Otelco Reports Second Quarter 2007 Results



    ONEONTA, AL, Aug. 8 /CNW/ - Otelco Inc. (AMEX:   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, 2007. Key quarterly highlights for Otelco include:

    
    -  Total revenues of $17.1 million.
    -  Operating income of $4.4 million.
    -  Adjusted EBITDA (as defined below) of $8.3 million.
    

    "The second quarter produced solid operating performance and access line
equivalent growth for Otelco. We are also very pleased to have completed our
follow-on offering of 3,000,000 Income Deposit Securities (IDS) units on July
5, 2007. As a result of our successful offering, we lowered our total leverage
by reducing debt over 16% or $32.9 million. In addition, the Company
negotiated a reduction in its interest rate margin for the senior credit
facility. Under the terms of our agreement, the interest rate margin is
dependent on our total leverage. At our new leverage level, there is a 125
basis point reduction in the interest rate margin and at the total leverage
level that existed prior to the completion of the follow-on offering, the
interest rate margin would have been reduced by 75 basis points. This
reduction was effective July 13th and the interest expense reduction will be
reflected in subsequent quarters," stated Mike Weaver, President and Chief
Executive Officer of Otelco.
    "While second quarter results are historically a bit softer, we continued
to grow our total access lines and access line equivalents," continued Weaver.
"Total access line equivalents increased 1.6% while access lines increased
1.2% from the first quarter of this year. At quarter end, we had 66,373 total
access line equivalents, an increase of 1,047 lines for the quarter. Digital
high-speed lines and long distance customers also continued to grow,
increasing 3.0% and 1.3%, respectively from the first quarter of this year. We
are also having good success increasing our business access lines in both our
RLEC and CLEC properties with a combined increase of 4.3% for the quarter. In
this quarter, our earnings were negatively impacted by $.2 million due to a
nonrecurring reduction in our settlements revenue. Adjusted EBITDA was $8.3
million for the quarter, a growth of 18.6% over second quarter 2006.
    "The bundled service packages we introduced in 2006 in Alabama and
Missouri continue to grow in popularity as more than 8,100 subscribers, or
over 33% of the offered base, were signed up to one of these plans at quarter
end. We also anticipate introducing high definition and digital video services
in Alabama by the end of the third quarter, which should also have a positive
impact on our subscriber base," added Weaver.
    "Our focus continues to be on enhancing cash flow and improving our
returns for investors," Weaver concluded.

    Distribution to IDS Holders
    ---------------------------
    Each quarter, the Board will consider the declaration of dividends during
its normally scheduled meeting. For the third quarter of 2007, the Board is
meeting on August 16, 2007. The scheduled interest and any dividend declared
will be paid on October 1, 2007 to holders of record as of the close of
business on September 14, 2007. The interest payment will cover the period
from June 30, 2007 through September 29, 2007.



    
                    Second Quarter 2007 Financial Summary
               (Dollars in thousands, except per share amounts)

                                                              Change
                                                   --------------------------
                            2Q 2006      2Q 2007        Amount       Percent
    -------------------------------------------------------------------------
    Revenues              $    11,558  $    17,118  $     5,560        48.1 %
    Operating income      $     4,880  $     4,389  $      (491)      (10.1)%
    Interest expense      $    (4,585) $    (5,412) $       827        18.0 %
    Net income available
     to stockholders      $     2,054  $      (105) $    (2,159)     (105.1)%
    Basic net income per
     share                $      0.21  $     (0.01) $     (0.22)     (104.8)%
    Diluted net income
     per share            $      0.20  $     (0.03) $     (0.23)     (115.0)%
    Adjusted EBITDA(a)    $     7,040  $     8,349  $     1,308        18.6 %
    Capital expenditures  $       809  $     1,501  $       692        85.5 %

