Otelco Reports First Quarter 2010 Results

ONEONTA, AL, May 5 /CNW/ - Otelco Inc. (NASDAQ: OTT)(TSX: OTT.un), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia, today announced results for its first quarter ended March 31, 2010. Key highlights for Otelco include:

    
    -   Total revenues of $25.8 million for first quarter 2010.
    -   Operating income of $5.9 million for first quarter 2010.
    -   Adjusted EBITDA (as defined below) of $12.3 million for first quarter
        2010.
    

"Otelco started 2010 with an increase in revenue over the same period in 2009 plus quarter over quarter and sequential growth in EBITDA," said Mike Weaver, President and Chief Executive Officer of Otelco. "In first quarter 2010, revenue grew 1.2% and Adjusted EBITDA grew 7.2% compared to first quarter 2009. As a result of growth in data lines and CLEC operations, our access line equivalents grew 0.2% for the enterprise. In addition, our RLEC operations experienced an improvement in the trend of line loss as the rate of decline was 0.2% which compares favorably with a decline of 0.7% in the fourth quarter 2009.

"In the next few months, our New England operations will become known as OTT Communications, reflecting the complete and successful integration of our Company in this geographic area," continued Weaver. "The name reflects our goal of one team serving the diverse needs of our expanding customer base through innovative services.

"Our cash position increased by $3.5 million during the first quarter, with capital investments in the business of $1.8 million. These investments were concentrated in New England as we started the process of building out new collocation sites in Maine and New Hampshire," said Weaver. "These expansion sites position us well to both add customers and control costs.

"The increase in Adjusted EBITDA to $12.3 million reflects the implementation of operational synergies since first quarter of last year and continued growth in our CLEC operations. In spite of the stagnant economic conditions in our local rural markets, we are starting the year on target with our growth plans for 2010 in each territory," Weaver concluded. "As evidenced by our growth in cash and the twenty-first consecutive IDS dividend, we remain committed to building value for and returning cash to our shareholders."

    
    Distribution to Income Deposit Security Holders
    -----------------------------------------------
    

Each quarter, the Board will consider the declaration of dividends during its normally scheduled meeting. For this quarter, the Board is meeting on May 13, 2010. The scheduled interest and any dividend declared will be paid on June 30, 2010, to holders of record as of the close of business on June 15, 2010. The interest payment will cover the period from March 30, 2009, through June 29, 2010. Currently, it is anticipated that the Company's dividends in 2010 will continue to be treated as a return of capital for tax purposes. The Company has made twenty-one successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December 2004.

    
                     First Quarter 2010 Financial Summary
               (Dollars in thousands, except per share amounts)

                                                                Change
                                                          -------------------
                                       1Q 2009   1Q 2010    Amount   Percent
    -------------------------------------------------------------------------

    Revenues                          $ 25,500  $ 25,794  $    294      1.2%
    Operating income                  $  4,465  $  5,869  $  1,404     31.4%
    Interest expense                  $ (6,599) $ (5,989) $   (610)   (9.2)%
    Net loss available to
     stockholders                     $ (1,834) $   (386) $  1,448        *
      Basic net loss per share        $  (0.14) $  (0.03) $   0.11        *
      Diluted net loss per share      $  (0.14) $  (0.03) $   0.11        *

    Adjusted EBITDA(a)                $ 11,502  $ 12,331  $    829      7.2%
    Capital expenditures              $  1,229  $  1,753  $    524     42.6%

    * Not a meaningful calculation



    Reconciliation of Adjusted EBITDA to Net Loss
    ---------------------------------------------

                                                         Three Months Ended
                                                               March 31,
                                                          2009          2010
                                                  ------------- -------------

    Net loss                                      $     (1,834) $       (386)
    Add:
      Depreciation                                       3,681         3,573
      Interest expense - net of premium                  5,917         5,651
      Interest expense - caplet cost                       344             -
      Interest expense - amortize loan cost                338           338
      Income tax benefit                                (1,025)         (262)
      Change in fair value of derivatives                  951           886
      Loan fees                                             19            19
      Amortization - intangibles                         3,111         2,512
    Adjusted EBITDA                               $     11,502  $     12,331

