Otelco Reports Second Quarter 2009 Results



    ONEONTA, AL, Aug. 5 /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
second quarter ended June 30, 2009. Key quarterly highlights for Otelco
include:

    
    -   Total revenues of $25.8 million.
    -   Operating income of $5.7 million.
    -   Adjusted EBITDA (as defined below) of $12.4 million.
    

    "Otelco delivered another solid quarter despite the continuing challenges
from the economy," said Mike Weaver, President and Chief Executive Officer of
Otelco. "We experienced growth in our revenue of $8.1 million over the second
quarter of 2008, as we continue our trajectory toward $100 million for 2009.
We had our best quarterly results with Adjusted EBITDA at $12.4 million. Both
our RLEC and CLEC customers contributed to the growth. Our results were
achieved by a combination of revenue growth, effective cost management and the
realization of synergies from our Country Road acquisition last fall. Adjusted
EBITDA increased by $3.9 million and $0.9 million over the same quarter last
year and the first quarter of 2009, respectively.
    "Our capital expenditures for the quarter were $2.3 million as we began
to move forward on projects we had delayed starting in first quarter. As a
result of the EBITDA growth, the lower LIBOR interest rates and conservative
capital expenditures, our cash grew by $2.4 million in the quarter and our
pay-out ratio was 84%.
    "We expect to complete the final phases of our integration plan for the
Country Road entities this quarter, including the final billing system
conversion," Weaver concluded. "The integration has provided an integrated
face to our customers in Maine and is producing the operational expense
reductions we had anticipated. As evidenced by our eighteenth consecutive IDS
dividend, we remain committed to returning cash to our shareholders. Given the
growth in our cash, we plan to make a voluntary prepayment of $5.0 million to
reduce our senior debt in the near future."

    
    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
August 14, 2009. The scheduled interest and any dividend declared will be paid
on September 30, 2009 to holders of record as of the close of business on
September 15, 2009. The interest payment will cover the period from June 30,
2009 through September 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 eighteen successive quarterly
distributions of dividends and interest since its IDS units were originally
offered to the public in December 2004.

    
                    Second Quarter 2009 Financial Summary
               (Dollars in thousands, except per share amounts)

                                                              Change
                      Three Months Ended June 30, ---------------------------
                              2008          2009        Amount       Percent
    -------------------------------------------------------------------------
    Revenues          $     17,669  $     25,797  $      8,128         46.0%
    Operating income  $      5,006  $      5,716  $        710         14.2%
    Interest expense  $     (4,773) $     (6,447) $      1,674         35.1%
    Net income (loss)
     available to
     stockholders     $        406  $       (716) $     (1,122)           (*)
      Basic net
       income (loss)
       per share      $       0.03  $      (0.06) $      (0.09)           (*)
      Diluted net
       income (loss)
       per share      $       0.02  $      (0.06) $      (0.08)           (*)
    Adjusted
     EBITDA(a)        $      8,479  $     12,352  $      3,873         45.7%
    Capital
     expenditures     $      1,534  $      2,349  $        815         53.3%


                                                              Change
                        Six Months Ended June 30, ---------------------------
                          YTD 2008      YTD 2009        Amount       Percent
    -------------------------------------------------------------------------
    Revenues          $     35,528  $     51,297  $     15,769         44.4%
    Operating income  $     10,146  $     10,181  $         35          0.3%
    Interest expense  $     (9,456) $    (13,046) $      3,590         38.0%
    Net income (loss)
     available to
     stockholders     $        814  $     (1,588) $     (2,402)           (*)
    Basic net income
     (loss) per share $       0.06  $      (0.13) $      (0.19)           (*)
    Diluted net
     income (loss)
     per share        $       0.05  $      (0.13) $      (0.18)           (*)
    Adjusted
     EBITDA(a)        $     17,333  $     23,854  $      6,521         37.6%
    Capital
     expenditures     $      3,947  $      3,578  $       (369)       (9.4)%

