Unbilled
receivables
|
1,828,104
|
1,853,499
|
|||||
Other
|
1,482,171
|
1,763,082
|
|||||
Materials
and supplies
|
932,861
|
975,074
|
|||||
Prepaid
expenses
|
504,256
|
437,326
|
|||||
Income
tax receivables
|
749,591
|
749,591
|
|||||
Deferred
income taxes
|
872,675
|
872,675
|
|||||
Total
current assets
|
13,151,800
|
16,881,322
|
|||||
Property
and equipment, net
|
44,555,611
|
42,661,952
|
|||||
Goodwill
|
119,431,993
|
119,431,993
|
|||||
Intangible
assets, net
|
1,588,079
|
1,485,226
|
|||||
Investments
|
1,108,249
|
555,588
|
|||||
Deferred
financing costs
|
6,971,610
|
6,284,735
|
|||||
Interest
rate cap
|
5,318,728
|
6,460,374
|
|||||
Deferred
costs - acquisition
|
-
|
85,940
|
|||||
Total
assets
|
$
|
192,126,070
|
$
|
193,847,130
|
|||
Liabilities
and Stockholders' Equity
|
|||||||
Current
liabilities
|
|||||||
Accounts
payable
|
$
|
1,106,114
|
$
|
961,175
|
|||
Accrued
expenses
|
1,692,841
|
3,299,229
|
|||||
Advance
billings and payments
|
1,204,680
|
1,184,739
|
|||||
Customer
deposits
|
213,524
|
224,827
|
|||||
Total
Current Liabilities
|
4,217,159
|
5,669,970
|
|||||
Deferred
income taxes
|
15,345,890
|
15,345,890
|
|||||
Other
liabilities
|
192,769
|
176,308
|
|||||
Total
deferred tax and other liabilities
|
15,538,659
|
15,522,198
|
|||||
Long-term
notes payable
|
161,075,498
|
161,075,498
|
|||||
Derivative
liability
|
1,830,095
|
1,519,632
|
|||||
Class
B common convertible to senior subordinated notes
|
3,655,454
|
3,876,917
|
|||||
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
|
5,613,703
|
3,695,090
|
|||||
Retained
earnings (deficit)
|
(805,731
|
)
|
-
|
||||
Accumulated
other comprehensive income
|
899,019
|
2,385,611
|
|||||
Total
stockholders' equity
|
5,809,205
|
6,182,915
|
|||||
Total
liabilities and stockholders' equity
|
$
|
192,126,070
|
$
|
193,847,130
|
Three
months ended
June
30,
|
Six
months ended
June
30,
|
||||||||||||
2005
|
2006
|
2005
|
2006
|
||||||||||
Revenues
|
|||||||||||||
Local
services
|
$
|
4,341,025
|
$
|
4,325,046
|
$
|
8,769,650
|
$
|
8,655,800
|
|||||
Network
access
|
5,235,327
|
5,170,581
|
10,964,633
|
10,315,636
|
|||||||||
Cable
television
|
516,060
|
538,565
|
1,012,178
|
1,081,071
|
|||||||||
Internet
|
1,350,112
|
1,523,621
|
2,723,158
|
3,018,704
|
|||||||||
Total
revenues
|
11,442,524
|
11,557,813
|
23,469,619
|
23,071,211
|
|||||||||
Operating
expenses
|
|||||||||||||
Cost
of services and products
|
3,020,050
|
3,185,359
|
6,073,594
|
6,361,801
|
|||||||||
Selling,
general and administrative expenses
|
1,512,050
|
1,483,078
|
3,326,999
|
3,152,664
|
|||||||||
Depreciation
and amortization
|
2,370,986
|
2,352,595
|
4,736,193
|
4,664,374
|
|||||||||
Total
operating expenses
|
6,903,086
|
7,021,032
|
14,136,786
|
14,178,839
|
|||||||||
Income
from operations
|
4,539,438
|
4,536,781
|
9,332,833
|
8,892,372
|
|||||||||
Other
income (expense)
|
|||||||||||||
Interest
expense
|
(4,057,957
|
)
|
(4,241,068
|
)
|
(8,035,748
|
)
|
(8,447,105
|
)
|
|||||
Change
in fair value of derivative
|
337,696
|
130,721
|
615,479
|
310,462
|
|||||||||
Other
income
|
47,215
|
2,809,270
|
320,691
|
2,996,509
|
|||||||||
Total
other expense
|
(3,673,046
|
)
|
(1,301,077
|
)
|
(7,099,578
|
)
|
(5,140,134
|
)
|
|||||
Income
before income tax and accretion expense
|
866,392
|
3,235,704
|
2,233,255
|
3,752,238
|
|||||||||
Income
tax expense
|
(139,301
|
)
|
(1,071,400
|
)
|
(566,221
|
)
|
(1,232,610
|
)
|
|||||
Income
before accretion expense
|
727,091
|
2,164,304
