Otelco Reports Fourth Quarter and Year 2008 Results



    ONEONTA, AL, Feb. 17 /CNW/ - Otelco Inc. (NASDAQ:   OTT; TSX: OTT.un), a
wireline telecommunications services provider in Alabama, Maine,
Massachusetts, Missouri and West Virginia, today announced results for its
fourth quarter and year ended December 31, 2008. The results include the
Company's announced acquisition of three Country Road Communications LLC
entities as of October 31, 2008. Key quarterly and annual highlights for
Otelco include:

    
    -   Total revenues of $23.3 million for fourth quarter and $77.1 million
        for 2008.
    -   Operating income of $5.3 million for fourth quarter and $21.1 million
        for 2008.
    -   Adjusted EBITDA (as defined below) of $11.0 million for fourth
        quarter and $37.4 million for 2008.
    

    "We are pleased with our fourth quarter results as both our operating and
financial metrics experienced growth," stated Mike Weaver, President and Chief
Executive Officer of Otelco. "We completed the acquisition of the Country Road
entities on favorable financial terms, significantly increasing our presence
in New England. The acquisition adds over 29,000 voice and data access lines,
bringing the combined Company to over 100,000 voice and data access lines. The
acquisition also added more than 98,000 wholesale network connections,
significantly expanding our switching capability and providing additional
network scale, particularly in New England. In the fourth quarter, the
combined Maine CLEC entities added over 1,400 voice and data access lines.
    "Revenue increased 30.7% in the fourth quarter compared to last year,
putting us on a trajectory to exceed $100 million for 2009. Adjusted EBITDA
was $11.0 million for the quarter, including $2.2 million from the
acquisition, and $37.4 million for the year, a growth of 26.6% for the quarter
and 7.9% for the year," added Weaver. "Our senior debt agreement has a
maturity date of October 2013. The lower market interest rates have allowed us
to hedge our interest expense into early 2012 at very favorable rates.
    "The integration process is moving forward on schedule. We remain focused
on this task and expect the process to be completed in the third quarter of
this year," noted Weaver. "As evidenced by our sixteenth consecutive IDS
distribution payment in December, we remain committed to 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
February 20, 2009. The scheduled interest and any dividend declared will be
paid on March 30, 2009 to holders of record as of the close of business on
March 16, 2009. The interest payment will cover the period from December 30,
2008 through March 29, 2009. Currently, it is anticipated that the Company's
dividends in 2009 will continue to be treated as a return of capital for tax
purposes. The Company has made sixteen successive quarterly distributions of
dividends and interest since its IDS units were originally offered to the
public in December 2004.

    
                    Fourth Quarter 2008 Financial Summary
               (Dollars in thousands, except per share amounts)

                                                             Change
                                                    -------------------------
                              4Q 2007      4Q 2008       Amount      Percent
    -------------------------------------------------------------------------

    Revenues              $    17,864  $    23,349  $     5,485        30.7%
    Operating income      $     4,989  $     5,276  $       287         5.8%
    Interest expense      $    (4,745) $    (7,578) $     2,833        59.7%
    Net income available
     to stockholders      $     1,070  $    (1,390) $    (2,460)    (229.9)%
    Basic net income
     per share            $      0.08  $     (0.11) $     (0.19)        (*)%
    Diluted net income
     per share            $      0.04  $     (0.13) $     (0.17)        (*)%

    Adjusted EBITDA(a)    $     8,708  $    11,020  $     2,312        26.6%
    Capital expenditures  $     2,186  $     2,395  $       209         9.6%


                                                             Change
                                                    -------------------------
                                 2007         2008       Amount      Percent
    -------------------------------------------------------------------------

    Revenues              $    69,749  $    77,115  $     7,366        10.6%
    Operating income      $    19,266  $    21,087  $     1,821         9.5%
    Interest expense      $   (21,378) $   (21,808) $       430         2.0%
    Net income available
     to stockholders      $       179  $       214  $        35        19.6%
    Basic net income
     per share            $      0.02  $      0.02  $         -           -%
    Diluted net income
     per share            $     (0.10) $     (0.03) $      0.07         (*)%

    Adjusted EBITDA(a)    $    34,636  $    37,366  $     2,730         7.9%
    Capital expenditures  $     6,572  $     9,244  $     2,672        40.7%