         (*) Not a meaningful calculation



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

                              Three Months Ended           Six Months Ended
                                   June 30,                    June 30,
                              2008          2009          2008          2009
                      ------------- ------------- ------------- -------------
    Adjusted EBITDA
    Net Income (Loss) $        406  $       (716) $        814  $     (1,588)
    Add: Depreciation        2,772         3,496         5,528         7,177
         Interest
          Expense
          - Net of
          Premium            4,179         5,773         8,276        11,710
         Interest
          Expense
          - Caplet Cost        240           356           470           700
         Interest
          Expense
          - Amortize
          Loan Cost            373           338           746           676
         Interest
          Expense
          - Premium            (18)          (20)          (35)          (40)
         Gain/Loss
          from
          Investment             -             -           (45)            -
         Income Tax
          Expense               57            61           232          (964)
         Change in
          Fair Value
          of
          Derivative          (167)          (63)           74           (74)
         Loan Fees              19            19            38            38
         Amortization
          - Intangibles        618         3,108         1,235         6,219
                      ------------- ------------- ------------- -------------
    Adjusted EBITDA   $      8,479  $     12,352  $     17,333  $     23,854
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------

    (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
                                  December 31,  March 31,  June 30,  % Change
    Key Operating Statistics    2007      2008      2009      2009      2009
                            --------- --------- --------- --------- ---------
    RLEC access lines:
      Voice lines             36,687    51,530    50,807    50,078    (1.4)%
      Data lines              12,160    18,709    19,365    19,596      1.2%
                            --------- --------- --------- --------- ---------
        RLEC access line
         equivalents(1)       48,847    70,239    70,172    69,674    (0.7)%

    CLEC access lines:
      Voice lines             16,973    26,558    26,744    27,110      1.4%
      Data lines               2,571     3,246     3,228     3,298      2.2%
                            --------- --------- --------- --------- ---------
        CLEC access line
         equivalents(1)       19,544    29,804    29,972    30,408      1.5%

    Otelco access line
     equivalents(1)           68,391   100,043   100,144   100,082    (0.1)%
                            --------- --------- --------- --------- ---------
                            --------- --------- --------- --------- ---------
    Cable television
     customers                 4,169     4,082     4,132     4,114    (0.4)%
    Wholesale network
     connections                   -    98,187   113,855   122,471      7.6%
    Dial-up internet
     customers                15,249    11,864    10,885    10,165    (6.6)%

    (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 2009:

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

    Revenue
    -------
    
    Total revenues grew 46.0% in the three months ended June 30, 2009 to
$25.8 million from $17.7 million in the three months ended June 30, 2008. The
growth in revenue was primarily associated with the acquisition. Local
services revenue grew 79.7% in the second quarter to $12.1 million from $6.7
million in the quarter ended June 30, 2008. The acquisition provided an
increase of $5.7 million for the quarter. Network access revenue increased
35.4% in the second quarter to $8.3 million from $6.1 million in the quarter
ended June 30, 2008. The acquisition provided an increase of $2.5 million for
the quarter. Cable television revenue for the existing subsidiaries in the
three months ended June 30, 2009 increased 8.1% to just over $0.6 million from
just under $0.6 million in the three months ended June 30, 2008. Internet
revenue for the first quarter 2009 increased 15.5% to $3.5 million from $3.0
million in the quarter ended June 30, 2008, primarily associated with the
acquisition. Transport services revenue for the existing subsidiaries grew
8.0% to $1.4 million in the three months ended June 30, 2009 from $1.3 million
in the same period in 2008.

    
    Operating Expenses
    ------------------
    
    Operating expenses in the three months ended June 30, 2009 increased
58.6% to $20.1 million from $12.7 million in the three months ended June 30,
2008. Cost of services increased 50.2% to $10.1 million in the quarter ending
June 30, 2009 from $6.7 million in the same period last year, including $3.7
million from the acquisition and a reduction of $0.3 million from the existing
units. Selling, general and administrative expenses increased 32.3% to $3.3
million in the three months ended June 30, 2009 from $2.5 million in the three
months ended June 30, 2008, reflecting the acquisition. Depreciation and
amortization for second quarter increased 94.8% to $6.6 million from $3.4
million. Depreciation and amortization included $3.6 million from the
acquisition including amortization of intangible assets acquired and a
reduction of $0.4 million from the existing units.

    
    Interest Expense
    ----------------
    
    Interest expense increased 35.1% to $6.4 million in the quarter ended
June 30, 2009 from $4.8 million a year ago. The results reflect $1.6 million
in interest on the increased senior debt associated with the acquisition and
$0.1 million in caplet cost amortization associated with the interest rate
cap. The Company has entered into two interest rate swaps to limit its
exposure to changes in interest rates through February 2012.

    
    Adjusted EBITDA
    ---------------
    
    Adjusted EBITDA for the three months ended June 30, 2009 was $12.4
million compared to $8.5 million for the same period in 2008 and $11.5 million
in the first quarter of 2009. Adjusted EBITDA included approximately $4.2
million from the acquisition. See financial tables for a reconciliation of
Adjusted EBITDA to net income.

