Otelco Reports Second Quarter 2008 Results



    ONEONTA, AL, Aug. 5 /CNW/ - Otelco Inc. (NASDAQ:   OTT; TSX: OTT.un), the
sole wireline telephone services provider in several rural communities in
Alabama, Maine and Missouri, today announced results for its second quarter
ended June 30, 2008. Key quarterly highlights for Otelco include:

    
    -   Total revenues of $17.7 million.
    -   Operating income of $5.0 million.
    -   Adjusted EBITDA (as defined below) of $8.5 million.
    

    "Our business provided solid revenue and subscriber growth which resulted
in a strong financial performance for second quarter," stated Mike Weaver,
President and Chief Executive Officer of Otelco. "Key operating highlights
include continued growth in access line equivalents when compared to last
quarter and last year, driven by increases in both RLEC data lines and CLEC
voice and data lines. Our bundled product offerings have increased to
approximately 40% of our eligible customers.
    "We also delivered solid increases in revenue and operating income, which
increased 3.2% and 14.1%, respectively, from the year-ago period and 3.6% and
10.8% respectively for the first half of 2008 compared to the same period in
2007. Adjusted EBITDA was $8.5 million for the quarter and $17.3 million
year-to-date, a 1.6% and 1.7% increase from the comparable periods last year,"
added Weaver. "Bottom line performance also improved from the year-ago period
as we reported net income of $0.4 million for the quarter and $0.8 million
year-to-date compared to a net loss of $0.1 million for the second quarter
2007 and a net loss of $0.2 million for the first half of 2007. We invested
over $1.5 million in our infrastructure to serve both our current and future
customers and delivered our fourteenth consecutive IDS distribution. That
demonstrates our continued focus on generating solid operating and financial
performance while also exploring strategic expansion opportunities to further
grow our business."

    Distribution to IDS Holders
    ---------------------------
    Each quarter, the Board considers the declaration of dividends during its
normally scheduled meeting. For the second quarter of 2008, the Board is
meeting on August 14, 2008. Currently, it is anticipated that the Company's
dividends will continue to be treated as a return of capital for tax purposes.
The scheduled interest and any dividend declared will be paid on
September 30, 2008 to holders of record as of the close of business on
September 15, 2008. The interest payment will cover the period from
June 30, 2008 through September 29, 2008.

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

                             Three Months Ended June 30,       Change
                                                        ---------------------
                                    2007        2008      Amount     Percent
    -------------------------------------------------------------------------

    Revenues                   $  17,118   $  17,669   $     551        3.2%
    Operating income           $   4,389   $   5,006   $     617       14.1%
    Interest expense           $  (5,412)  $  (4,773)  $    (639)    (11.8)%
    Net income (loss) available
     to stockholders           $    (105)  $     406   $     511        (*)%
      Basic net income (loss)
       per share               $   (0.01)  $    0.03   $     0.4        (*)%
      Diluted net income (loss)
       per share               $   (0.03)  $    0.02   $     0.5        (*)%
    Adjusted EBITDA(a)         $   8,349   $   8,479   $     130        1.6%
    Capital expenditures       $   1,501   $   1,534   $      33        2.2%


                              Six Months Ended June 30,         Change
                                                        ---------------------
                                YTD 2007    YTD 2008      Amount     Percent
    -------------------------------------------------------------------------

    Revenues                   $  34,291   $  35,528   $   1,237        3.6%
    Operating income           $   9,159   $  10,146   $     987       10.8%
    Interest expense           $ (10,789)  $  (9,456)  $  (1,333)    (12.4)%
    Net income (loss) available
     to stockholders           $    (223)  $     814   $   1,037        (*)%
    Basic net income (loss)
     per share                 $   (0.02)  $    0.06   $     0.8        (*)%
    Diluted net income (loss)
     per share                 $   (0.07)  $    0.05   $    0.12        (*)%
    Adjusted EBITDA(a)         $  17,049   $  17,333   $     284        1.7%
    Capital expenditures       $   2,876   $   3,947   $   1,071       37.2%

    (*) Not a meaningful calculation


    Reconciliation of Adjusted EBITDA to Net Income (Loss)
    ------------------------------------------------------