        (*) Not a meaningful calculation


    Reconciliation of Adjusted EBITDA to Net Income
    -----------------------------------------------

                                Three Months Ended       Twelve Months Ended
                                    December 31,              December 31,
                                 2007         2008         2007         2008
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA
    Net Income            $     1,070  $    (1,390) $       179  $       214
    Add: Depreciation           2,818        3,497       11,752       11,772
         Interest Expense,
          net of premium        4,155        5,516       17,881       17,905
         Interest Expense -
          Caplet Cost             217          307          891        1,029
         Interest Expense -
          Amortize Loan
          Cost                    373        1,755        2,606        2,874
         Gain/Loss from
          Investments               -            -            -          (45)
         Income Tax Expense
          (Benefit)              (277)        (667)        (374)          29
         Change in Fair Value
          of Derivatives         (316)        (224)        (970)        (324)
         Loan Fees                 19           19           76           76
         Amortization -
          Intangibles             649        2,207        2,254        3,836
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA       $     8,708  $    11,020  $    34,636  $    37,366
      Less: Acquired
       Entity                       -        2,193            -        2,193
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA
     w/o acquisition      $     8,708  $     8,827  $    34,636  $    35,173
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    (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. (including Acquired Entities at date of acquisition)
    ----------------------------------------------------------------

                                                                     Quarter
    Key Operating                         Sept. 30,     Dec. 31,    % Change
     Statistics                  2007         2008         2008         2008
                          ------------ ------------ ------------ ------------
    RLEC access lines:
      Voice lines              36,687       35,600       51,530        44.7%
      Data lines               12,160       13,395       18,709        39.7%
                          ------------ ------------ ------------ ------------
      RLEC access line
       equivalents(1)          48,847       48,995       70,239        43.4%

    CLEC access lines:
      Voice lines              16,973       18,229       26,558        45.7%
      Data lines                2,571        2,864        3,246        13.3%
                          ------------ ------------ ------------ ------------
      CLEC access line
       equivalents(1)          19,544       21,093       29,804        41.3%

    Otelco access line
     equivalents(1)            68,391       70,088      100,043        42.7%
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Cable television
     customers                  4,169        4,115        4,082       (0.8)%
    Wholesale network
     connections                    -            -       98,187         (*)%
    Dial-up internet
     customers                 15,249       12,537       11,864       (5.4)%

         (*) Not a meaningful calculation

    (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).

    Country Road Communications LLC Acquired Entities
    -------------------------------------------------

                                           Oct. 31,     Dec. 31,    % Change
    Key Operating Statistics                  2008         2008         2008
                                       ------------ ------------ ------------
    RLEC access lines:
      Voice lines                           16,933       16,360       (3.4)%
      Data lines                             5,229        5,158       (1.4)%
                                       ------------ ------------ ------------
      RLEC access line equivalents(1)       22,162       21,518       (2.9)%

    CLEC access lines:
      Voice lines                            6,583        7,707        17.1%
      Data lines                               367          391         6.5%
                                       ------------ ------------ ------------
      CLEC access line
       equivalents(1)                        6,950        8,098        16.5%

    Acquired access line equivalents(1)     29,112       29,616         1.7%
                                       ------------ ------------ ------------
                                       ------------ ------------ ------------

    Wholesale network connections           93,994       98,187         4.5%
    Dial-up internet customers                 251          214      (14.7)%

    (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).


    FINANCIAL DISCUSSION FOR FOURTH QUARTER 2008:

    All financial information includes three entities acquired from Country
    -----------------------------------------------------------------------
    Road Communications LLC on and as of October 31, 2008.
    ------------------------------------------------------

    Revenue
    -------
    
    Total revenues grew 30.7% in the three months ended December 31, 2008 to
$23.3 million from $17.9 million in the three months ended December 31, 2007.
The growth in revenue was associated with the acquisition. Local services
revenue grew 48.0% in the fourth quarter to $9.9 million from $6.7 million in
the quarter ended December 31, 2007. The acquisition provided an increase of
$3.5 million for the quarter. Network access revenue increased 23.4% in the
fourth quarter to $8.0 million from $6.5 million in the quarter ended December
31, 2007. The acquisition provided an increase of $1.6 million for the
quarter. Cable television revenue for the existing subsidiaries in the three
months ended December 31, 2008 increased 24.8% to just under $0.7 million from
just over $0.5 million in the three months ended December 31, 2007. Internet
revenue for the fourth quarter 2008 increased 14.0% to $3.4 million from $3.0
million in the quarter ended December 31, 2007, primarily associated with the
acquisition. Transport services revenue for the existing subsidiaries grew
16.7% to over $1.3 million in the three months ended December 31, 2008 from
just under $1.2 million in the same period in 2007.