    
    Balance Sheet
    -------------
    
    As of June 30, 2009, the Company had cash and cash equivalents of $18.9
million compared to $13.5 million as the end of 2008. Total long-term debt
remained unchanged at $278.8 million. The second quarter distribution of $5.3
million in interest and dividends to our share owners and $0.3 million in
interest to our bond holders occurred on June 30, 2009. This represents the
eighteenth consecutive quarterly distribution since going public in December
2004.

    
    Capital Expenditures
    --------------------
    
    Capital expenditures were $2.3 million for the quarter, reflecting a
conservative level of investment when compared to historical levels. The
Company added DSL capacity; expanded IPTV capability; purchased competitive
customer specific equipment; and upgraded and expanded other network and
switching facilities.

    
    Second Quarter Earnings Conference Call
    ---------------------------------------
    
    Otelco has scheduled a conference call, which will be broadcast live over
the Internet, on Thursday, August 6, 2009, at 11:00 a.m. ET. To participate in
the call, dial (913) 312-6667 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 6546694.

    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, 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,      June 30,
                                                          2008          2009
                                                  ------------- -------------
                                                                  (unaudited)
    Assets
      Current assets
        Cash and cash equivalents                 $ 13,542,255  $ 18,852,408
        Accounts receivable:
          Due from subscribers, net of allowance
           for doubtful accounts of $318,446 and
           $363,926 respectively                     5,207,731     5,134,257
          Unbilled receivables                       2,567,730     2,517,620
          Other                                      4,348,044     4,234,922
        Materials and supplies                       2,305,755     2,066,179
        Prepaid expenses                             1,141,908       907,719
        Income tax receivable                          181,644       181,644
        Deferred income taxes                          827,686       827,686
                                                  ------------- -------------
          Total current assets                      30,122,753    34,722,435
                                                  ------------- -------------

        Property and equipment, net                 75,407,062    71,043,061
        Goodwill                                   189,334,837   189,164,662
        Intangible assets, net                      44,390,644    38,971,522
        Investments                                  2,015,583     2,002,828
        Deferred financing costs                     8,315,921     7,639,968
        Deferred income taxes                        5,897,382     5,897,382
        Interest rate swaps                                  -       264,267
        Interest rate cap                                7,765             -
        Deferred charges                                49,540        26,345
                                                  ------------- -------------
          Total assets                            $355,541,487  $349,732,470
                                                  ------------- -------------
                                                  ------------- -------------

    Liabilities and Stockholders' Equity
      Current liabilities
        Accounts payable                          $  2,312,920  $  1,915,090
        Accrued expenses                             6,632,287     6,511,552
        Advanced billings and payments               2,024,123     1,998,610
        Customer deposits                              180,582       192,103
                                                  ------------- -------------
          Total current liabilities                 11,149,912    10,617,355
                                                  ------------- -------------
      Deferred income taxes                         45,962,402    45,962,402
      Advance billings and payments                    739,736       719,044
      Other liabilities                                188,346       146,822
      Long-term notes payable                      278,799,513   278,759,595
                                                  ------------- -------------
          Total liabilities                        336,839,909   336,205,218
                                                  ------------- -------------

      Derivative liability                             238,054       163,592
      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                  19,277,959    14,809,411
        Retained deficit                            (3,870,923)   (5,458,523)
        Accumulated other comprehensive loss        (1,160,759)     (204,475)
                                                  ------------- -------------
          Total stockholders' equity                14,378,491     9,278,627
                                                  ------------- -------------
          Total liabilities and stockholders'
           equity                                 $355,541,487  $349,732,470
                                                  ------------- -------------
                                                  ------------- -------------



                                 OTELCO INC.
                    Consolidated Statements of Operations
                                 (unaudited)