    (a) Adjusted EBITDA is defined as consolidated net income (loss) plus
        interest expense, depreciation and amortization, income taxes and
        certain non-recurring fees, expenses or charges and other non-cash
        charges reducing consolidated net income. Adjusted EBITDA is not a
        measure calculated in accordance with generally acceptable accounting
        principles (GAAP). While providing useful information, Adjusted
        EBITDA should not be considered in isolation or as a substitute for
        consolidated statement of operations data prepared in accordance with
        GAAP. The Company believes Adjusted EBITDA is useful as a tool to
        analyze the Company on the basis of operating performance and
        leverage. The definition of Adjusted EBITDA corresponds to the
        definition of Adjusted EBITDA in the indenture governing the
        Company's senior subordinated notes and its credit facility and
        certain of the covenants contained therein. The Company's
        presentation of Adjusted EBITDA may not be comparable to similarly
        titled measures used by other companies.



    Otelco Inc. - Key Operating Statistics
    --------------------------------------

                                                                     Quarter
                                           December 31,   March 31, % Change
    Key Operating Statistics              2008      2009      2010      2010
                                      --------- --------- --------- ---------
    RLEC access lines:
      Voice lines                       51,530    48,215    47,552    (1.4)%
      Data lines                        18,709    20,066    20,614      2.7%
                                      --------- --------- ---------
      RLEC access line equivalents(1)   70,239    68,281    68,166    (0.2)%

    CLEC access lines:
      Voice lines                       26,558    28,647    28,889      0.8%
      Data lines                         3,246     3,428     3,467      1.1%
                                      --------- --------- ---------
        CLEC access line
         equivalents(1)                 29,804    32,075    32,356      0.9%

    Otelco access line equivalents(1)  100,043   100,356   100,522      0.2%
                                      --------- --------- --------- ---------
                                      --------- --------- --------- ---------

    Cable television customers           4,082     4,195     4,239      1.0%
    Wholesale network connections       98,187   132,324   137,318      3.8%
    Other internet customers(2)         11,864     9,116     8,528    (6.5)%

    (1) We define access line equivalents as voice access lines and data
        access lines (including cable modems, digital subscriber lines, and
        dedicated data access trunks).

    (2) Includes dial-up Internet customers of 9,213, 6,439 and 5,765 and
        digital high-speed data customers of 1,468, 1,891 and 2,107 for
        December 31, 2008, December 31, 2009 and March 31, 2010,
        respectively, that are outside of our traditional service territories
        and dial-up Internet customers of 1,183, 786 and 656 for December 31,
        2008, December 31, 2009 and March 31, 2010, respectively, that are in
        our traditional service territories.
    

FINANCIAL DISCUSSION FOR FIRST QUARTER 2010:

    
    Revenue
    -------
    

Total revenues grew 1.2% in the three months ended March 31, 2010, to $25.8 million from $25.5 million in the three months ended March 31, 2009. The growth in revenue was primarily associated with growth in CLEC sales in Maine and New Hampshire, as well as selective price increases, partially offset by declines in RLEC subscribers. Local services revenue grew 3.2% in the first quarter to $12.2 million from $11.9 million in the quarter ended March 31, 2009. Growth in CLEC revenue of $0.8 million was partially offset by lower RLEC voice access lines. Network access revenue decreased 1.4% in the first quarter to $8.0 million from $8.1 million in the quarter ended March 31, 2009. Special circuits access decreased $0.4 million, partially offset by an increase of $0.3 million in switched interstate and intrastate access. Cable television revenue in the three months ended March 31, 2010, increased 9.8% to $0.7 million from $0.6 million in first quarter 2009. Growth in IPTV subscribers and the shift to high definition services in Alabama exceeded attrition in basic customers as a result of the sluggish economy. Internet revenue for the first quarter 2010 decreased 0.8%, remaining at $3.5 million for both periods. Growth in broadband data lines was offset be the loss of dial-up subscribers. Transport services revenue declined slightly by 0.7%, holding at $1.4 million in both periods.