    
    Operating Expenses
    ------------------
    
    Operating expenses in the three months ended December 31, 2008 increased
40.4% to $18.1 million from $12.9 million in the three months ended December
31, 2007. Cost of services increased 38.8% to $9.1 million in the quarter
ending December 31, 2008 from $6.6 million in the same period last year,
included $2.7 million from the acquisition and a reduction of $0.2 million
from the existing units. Selling, general and administrative expenses
increased 14.5% to $3.2 million in the quarter ended December 31, 2008 from
$2.8 million in the quarter ended December 31, 2007. Selling, general and
administrative included $0.6 million from the acquisition and a reduction of
$0.2 million from the existing units. Depreciation and amortization for fourth
quarter increased 64.5% to $5.7 million from $3.5 million. Depreciation and
amortization included $2.5 million from the acquisition including amortization
of intangible assets acquired and a reduction of $0.3 million from the
existing units.

    
    Interest Expense
    ----------------
    Interest expense increased 59.7% to $7.6 million in the quarter ended
December 31, 2008 from $4.7 million a year ago. The results reflect $1.4
million in one time amortization of loan costs for extinguished loans. The
balance reflects the increased senior debt associated with the acquisition.

    Adjusted EBITDA
    ---------------
    
    Adjusted EBITDA for the three months ended December 31, 2008 was $11.0
million compared to $8.7 million for the same period in 2007. Adjusted EBITDA
included $2.2 million from the acquisition and an increase of $0.1 million
from the existing units. For the year ended December 31, 2008, Adjusted EBITDA
was $37.4 million, an increase of 7.9% from $34.6 million the year ended
December 31, 2007. See financial tables for a reconciliation of Adjusted
EBITDA to net income.

    
    Balance Sheet
    -------------
    
    As of December 31, 2008, the Company had cash and cash equivalents of
$13.5 million compared to $12.8 million at the end of 2007. Total long-term
debt increased to $278.8 million, reflecting the acquisition. The fourth
quarter distribution of $5.3 million in interest and dividends to our share
owners and $0.3 million to our bond holders occurred on December 30, 2008.
This represents the sixteenth consecutive quarterly distribution since going
public in December 2004.

    
    Capital Expenditures
    --------------------
    Capital expenditures were $2.4 million for the quarter and $9.2 million
for all of 2008. In addition to the acquisition, the Company completed the
initial deployment of IPTV in Alabama; added DSL capacity in each subsidiary;
added 43 miles to its fiber backbone in Maine; purchased competitive customer
specific equipment; and upgraded other network and switching facilities.

    Selected Information on Acquisition
    -----------------------------------

    Otelco's results include two months of the results of the entities
acquired from Country Road Communications LLC. Selected financial information
for those entities, as included in the reported Otelco financial statements,
is provided below.

    Revenue                               ($000)
                                       ------------
        Local services                 $     3,481
        Network access                       1,596
        Internet                               411
                                       ------------
    Total Revenue                      $     5,488

        Cost of services and products        2,733
        General and Administrative             563
                                       ------------

    Margin on revenue                  $     2,192

    Capital expenditures               $       123


    Fourth Quarter Earnings Conference Call
    ---------------------------------------
    
    Otelco has scheduled a conference call, which will be broadcast live over
the Internet, on Wednesday, February 18, 2009, at 11:00 a.m. ET. To
participate in the call, dial (913) 312-6691 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 3842477.