                                  Three Months Ended       Six Months Ended
                                        June 30,                June 30,
                                    2007        2008        2007        2008
                              ----------- ----------- ----------- -----------
    Adjusted EBITDA
    Net Income (Loss)          $    (105)  $     406   $    (223)  $     814
    Add: Depreciation              3,127       2,772       6,107       5,528
         Interest Expense - Net
          of Premium               4,774       4,179       9,525       8,276
         Interest Expense -
          Caplet Cost                240         240         468         470
         Interest Expense -
          Amortize Loan Cost         398         373         796         746
         Interest Expense -
          Premium                      -         (18)          -         (35)
         Gain/Loss from
          Investment                   -           -           -         (45)
         Income Tax Expense         (503)         57        (491)        232
         Change in Fair Value of
          Derivative                (250)       (167)       (468)         74
         Loan Fees                    19          19          38          38
         Amortization -
          Intangibles                649         618       1,297       1,235
                              ----------- ----------- ----------- -----------
    Adjusted EBITDA             $  8,349   $   8,479   $  17,049   $  17,333
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    (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.


                              Year Ended December 31,   March 31,    June 30,
                              -----------------------------------------------
    Key Operating Statistics        2006        2007        2008        2008
                              ----------- ----------- ----------- -----------
    RLEC access lines:
      Voice lines                 37,736      36,687      36,239      35,989
      Data lines                  10,016      12,160      12,729      13,065
                              ----------- ----------- ----------- -----------
        RLEC access line
         equivalents(1)           47,752      48,847      48,968      49,054

    CLEC access lines:
      Voice lines                 14,267      16,973      17,457      17,740
      Data lines                   2,016       2,571       2,602       2,735
                              ----------- ----------- ----------- -----------
    CLEC access line
     equivalents(1)               16,283      19,544      20,059      20,475

    Otelco access line
     equivalents(1)               64,035      68,391      69,027      69,529
                              ----------- ----------- ----------- -----------

    Cable television customers     4,188       4,169       4,175       4,109
    Dial-up internet customers    19,587      15,249      14,290      13,419

    (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 SECOND QUARTER 2008:

    Revenue
    -------
    Total revenues grew 3.2% in the three months ended June 30, 2008 to
$17.7 million from $17.1 million in the three months ended June 30, 2007. The
growth in revenue reflected growth in CLEC customers in Maine and increased
digital Internet lines throughout the areas we serve. Local services revenue
grew 2.8% in the second quarter 2008 to $6.7 million from $6.5 million in the
quarter ended June 30, 2007. Network access revenue remained constant in the
second quarter at $6.1 million compared with the quarter ended June 30, 2007.
Cable television revenue in the three months ended June 30, 2008 remained
constant at just over $0.5 million when compared to the three months ended
June 30, 2007. Internet revenue for the second quarter 2008 increased 6.0% to
$3.0 million from $2.9 million in the quarter ended June 30, 2007. Transport
services revenue grew 20.8% to $1.3 million in the three months ended
June 30, 2008 from $1.0 million in the same period in 2007.

    Operating Expenses
    ------------------
    Operating expenses in the three months ended June 30, 2008 decreased 0.5%
to slightly less than $12.7 million from just over $12.7 million in the three
months ended June 30, 2007. Cost of services increased 3.2% to $6.7 million
from $6.5 million in the quarter ended June 30, 2007. The cost associated with
increased CLEC revenue in Maine, increased long distance and Internet
bandwidth requirements to support additional market penetration, and higher
cost of living expense for our employees and energy were partially offset by
network and organizational efficiencies. Selling, general and administrative
expenses increased 4.4% to $2.5 million in the quarter ended June 30, 2008
from $2.4 million in the quarter ended June 30, 2007. Increased property taxes
and employee cost of living expense were partially offset by organizational
efficiencies. Depreciation and amortization for second quarter decreased 10.2%
to $3.4 million from $3.8 million.

    Interest Expense
    ----------------
    Interest expense decreased 11.8% to $4.8 million in the quarter ended
June 30, 2008 from $5.4 million in the same period a year ago, reflecting the
reduction in senior and total debt after the sale of 3,000,000 Income Deposit
Securities units in July 2007 and a lower margin on senior debt.

    Adjusted EBITDA
    ---------------
    Adjusted EBITDA for the three months ended June 30, 2008 was
$8.5 million, up 1.6% over the same period in 2007. See financial tables for a
reconciliation of Adjusted EBITDA to net income.

    Balance Sheet
    -------------
    As of June 30, 2008, the Company had cash and cash equivalents of
$12.8 million and total long-term debt of $170.0 million. The second quarter
distribution of $5.3 million in interest and dividends to our share owners and
$0.3 million to our bond holders occurred on June 30, 2008. This was the
Company's fourteenth consecutive distribution since going public in 2004.