    
    Operating Expenses
    ------------------
    

Operating expenses in the three months ended March 31, 2010, decreased 5.3% to $19.9 million from $21.0 million in the three months ended March 31, 2009. Cost of services decreased 0.5% to $10.6 million in the quarter ended March 31, 2010, from $10.7 million in the same period last year. Synergies from the Country Road acquisition, including network consolidation were partially offset by higher cable programming costs, sales commissions and long distance costs in Missouri. Implementation of organization synergies, including lower advertising and long distance costs in Maine, offset approximately $0.7 million of the increase. Selling, general and administrative expenses decreased 9.7% to $3.2 million in the three months ended March 31, 2010, from $3.6 million in the three months ended March 31, 2009. The decrease reflects synergies from completion of integrating the Country Road acquisition and lower additions to the uncollectible reserve. These savings were partially offset by higher salaries and human resources, regulatory and IT increases. Depreciation and amortization for first quarter 2010 decreased 10.4% to $6.1 million from $6.8 million in the first quarter 2009. Amortization of intangible assets associated with the Country Road acquisition decreased $0.6 million, including a covenant not to compete and contract customer base assets. The remaining decrease of $0.1 million reflected lower depreciation of plant assets in Alabama.

    
    Interest Expense
    ----------------
    

Interest expense decreased 9.2% to $6.0 million in the quarter ended March 31, 2010, from $6.6 million a year ago. Half of the decline reflects the interest rate caplet expense present in first quarter 2009 that was fully expensed in 2009. The difference reflects a reduction of $5.0 million in principal from 2009 to 2010 and lower LIBOR rates, partially offset by fixed rate swap impact of our second swap which became effective in February 2010. The interest rate swaps limit the Company's exposure to changes in interest rates through February 2012.

    
    Change in Fair Value of Derivatives
    -----------------------------------
    

As a requirement of the existing senior debt, the Company has two interest rate swap agreements intended to hedge changes in interest rates on its senior debt. The swap agreements do not qualify for hedge accounting under the technical requirements of Accounting Standards Codification 815. Changes in value for the two swaps are reflected in change in the fair value of derivatives on the income statement and have no impact on cash. Over the life of the swaps, the change in value will be zero, with no impact on Adjusted EBITDA or operations. The value of the swaps declined $0.9 million in first quarter 2010 compared to a decline of $1.0 million in the same period of 2009.

    
    Adjusted EBITDA
    ---------------
    

Adjusted EBITDA for the three months ended March 31, 2010, was $12.3 million compared to $11.5 million for the same period in 2009, and $12.2 million in the fourth quarter of 2009. See financial tables for a reconciliation of Adjusted EBITDA to net loss.

    
    Balance Sheet
    -------------
    

As of March 31, 2010, the Company had cash and cash equivalents of $21.2 million compared to $17.7 million at the end of 2009. Total long-term notes payable was unchanged at $273.7 million. The Company continues to meet all of its loan covenants. The Company expects to convert the Class B shares into IDS units during second quarter 2010, as requested by the Class B shareowners. The first quarter distribution of $5.3 million in interest and dividends to our shareowners and $0.3 million in interest to our bond holders occurred on March 31, 2010. This represents the twenty-first consecutive quarterly distribution since going public in December 2004.

    
    Capital Expenditures
    --------------------
    

Capital expenditures were $1.8 million for the quarter, up $0.5 million from first quarter 2009 and down from $3.2 million in fourth quarter 2009. The Company is expanding its CLEC capabilities in Maine and New Hampshire; enhancing DSL capacity; and expanding IPTV capability in Alabama.

    
    First Quarter Earnings Conference Call
    --------------------------------------
    

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Thursday, May 6, 2010, at 11:00 a.m. ET. To participate in the call, dial (913) 312-0391 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the Internet by visiting the Company's Web site at www.OtelcoInc.com or www.earnings.com. To listen to the live call online, please visit the Web site at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live Web cast, a replay of the Web cast will be available on the Company's website at www.OtelcoInc.com or www.earnings.com for 30 days. A one-week telephonic replay may also be accessed by calling 719-457-0820 and using the passcode 4567897.