|
1,667,034
|
2,519,628
|
|||||||||
Accretion
of Class B common convertible to senior
|
|||||||||||||
subordinated
notes
|
(110,732
|
)
|
(110,731
|
)
|
(221,463
|
)
|
(221,463
|
)
|
|||||
Net
income available to common stockholders
|
$
|
616,359
|
$
|
2,053,573
|
$
|
1,445,571
|
$
|
2,298,165
|
|||||
Weighted
average shares outstanding:
|
|||||||||||||
Basic
|
9,676,733
|
9,676,733
|
9,676,733
|
9,676,733
|
|||||||||
Diluted
|
10,221,404
|
10,221,404
|
10,221,404
|
10,221,404
|
|||||||||
Net
income per share
|
|||||||||||||
Basic
|
$
|
0.06
|
$
|
0.21
|
$
|
0.15
|
$
|
0.24
|
|||||
Diluted
|
$
|
0.04
|
$
|
0.20
|
$
|
0.10
|
$
|
0.22
|
|||||
Dividends
declared per share
|
$
|
0.18
|
$
|
0.18
|
$
|
0.35
|
$
|
0.35
|
Six
months ended
June
30,
|
|||||||
2005
|
2006
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
income
|
$
|
1,445,571
|
$
|
2,298,165
|
|||
Adjustments
to reconcile net income to cash flows from operating
activities:
|
|||||||
Depreciation
|
3,844,022
|
3,874,647
|
|||||
Amortization
|
892,171
|
789,728
|
|||||
Interest
rate caplet
|
50,716
|
344,946
|
|||||
Accretion
expense
|
221,463
|
221,463
|
|||||
Change
in fair value of derivative liability
|
(615,479
|
)
|
(310,462
|
)
|
|||
Provision
for uncollectible revenue
|
42,249
|
60,903
|
|||||
Gain
on disposition of other assets
|
-
|
(2,686,745
|
)
|
||||
Changes
in assets and liabilities; net of assets and liabilities
acquired:
|
|||||||
Accounts
receivables
|
142,418
|
(358,856
|
)
|
||||
Material
and supplies
|
33,296
|
(42,213
|
)
|
||||
Prepaid
expenses and other assets
|
68,151
|
66,930
|
|||||
Accounts
payable and accrued liabilities
|
(566,838
|
)
|
1,461,447
|
||||
Advance
billings and payments
|
18,080
|
(19,941
|
)
|
||||
Other
liabilities
|
2,295
|
(5,158
|
)
|
||||
Net
cash from operating activities
|
5,578,115
|
5,694,854
|
|||||
Cash
flows from investing activities:
|
|||||||
Acquisition
and construction of property and equipment
|
(2,359,481
|
)
|
(1,968,233
|
)
|
|||
Proceeds
from retirement of investment
|
80,846
|
3,226,651
|
|||||
Deferred
charges - acquisition
|
-
|
(85,940
|
)
|
||||
Net
cash from investing activities
|
(2,278,635
|
)
|
1,172,478
|
||||
Cash
flows from financing activities:
|
|||||||
Cash
dividends paid
|
(3,411,048
|
)
|
(3,411,048
|
)
|
|||
Loan
origination costs and transaction cost
|
(63,262
|
)
|
-
|
||||
Net
cash from financing activities
|
(3,474,310
|
)
|
(3,411,048
|
)
|
|||
Net
increase (decrease) in cash and cash equivalents
|
(174,830
|
)
|
3,456,284
|
||||
Cash
and cash equivalents, beginning of period
|
5,406,545
|
5,569,233
|
|||||
Cash
and cash equivalents, end of period
|
$
|
5,231,715
|
$
|
9,025,517
|
|||
Supplemental
disclosures of cash flow information:
|
|||||||
Interest
paid
|
$
|
8,287,120
|
$
|
8,085,647
|
|||
Income
taxes paid (received)
|
$
|
(350,000
|
)
|
$
|
40,000
|
For
the three months
|
For
the six months
|
||||||||||||
ended
June 30,
|
ended
June 30,
|
||||||||||||
2005
|
|
2006
|
|
2005
|
|
2006
|
|||||||
Weighted
average common shares-basic
|
9,676,733
|
9,676,733
|
9,676,733
|
9,676,733
|
|||||||||
Effect
of dilutive securities
|
544,671
|
544,671
|
544,671
|
544,671
|
|||||||||
Weighted-average
common shares and potential
|
|||||||||||||
common
shares-diluted
|
10,221,404
|
10,221,404
|
10,221,404
|
10,221,404
|
|||||||||
Net
income available to common stockholders
|
$
|
616,359
|
$
|
2,053,574
|
$
|
1,445,571
|
$
|
2,298,165
|
|||||
Net
income per basic share
|
$
|