    ABOUT OTELCO

    Otelco Inc., headquartered in Oneonta, Alabama, provides wireline
telecommunications services in Alabama, Maine, Massachusetts, Missouri and
West Virginia. The Company's services include local and long distance
telephone, network access, transport, digital high-speed 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, each of which can trace its history as a local
telecommunications provider as far back as the early 1900s. 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,   December 31,
                                                         2007           2008
                                                -------------- --------------
    Assets
      Current assets
      Cash and cash equivalents                 $  12,810,497  $  13,542,255

      Accounts receivable:
        Due from subscribers, net of allowance
         for doubtful accounts of $257,862 and
         $318,446 respectively                      2,753,451      5,207,731
        Unbilled receivables                        2,616,867      2,567,730
        Other                                       1,760,207      4,348,044
      Materials and supplies                        1,991,724      2,305,755
      Prepaid expenses                              1,149,180      1,141,908
      Income tax receivable                           469,546        181,644
      Deferred income taxes                         1,486,439      6,725,068
                                                -------------- --------------
        Total current assets                       25,037,911     36,020,135
                                                -------------- --------------

      Property and equipment, net                  54,610,355     75,407,062
      Goodwill                                    134,570,435    189,334,837
      Intangible assets, net                        9,514,772     44,390,644
      Investments                                   1,207,183      2,015,583
      Deferred financing costs                      5,878,943      8,315,921
      Interest rate cap                             1,510,951          7,765
      Deferred charges                                155,573         49,540
                                                -------------- --------------
        Total assets                            $ 232,486,123  $ 355,541,487
                                                -------------- --------------
                                                -------------- --------------

    Liabilities and Stockholders' Equity
      Current liabilities
        Accounts payable                        $   2,058,989  $   2,312,920
        Accrued expenses                            3,716,880      6,632,287
        Advanced billings and payments              2,077,713      2,024,123
        Customer deposits                             185,147        180,582
                                                -------------- --------------
          Total current liabilities                 8,038,729     11,149,912
                                                -------------- --------------
      Deferred income taxes                        25,223,656     45,962,402
      Advance billings and payments                   797,498        739,736
      Other liabilities                               183,756        188,346
      Long-term notes payable                     170,019,705    278,799,513
                                                -------------- --------------
          Total liabilities                       204,263,344    336,839,909
                                                -------------- --------------

      Derivative liability                            814,005        238,054
      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                 28,215,056     19,277,959
        Retained deficit                           (4,084,797)    (3,870,923)
        Accumulated other comprehensive loss         (938,732)    (1,160,759)
                                                -------------- --------------
          Total stockholders' equity               23,323,741     14,378,491
                                                -------------- --------------
          Total liabilities and
           stockholders' equity                 $ 232,486,123  $ 355,541,487
                                                -------------- --------------
                                                -------------- --------------


                                 OTELCO INC.
                    Consolidated Statements of Operations

                              Three Months Ended       Twelve Months Ended
                                 December 31,              December 31,
                          ------------------------  ------------------------
                              2007         2008         2007         2008
                          -----------  -----------  -----------  -----------
    Revenues
      Local services      $ 6,709,706  $ 9,929,632  $26,101,800  $30,013,901
      Network access        6,490,828    8,011,824   25,670,619   27,281,727
      Cable television        541,087      675,428    2,184,072    2,388,885
      Internet              2,970,429    3,387,954   11,517,514   12,448,776
      Transport services    1,152,489    1,344,376    4,275,429    4,981,651
                          -----------  -----------  -----------  -----------
        Total revenues     17,864,539   23,349,214   69,749,434   77,114,940
                          -----------  -----------  -----------  -----------
    Operating expenses
      Cost of services
       and products         6,587,164    9,139,404   25,718,634   29,191,987
      Selling, general
       and administrative
       expenses             2,820,918    3,229,767   10,418,760   11,228,585
    Depreciation and
     amortization           3,467,108    5,704,024   14,346,620   15,607,726
                          -----------  -----------  -----------  -----------
      Total operating
       expenses            12,875,190   18,073,195   50,484,014   56,028,298
                          -----------  -----------  -----------  -----------

    Income from operations  4,989,349    5,276,019   19,265,420   21,086,642
                          -----------  -----------  -----------  -----------
    Other income (expense)
      Interest expense     (4,744,927)  (7,578,074) (21,378,434) (21,807,800)
      Change in fair
       value of
       derivative             315,809      224,271      970,281      324,058
      Other income            232,348       20,999      947,737      639,784
                          -----------  -----------  -----------  -----------
        Total other
         expense           (4,196,770)  (7,332,804) (19,460,416) (20,843,958)
                          -----------  -----------  -----------  -----------