    Capital Expenditures
    --------------------
    Capital expenditures were $1.5 million for the quarter. The Company added
enhanced network capability to serve competitive customers in Maine; continued
to upgrade its rural facilities in all three states, including additional data
line capacity; and other upgrades to its network and switching facilities.

    Second Quarter Earnings Conference Call
    ---------------------------------------
    Otelco has scheduled a conference call, which will be broadcast live over
the Internet, on Wednesday, August 6, 2008, at 11:00 a.m. ET. To participate
in the call, dial (913) 981-5573 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 5357214.

    ABOUT OTELCO

    Otelco Inc., headquartered in Oneonta, Alabama, provides wireline
telephone services in Alabama, Maine and Missouri. The Company's services
include local and long distance telephone, network access, transport, digital
high-speed data and dial-up Internet access, cable television and other
telephone related services. With more than 69,000 voice and data access lines,
which are collectively referred to as access line equivalents, Otelco is among
the top 40 largest local exchange carriers in the United States based on
number of access lines. Otelco operates six 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 telecommunications 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,      June 30,
                                                          2007          2008
                                                  ------------- -------------
                                                                  (unaudited)
    Assets
      Current Assets
        Cash and cash equivalents                 $ 12,810,497  $ 12,849,128
        Accounts receivable:
          Due from subscribers, net of allowance
           for doubtful accounts of $257,862 and
           $160,136, respectively                    2,753,451     2,709,891
          Unbilled receivables                       2,616,867     2,617,230
          Other                                      1,760,207     1,839,017
        Materials and supplies                       1,991,724     2,275,760
        Prepaid expenses                             1,149,180       722,378
        Income tax receivable                          469,546       214,440
        Deferred income taxes                        1,486,439     1,486,439
                                                  ------------- -------------
        Total current assets                        25,037,911    24,714,283
                                                  ------------- -------------

        Property and equipment, net                 54,610,355    52,684,279
        Goodwill                                   134,570,435   134,570,435
        Intangible assets, net                       9,514,772     8,660,111
        Investments                                  1,207,183     1,194,428
        Deferred financing costs                     5,878,943     5,133,288
        Interest rate cap                            1,510,951       624,008
        Deferred charges                               155,573       365,598
                                                  ------------- -------------
          Total assets                            $232,486,123  $227,946,430
                                                  ------------- -------------
                                                  ------------- -------------
    Liabilities and Stockholders' Equity
      Current liabilities
        Accounts payable                          $  2,058,989  $  1,602,585
        Accrued expenses                             3,716,880     3,780,820
        Advanced billings and payments               2,077,713     2,009,690
        Customer deposits                              185,147       193,163
                                                  ------------- -------------
          Total current liabilities                  8,038,729     7,586,258
                                                  ------------- -------------
      Deferred income taxes                         25,223,656    25,223,656
      Advance billings and payments                    797,498       756,979
      Other liabilities                                183,756       169,846
      Long-term notes payable                      170,019,705   169,984,152
                                                  ------------- -------------
      Total liabilities                            204,263,344   203,720,891
                                                  ------------- -------------

      Derivative liability                             814,005       717,767
      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    23,746,507
        Retained deficit                            (4,084,797)   (3,270,622)
        Accumulated other comprehensive loss          (938,732)   (1,185,360)
                                                  ------------- -------------
          Total stockholders' equity                23,323,741    19,422,739
                                                  ------------- -------------
          Total liabilities and stockholders'
           equity                                 $232,486,123  $227,946,430
                                                  ------------- -------------
                                                  ------------- -------------



                                 OTELCO INC.
                    Consolidated Statements of Operations
                                 (unaudited)

                             Three Months Ended         Six Months Ended
                                   June 30,                  June 30,
                          ------------------------- -------------------------
                                 2007         2008         2007         2008
                          ------------ ------------ ------------ ------------
    Revenues
      Local services      $ 6,530,615  $ 6,711,884  $12,879,111  $13,438,075
      Network access        6,140,830    6,105,129   12,578,418   12,542,783
      Cable television        548,414      566,270    1,095,941    1,112,432
      Internet              2,859,407    3,030,393    5,679,704    6,031,859
      Transport services    1,038,936    1,255,054    2,057,419    2,403,002
                          ------------ ------------ ------------ ------------
        Total revenues     17,118,202   17,668,730   34,290,593   35,528,151
                          ------------ ------------ ------------ ------------
    Operating expenses
      Cost of services
       and products         6,534,399    6,745,612   12,805,456   13,397,723
      Selling, general and
       administrative
       expenses             2,419,527    2,527,425    4,921,328    5,221,408
      Depreciation and
       amortization         3,775,623    3,389,765    7,404,714    6,763,013
                          ------------ ------------ ------------ ------------
        Total operating
         expenses          12,729,549   12,662,802   25,131,498   25,382,144
                          ------------ ------------ ------------ ------------