0.06
|
$
|
0.21
|
$
|
0.15
|
$
|
0.24
|
|||||
Net
income available to common stockholders
|
$
|
616,359
|
$
|
2,053,574
|
$
|
1,445,571
|
$
|
2,298,165
|
|||||
Plus:
Accretion expense of Class B common
|
|||||||||||||
convertible
to senior subordinated notes
|
110,732
|
110,732
|
221,463
|
221,463
|
|||||||||
Less:
Change in fair value of derivative
|
(337,696
|
)
|
(130,721
|
)
|
(615,479
|
)
|
(310,462
|
)
|
|||||
Net
income available for diluted shares
|
$
|
389,395
|
$
|
2,033,585
|
$
|
1,051,555
|
$
|
2,209,166
|
|||||
Net
income per diluted share
|
$
|
0.04
|
$
|
0.20
|
$
|
0.10
|
$
|
0.22
|
For
the three months
|
For
the six months
|
||||||||||||
ended
June 30,
|
ended
June 30,
|
||||||||||||
2005
|
|
2006
|
|
2005
|
|
2006
|
|||||||
|
|
|
|
||||||||||
Net
income
|
$
|
616,359
|
$
|
2,053,574
|
$
|
1,445,571
|
$
|
2,298,165
|
|||||
Hedge
accounting
|
(1,554,453
|
)
|
610,139
|
(751,321
|
)
|
1,486,592
|
|||||||
Total
comprehensive income
|
$
|
(938,094
|
)
|
$
|
2,663,713
|
$
|
694,250
|
$
|
3,784,757
|
· |
Local
services.
We
receive revenues from providing local exchange telephone services.
These
revenues include monthly subscription charges for basic service,
calling
to adjacent communities 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 receive revenues for providing
long distance services to our customers. With the high level of acceptance
of local service bundles including unlimited calling, these telephone
services are viewed by our customers as part of their local telephone
service. We also provide billing and collections services for other
carriers under contract and receive revenues from directory advertising
in
our local communities.
|
· |
Network
access services.
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
and
Missouri are based on rates approved by the Alabama Public Service
Commission and Missouri Public Service Commission respectively. Switched
and special access charges for interstate and international services
are
based on rates approved by the Federal Communications
Commission.
|
· |
Cable
television services.
We
offer basic, digital and pay per view cable television services to
a
portion of our telephone service territory in both Alabama and
Missouri.
|
· |
Internet
services.
We
receive revenues from monthly recurring charges for dial-up and digital
high-speed Internet access.
|
Year
Ended December 31,
|
March
31,
|
June
30,
|
||||||||||||||
2003
|
2004
|
2005
|
2006
|
2006
|
||||||||||||
Access
line equivalents (1):
|
||||||||||||||||
Residential
access lines
|
22,100
|
25,237
|
24,541
|
24,491
|
24,273
|
|||||||||||
Business
access lines
|
7,355
|
8,414
|
8,036
|
7,877
|
7,961
|
|||||||||||
Access
lines
|
29,455
|
33,651
|
32,577
|
32,368
|
32,234
|
|||||||||||
Digital
high-speed lines
|
2,185
|
3,488
|
5,962
|
6,800
|
7,323
|
|||||||||||
Total
access line equivalents
|
31,640
|
37,139
|
38,539
|
39,168
|
39,557
|
|||||||||||
Long
distance customers
|
11,374
|
13,641
|
14,438
|
15,618
|
16,566
|
|||||||||||
Cable
television customers
|
3,628
|
3,959
|
4,220
|
4,236
|
4,196
|
|||||||||||
Dial-up
Internet customers
|
2,331
|
15,348
|
12,149
|
11,659
|
10,614
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
||||||||||||
2005
|
2006
|
|
2005
|
|
2006
|
||||||||
Revenues
|
|||||||||||||
Local
services
|
37.9
|
%
|
37.4
|
%
|
37.4
|
%
|
37.5
|
%
|
|||||
Network
access
|
45.8
|
44.7
|
46.7
|
44.7
|
|||||||||
Cable
television
|
4.5
|
4.7
|
4.3
|
4.7
|
|||||||||
Internet
|