ABOUT OTELCO

Otelco Inc., headquartered in Oneonta, Alabama, provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia. The Company's services include local and long distance telephone, network access, transport, digital high-speed data lines and dial-up Internet access, cable television and other telephone related services. With more than 100,000 voice and data access lines, which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines. Otelco operates ten incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services through several subsidiaries. For more information, visit the Company's web site at www.OtelcoInc.com.

FORWARD LOOKING STATEMENTS

Statements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes", "belief," "expects," "intends," "anticipates," "plans," or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's filings with the Securities and Exchange Commission.

    
                                 OTELCO INC.
                         Consolidated Balance Sheets

                                                         As of        As of
                                                   December 31,    March 31,
                                                          2009         2010
                                                  ------------- -------------
                                                                  (unaudited)
    Assets
      Current assets
        Cash and cash equivalents                 $ 17,731,044  $ 21,204,781
        Accounts receivable:
          Due from subscribers, net of allowance
           for doubtful accounts of $473,572 and
           $411,964 respectively                     4,650,909     4,307,278
          Unbilled receivables                       2,444,979     2,438,340
          Other                                      3,200,945     3,137,048
        Materials and supplies                       1,969,966     2,056,125
        Prepaid expenses                             1,342,249     1,368,752
        Income tax receivable                          389,486             -
        Deferred income taxes                          744,531       744,531
                                                  ------------- -------------
          Total current assets                      32,474,109    35,256,855
                                                  ------------- -------------

        Property and equipment, net                 69,028,973    66,826,868
        Goodwill                                   188,190,078   188,190,078
        Intangible assets, net                      34,218,115    32,096,989
        Investments                                  1,991,158     1,984,781
        Deferred financing costs                     6,964,015     6,626,038
        Deferred income taxes                        4,482,430     4,482,430
        Other assets                                   179,325       149,472
                                                  ------------- -------------
          Total assets                            $337,528,203  $335,613,511
                                                  ------------- -------------
                                                  ------------- -------------

    Liabilities and Stockholders' Equity
      Current liabilities
        Accounts payable                          $  3,145,728  $  3,205,704
        Accrued expenses                             6,167,023     5,919,142
        Advanced billings and payments               1,665,422     1,694,474
        Deferred income taxes                          394,850       394,850
        Customer deposits                              172,109       182,719
                                                  ------------- -------------
          Total current liabilities                 11,545,132    11,396,889
                                                  ------------- -------------
      Deferred income taxes                         42,239,262    42,239,262
      Interest rate swaps                            1,592,813     2,478,983
      Advance billings and payments                    698,352       688,006
      Other liabilities                                165,968       165,709
      Long-term notes payable                      273,717,301   273,695,215
                                                  ------------- -------------
        Total liabilities                          329,958,828   330,664,064
                                                  ------------- -------------

      Class B common convertible to senior
       subordinated notes                            4,085,033     4,085,033

      Stockholders' equity
        Class A Common stock, $.01 par value-
         authorized 20,000,000 shares; issued
         and outstanding 12,676,733 shares             126,767       126,767
        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                  10,340,862     8,106,588
        Retained deficit                            (6,988,734)   (7,374,388)
                                                  ------------- -------------

          Total stockholders' equity                 3,484,342       864,414
                                                  ------------- -------------
          Total liabilities and stockholders'
           equity                                 $337,528,203  $335,613,511
                                                  ------------- -------------
                                                  ------------- -------------



                                 OTELCO INC.
                    Consolidated Statements of Operations
                                 (unaudited)

                                                        Three Months Ended
                                                              March 31,
                                                  ---------------------------
                                                          2009          2010
                                                  ------------- -------------
    Revenues
      Local services                              $ 11,854,980  $ 12,238,674
      Network access                                 8,094,133     7,984,968
      Cable television                                 606,687       665,835
      Internet                                       3,541,677     3,511,106
      Transport services                             1,402,699     1,393,626
                                                  ------------- -------------
        Total revenues                              25,500,176    25,794,209
                                                  ------------- -------------