                           Three Months Ended           Six Months Ended
                                June 30,                    June 30,
                      --------------------------- ---------------------------
                              2008          2009          2008          2009
                      ------------- ------------- ------------- -------------
    Revenues
      Local services  $  6,711,884  $ 12,063,419  $ 13,438,075  $ 23,918,400
      Network access     6,105,129     8,265,063    12,542,783    16,359,196
      Cable television     566,270       612,363     1,112,432     1,219,050
      Internet           3,030,393     3,500,149     6,031,859     7,041,826
      Transport
       services          1,255,054     1,355,677     2,403,002     2,758,376
                      ------------- ------------- ------------- -------------
        Total revenues  17,668,730    25,796,671    35,528,151    51,296,848
                      ------------- ------------- ------------- -------------
    Operating expenses
      Cost of services
       and products      6,745,612    10,133,256    13,397,723    20,799,712
      Selling, general
       and
       administrative
       expenses          2,527,425     3,342,855     5,221,408     6,919,529
      Depreciation and
       amortization      3,389,765     6,604,748     6,763,013    13,396,586
                      ------------- ------------- ------------- -------------
        Total operating
         expenses       12,662,802    20,080,859    25,382,144    41,115,827
                      ------------- ------------- ------------- -------------
    Income from
     operations          5,005,928     5,715,812    10,146,007    10,181,021
                      ------------- ------------- ------------- -------------
    Other income
     (expense)
      Interest expense  (4,773,240)   (6,446,902)   (9,456,080)  (13,045,855)
      Change in fair
       value of
       derivative          166,850        62,882       (74,055)       74,462
      Other income          64,045        12,510       430,625       238,371
                      ------------- ------------- ------------- -------------
        Total other
         expense        (4,524,345)   (6,371,510)   (9,099,510)  (12,733,022)
                      ------------- ------------- ------------- -------------
    Income (loss)
     before income tax
     expense               463,583      (655,698)    1,046,497    (2,552,001)
    Income tax
     (expense) benefit     (57,448)      (60,552)     (232,322)      964,401
                      ------------- ------------- ------------- -------------
    Net income (loss)
     available to
     common
     stockholders     $    406,135  $   (716,250) $    814,175  $ (1,587,600)
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------
    Weighted average
     shares
     outstanding:
      Basic             12,676,733    12,676,733    12,676,733    12,676,733
      Diluted           13,221,404    13,221,404    13,221,404    13,221,404
    Net income (loss)
     per share:
      Basic           $       0.03  $      (0.06) $       0.06  $      (0.13)
      Diluted         $       0.02  $      (0.06) $       0.05  $      (0.13)
    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,
                                                          2008          2009
                                                  ------------- -------------
    Cash flows from operating activities:
      Net income                                  $    814,175  $ (1,587,600)
      Adjustments to reconcile net income to cash
       flows from operating activities:
        Depreciation                                 5,527,814     7,176,803
        Amortization                                 1,235,199     6,219,783
        Interest rate caplet                           470,022       699,783
        Amortization of debt premium                   (35,553)      (39,918)
        Amortization of loan costs                     745,655       675,953
        Change in fair value of derivative              74,055       (74,462)
        Provision for uncollectible revenue            129,453       149,765
        Changes in assets and liabilities; net
         of assets and liabilities acquired:
          Accounts receivables                        (165,066)       86,941
          Material and supplies                       (284,036)      239,576
          Prepaid expenses and other assets            426,802       234,189
          Income tax receivable                        255,106             -
          Accounts payable and accrued liabilities    (392,464)     (518,565)
          Advance billings and payments               (108,542)      (46,205)
          Other liabilities                             (5,894)      (30,003)
                                                  ------------- -------------
            Net cash from operating activities       8,686,726    13,186,040
                                                  ------------- -------------
    Cash flows from investing activities:
      Acquisition and construction of property and
       equipment                                    (3,947,447)   (3,577,514)
      Deferred charges/acquisition                    (232,100)            -
      Adjustment to the purchase of the CR
       Companies                                             -       170,175
                                                  ------------- -------------
            Net cash used in investing activities   (4,179,547)   (3,407,339)
                                                  ------------- -------------
    Cash flows from financing activities:
      Cash dividends paid                           (4,468,548)   (4,468,548)
                                                  ------------- -------------
            Net cash used in financing activities   (4,468,548)   (4,468,548)
                                                  ------------- -------------
    Net increase in cash and cash equivalents           38,631     5,310,153
    Cash and cash equivalents, beginning of period  12,810,497    13,542,255
                                                  ------------- -------------
    Cash and cash equivalents, end of period      $ 12,849,128  $ 18,852,408
                                                  ------------- -------------
                                                  ------------- -------------
    Supplemental disclosures of cash flow
     information:
      Interest paid                               $  8,569,514  $ 12,018,858
                                                  ------------- -------------
                                                  ------------- -------------
      Income taxes received                       $   (146,606) $    (15,342)
                                                  ------------- -------------
                                                  ------------- -------------
    





For further information:

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

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