11.8
|
13.2
|
11.6
|
13.1
|
|||||||||
Total
revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
Operating
expenses
|
|||||||||||||
Cost
of services and products
|
26.4
|
%
|
27.5
|
%
|
25.9
|
%
|
27.6
|
%
|
|||||
Selling,
general and administrative expenses
|
13.2
|
12.8
|
14.1
|
13.7
|
|||||||||
Depreciation
and amortization
|
20.7
|
20.4
|
20.2
|
20.2
|
|||||||||
Total
operating expenses
|
60.3
|
60.7
|
60.2
|
61.5
|
|||||||||
Income
from operations
|
39.7
|
39.3
|
39.8
|
38.5
|
|||||||||
Other
income (expense)
|
|||||||||||||
Interest
expense
|
(35.5
|
)
|
(36.7
|
)
|
(34.2
|
)
|
(36.6
|
)
|
|||||
Change
in fair value of derivative
|
3.0
|
1.1
|
2.6
|
1.3
|
|||||||||
Other
income
|
0.4
|
24.3
|
1.3
|
13.0
|
|||||||||
Total
other expense
|
(32.1
|
)
|
(11.3
|
)
|
(30.3
|
)
|
(22.3
|
)
|
|||||
Income
before income taxes
|
7.6
|
28.0
|
9.5
|
16.2
|
|||||||||
Income
tax expense
|
(1.2
|
)
|
(9.3
|
)
|
(2.4
|
)
|
(5.3
|
)
|
|||||
Income
before accretion expense
|
6.4
|
18.7
|
7.1
|
10.9
|
|||||||||
Accretion
of Class B common convertible to senior
|
|||||||||||||
subordinated
notes
|
(1.0
|
)
|
(0.9
|
)
|
(0.9
|
)
|
(0.9
|
)
|
|||||
Net
income available to common stockholders
|
5.4
|
%
|
17.8
|
%
|
6.2
|
%
|
10.0
|
%
|
Three
Months Ended June 30,
|
Change
|
||||||||||||
2005
|
2006
|
Amount
|
Percent
|
||||||||||
(dollars
in thousands)
|
|||||||||||||
Local
services
|
$
|
4,341
|
$
|
4,325
|
$
|
(16
|
)
|
(0.4
|
)%
|
||||
Network
access
|
5,235
|
5,171
|
(64
|
)
|
(1.2
|
)
|
|||||||
Cable
television
|
516
|
538
|
22
|
4.3
|
|||||||||
Internet
|
1,350
|
1,524
|
174
|
12.9
|
|||||||||
Total
|
$
|
11,442
|
$
|
11,558
|
$
|
116
|
1.0
|
Six
Months Ended June 30,
|
Change
|
||||||||||||
2005
|
2006
|
Amount
|
Percent
|
||||||||||
(dollars
in thousands)
|
|||||||||||||
Local
services
|
$
|
8,769
|
$
|
8,655
|
$
|
(114
|
)
|
(1.3
|
)%
|
||||
Network
access
|
10,965
|
10,316
|
(649
|
)
|
(5.9
|
)
|
|||||||
Cable
television
|
1,012
|
1,081
|
69
|
6.8
|
|||||||||
Internet
|
2,723
|
3,019
|
296
|
10.9
|
|||||||||
Total
|
$
|
23,469
|
$
|
23,071
|
$
|
(398
|
)
|
(1.7
|
)
|
Three
Months Ended June 30,
|
Change
|
||||||||||||
2005
|
2006
|
Amount
|
Percent
|
||||||||||
(dollars
in thousands)
|
|||||||||||||
Cost
of services and products
|
$
|
3,020
|
$
|
3,185
|
$
|
165
|
5.5
|
%
|
|||||
Selling,
general and administrative expenses
|
1,512
|
1,483
|
(29
|
)
|
(1.9
|
)
|
|||||||
Depreciation
and amortization
|
2,371
|
2,353
|
(18
|
)
|
(0.8
|
)
|
|||||||
Total
|
$
|
6,903
|
$
|
7,021
|
$
|
118
|
1.7
|
Six
Months Ended June 30,
|
Change
|
||||||||||||
2005
|
2006
|
Amount
|
Percent
|
||||||||||
(dollars
in thousands)
|
|||||||||||||
Cost
of services and products
|
$
|
6,074
|
$
|
6,362
|
$
|
288
|
4.7
|
%
|
|||||
Selling,
general and administrative expenses
|
3,327
|
3,153
|
(174
|
)
|
(5.2
|
)
|
|||||||
Depreciation
and amortization
|
4,736
|
4,664
|
(72
|
)
|
(1.5
|
)
|
|||||||
Total
|
$
|
14,137
|
$
|
14,179
|
$
|
42
|
0.3
|
Votes
For
|
Votes
Withheld
|
||||||
John
P. Kunz
|
8,780,933
|
115,995
|
|||||
Andrew
Meyers
|
8,812,300
|
84,628
|
Votes
For
|
Votes
Against
|
Abstain
|
Broker
Non-Vote
|
||||||||||
Ratification
of appointment of independent
|
|
|
|
|
|||||||||
registered
public accounting firm
|
8,831,735
|
23,991
|
41,202
|
0
|
Date: August 9, 2006 | OTELCO INC. | |
|
|
|
By: | /s/ Curtis L. Garner, Jr. | |
Curtis L. Garner, Jr. |
||
Chief Financial Officer |
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
|