    Income from operations  4,388,653    5,005,928    9,159,095   10,146,007
                          ------------ ------------ ------------ ------------
    Other income (expense)
      Interest expense     (5,412,345)  (4,773,240) (10,788,609)  (9,456,080)
      Change in fair value
       of derivative          250,549      166,850      468,417      (74,055)
      Other income            165,581       64,045      447,033      430,625
                          ------------ ------------ ------------ ------------
        Total other
         expense           (4,996,215)  (4,542,345)  (9,873,159)  (9,099,510)
                          ------------ ------------ ------------ ------------
    Income (loss) before
     income tax expense      (607,562)     463,583     (714,064)   1,046,497

    Income tax (expense)
     benefit                  502,981      (57,448)     491,276     (232,322)
                          ------------ ------------ ------------ ------------
    Net income (loss)
     available to common
     stockholders         $  (104,581) $   406,135  $  (222,788) $   814,175
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------
    Weighted average
     shares outstanding:
      Basic                 9,676,733   12,676,733    9,676,733   12,676,733
      Diluted              10,221,404   13,221,404   10,221,404   13,221,404

    Net income (loss) per
     share:
      Basic               $     (0.01) $      0.03  $     (0.02) $      0.06
      Diluted             $     (0.03) $      0.02  $     (0.07) $      0.05

      Dividends declared
       per share          $      0.18  $      0.18  $      0.35  $      0.35



                                 OTELCO INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (unaudited)

                                                       Six Months Ended
                                                           June 30,
                                                          2007          2008
                                                  ------------- -------------
    Cash flows from operating activities:
      Net income (loss)                           $   (222,788) $    814,175
      Adjustments to reconcile net income to cash
       flows from operating activities:
        Depreciation                                 6,107,336     5,527,814
        Amortization                                 1,297,378     1,235,199
        Interest rate caplet                           467,793       470,022
        Amortization of debt premium                         -       (35,553)
        Amortization of loan costs                     796,245       745,655
        Change in fair value of derivative liability  (468,417)       74,055
        Provision for uncollectible revenue             78,231       129,453
        Changes in assets and liabilities; net of
         assets and liabilities acquired:
          Accounts receivables                        (224,145)     (165,066)
          Material and supplies                         59,352      (284,036)
          Prepaid expenses and other assets            288,417       426,802
          Income tax receivable                              -       255,106
          Accounts payable and accrued liabilities     (10,888)     (392,464)
          Advance billings and payments                   (836)     (108,542)
          Other liabilities                             (6,816)       (5,894)
                                                  ------------- -------------
            Net cash from operating activities       8,160,862     8,686,726
                                                  ------------- -------------
    Cash flows from investing activities:
      Acquisition and construction of property and
       equipment                                    (2,875,642)   (3,947,447)
      Proceeds from retirement of investment             7,871             -
      Deferred charges                                (166,921)     (232,100)
                                                  ------------- -------------
        Net cash used in investing activities       (3,034,692)   (4,179,547)
                                                  ------------- -------------

    Cash flows from financing activities:
      Cash dividends paid                           (3,411,048)   (4,468,548)
                                                  ------------- -------------
        Net cash used in financing activities       (3,411,048)   (4,468,548)
                                                  ------------- -------------

    Net increase in cash and cash equivalents        1,715,122        38,631
    Cash and cash equivalents, beginning of period  14,401,849    12,810,497
                                                  ------------- -------------
    Cash and cash equivalents, end of period      $ 16,116,971  $ 12,849,128
                                                  ------------- -------------
                                                  ------------- -------------
    Supplemental disclosures of cash flow
     information:
      Interest paid                               $  9,547,279  $  8,569,514
                                                  ------------- -------------
                                                  ------------- -------------

      Income taxes received                       $   (173,718) $   (146,606)
                                                  ------------- -------------
                                                  ------------- -------------

      Dividends declared but not paid             $  1,705,524             -
    





For further information:

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

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