    Operating expenses
      Cost of services and products                 10,666,456    10,610,193
      Selling, general and administrative expenses   3,576,674     3,230,996
      Depreciation and amortization                  6,791,839     6,084,291
                                                  ------------- -------------
        Total operating expenses                    21,034,969    19,925,480
                                                  ------------- -------------

    Income from operations                           4,465,207     5,868,729
                                                  ------------- -------------

    Other income (expense)
      Interest expense                              (6,598,953)   (5,988,642)
      Change in fair value of derivative              (951,103)     (886,170)
      Other income                                     225,860       358,832
                                                  ------------- -------------
        Total other expense                         (7,324,196)   (6,515,980)
                                                  ------------- -------------

    Loss before income taxes                        (2,858,989)     (647,251)

    Income tax benefit                               1,024,953       261,595
                                                  ------------- -------------

    Net loss available to common stockholders     $ (1,834,036) $   (385,656)
                                                  ------------- -------------
                                                  ------------- -------------

    Weighted average shares outstanding:
      Basic                                         12,676,733    12,676,733
      Diluted                                       13,221,404    13,221,404

    Net loss per share:
      Basic                                       $      (0.14) $      (0.03)
      Diluted                                     $      (0.14) $      (0.03)
      Dividends declared per share                $       0.18  $       0.18



                                 OTELCO INC.
                    Consolidated Statements of Cash Flows
                                 (unaudited)

                                                        Three Months Ended
                                                              March 31,
                                                          2009          2010
                                                  ------------- -------------
    Cash flows from operating activities:
      Net loss                                    $ (1,834,036) $   (385,656)
      Adjustments to reconcile net income to cash
       flows from operating activities:
        Depreciation                                 3,680,873     3,572,918
        Amortization                                 3,110,966     2,511,373
        Interest rate caplet                           344,082             -
        Amortization of debt premium                   (19,671)      (22,086)
        Amortization of loan costs                     337,976       337,976
        Change in fair value of derivatives            951,103       886,170
        Provision for uncollectible revenue             58,691        77,045
        Changes in assets and liabilities; net
         of assets and liabilities acquired:
          Accounts receivables                         129,927       365,460
          Material and supplies                         (7,465)      (86,159)
          Income tax receivable                              -       389,486
          Prepaid expenses and other assets            210,917       (26,503)
          Accounts payable and accrued liabilities    (589,196)     (187,900)
          Advance billings and payments                (13,595)       18,706
          Other liabilities                            (14,921)       10,351
                                                  ------------- -------------
            Net cash from operating activities       6,345,651     7,461,181
                                                  ------------- -------------
    Cash flows from investing activities:
      Acquisition and construction of property
       and equipment                                (1,228,751)   (1,753,170)
                                                  ------------- -------------
        Net cash used in investing activities       (1,228,751)   (1,753,170)
                                                  ------------- -------------

    Cash flows from financing activities:
      Cash dividends paid                           (2,234,274)   (2,234,274)
                                                  ------------- -------------
        Net cash used in financing activities       (2,234,274)   (2,234,274)
                                                  ------------- -------------

    Net increase in cash and cash equivalents        2,882,626     3,473,737
    Cash and cash equivalents, beginning of period  13,542,255    17,731,044
                                                  ------------- -------------

    Cash and cash equivalents, end of period      $ 16,424,881  $ 21,204,781
                                                  ------------- -------------
                                                  ------------- -------------

    Supplemental disclosures of cash flow
     information:
      Interest paid                               $  6,215,276  $  5,569,134
                                                  ------------- -------------
                                                  ------------- -------------

      Income taxes received                       $    (61,342) $   (326,486)
                                                  ------------- -------------
                                                  ------------- -------------
    

SOURCE Otelco Inc.

For further information: For further information: Curtis Garner, Chief Financial Officer, Otelco Inc., (205) 625-3571, Curtis@otelcotel.com

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