    Income (loss) before
     income taxes             792,579   (2,056,785)    (194,996)     242,684

    Income tax benefit        277,296      667,239      374,375      (28,810)
                          -----------  -----------  -----------  -----------
    Net income (loss)
     available to common
     stockholders         $ 1,069,875  $(1,389,546) $   179,379  $   213,874
                          -----------  -----------  -----------  -----------
                          -----------  -----------  -----------  -----------

    Weighted average
     shares outstanding:
      Basic                12,676,733   12,676,733   11,156,185   12,676,733
      Diluted              13,221,404   13,221,404   11,700,856   13,221,404

    Net income (loss)
     per share:
      Basic               $      0.08  $     (0.11) $      0.02  $      0.02
      Diluted             $      0.04  $     (0.13) $     (0.10) $     (0.03)
    Dividends declared
     per share            $      0.18  $      0.18  $      0.71  $      0.71



                                 OTELCO INC.
                    Consolidated Statements of Cash Flows

                                                     Twelve Months Ended
                                                         December 31,
                                                     2007           2008
                                                -------------- --------------
    Cash flows from operating activities:
      Net income                                $     179,379  $     213,874
      Adjustments to reconcile
       net income to cash flows from
       operating activities:
        Depreciation                               11,751,673     11,772,191
        Amortization                                2,594,943      3,835,535
        Interest rate caplet                          890,840      1,029,264
        Amortization of debt premium                  (33,552)       (73,224)
        Amortization of loan costs                  2,606,422      2,874,164
        Change in fair value of derivative           (970,281)      (324,058)
        Provision for deferred income taxes          (208,771)      (114,845)
        Provision for uncollectible revenue           225,615        416,892
        Gain on early lease termination                     -       (121,124)
        Changes in assets and liabilities;
         net of assets and liabilities acquired:
          Accounts receivables                       (422,708)    (1,394,629)
          Material and supplies                      (183,373)      (124,010)
          Income tax receivable                      (469,546)       287,902
          Prepaid expenses and other assets           (86,233)       404,306
          Accounts payable and
           accrued liabilities                     (1,843,834)       143,551
          Advance billings and payments               755,510       (111,352)
          Other liabilities                           (15,630)       (25,909)
                                                -------------- --------------
            Net cash from operating activities     14,770,454     18,688,528
                                                -------------- --------------
    Cash flows from investing activities:
      Acquisition and construction of
       property and equipment                      (6,572,336)    (9,244,137)
      Proceeds from retirement of investment            7,557         (2,453)
      Payment for the purchase CR Companies,
       net of cash acquired                                 -   (108,677,338)
      Deferred charges/acquisition                   (110,923)        51,222
                                                -------------- --------------
            Net cash from investing activities     (6,675,702)  (117,872,706)
                                                -------------- --------------

    Cash flows from financing activities:
      Cash dividends paid                          (9,585,120)    (8,937,096)
      Proceeds from long-term notes payable                 -    108,853,032
      Direct cost of subsequent public offering    (2,314,980)             -
      Repayment of long-term notes payable        (55,353,032)             -
      Loan origination costs
       and transaction costs                       (1,832,972)             -
      Proceeds from issuance of
       Income Deposit Securities (IDS)             59,400,000              -
                                                -------------- --------------

            Net cash from financing activities     (9,686,104)    99,915,936
                                                -------------- --------------

    Net increase (decrease) in cash and
     cash equivalents                              (1,591,352)       731,758
    Cash and cash equivalents,
     beginning of period                           14,401,849     12,810,497
                                                -------------- --------------

    Cash and cash equivalents, end of period    $  12,810,497  $  13,542,255
                                                -------------- --------------
                                                -------------- --------------

    Supplemental disclosures of
     cash flow information:
      Interest paid                             $  20,636,959  $  17,267,118
                                                -------------- --------------
                                                -------------- --------------

      Income taxes received                     $    (133,218) $    (220,221)
                                                -------------- --------------
                                                -------------- --------------
    





For further information:

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

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