                                                             Change
                                                   --------------------------
                            YTD 2006     YTD 2007      Amount        Percent
    -------------------------------------------------------------------------
    Revenues              $    23,071  $    34,291  $    11,220        48.6 %
    Operating income      $     9,579  $     9,159  $      (420)       (4.4)%
    Interest expense      $    (9,134) $   (10,789) $     1,655        18.1 %
    Net income available
     to stockholders      $     2,298  $      (223) $    (2,521)     (109.7)%
    Basic net income per
     share                $      0.24  $     (0.02) $     (0.26)     (108.3)%
    Diluted net income
     per share            $      0.22  $     (0.07) $     (0.29)     (131.8)%
    Adjusted EBITDA(a)    $    13,923  $    17,049  $     3,126        22.5 %
    Capital expenditures  $     1,968  $     2,876  $       908        46.1 %

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

                              Three Months Ended        Six Months Ended
                                   June 30,                  June 30,
                              2006         2007         2006         2007
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA
    Net Income            $     2,054  $      (105) $     2,298  $      (223)
    Add:  Depreciation          1,958        3,127        3,875        6,107
      Interest Expense          4,059        4,774        8,102        9,525
      Interest Expense -
       Caplet Cost                183          240          345          468
      Amortization -
       Loan Cost                  343          398          687          796
      Gain/Loss from
       Investments             (2,687)           -       (2,687)           -
      Income Tax Expense        1,071         (503)       1,233         (491)
      Accretion Expense           111            -          221            -
      Change in Fair Value
       of Derivative
      Liability                  (131)        (250)        (310)        (468)
      Loan Fees                    28           19           56           38
      Amortization -
       Intangibles                 51          649          103        1,297
                          ------------ ------------ ------------ ------------
    Adjusted EBITDA       $     7,040  $     8,349  $    13,923  $    17,049
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    (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. It reflects actual results with no pro
    forma adjustments. 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.

                              Fourth        First       Second
                              Quarter      Quarter      Quarter     % Change
    Key Operating Statistics    2006         2007         2007       Quarter
    -------------------------------------------------------------------------
    Access line
     equivalents (1)
      Residential access
       lines                   29,832       29,789       29,483        (1.0)%
      Business access lines    22,171       22,577       23,537         4.3 %
                          ------------ ------------ ------------
    Total access lines         52,003       52,366       53,020         1.2 %
      High-speed lines         11,951       12,960       13,353         3.0 %
                          ------------ ------------ ------------
    Total access line
     equivalents               63,954       65,326       66,373         1.6 %

    Long distance customers    21,370       22,066       22,358         1.3 %
    Cable television
     customers                  4,188        4,211        4,187        (0.6)%
    Dial-up internet
     customers                 19,780       18,313       17,220        (6.0)%

    (1) We define access line equivalents as access lines, cable modems, and
        digital subscriber lines, including wholesale digital subscriber
        lines.
    

    FINANCIAL DISCUSSION FOR SECOND QUARTER 2007 (including the acquisition
of Mid-Maine at July 3, 2006):

    Revenue
    -------
    Total revenues grew 48.1% in the three months ended June 30, 2007 to
$17.1 million from $11.6 million in the three months ended June 30, 2006. The
growth in revenue was primarily driven by the acquisition of Mid-Maine. Local
services revenue grew 52.2% in the second quarter to $6.5 million from $4.3
million in the quarter ended June 30, 2006. Network access revenue grew 18.8%
to $6.1 million from $5.2 million in the quarter ended June 30, 2006. Cable
television revenue in the three months ended June 30, 2007 increased 1.9% to
$0.5 million which was slightly higher than in the three months ended June 30,
2006. Internet revenue for the quarter increased 83.4% to $2.9 million from
$1.6 million in the quarter ended June 30, 2006. The addition of $1.0 million
in transport services is attributable to the acquisition of Mid-Maine.

    Operating Expenses
    ------------------
    Operating expenses in the three months ended June 30, 2007 increased
90.6% to $12.7 million from $6.7 million in the three months ended June 30,
2006. The increase was primarily attributable to the purchase of Mid-Maine.
Cost of services increased 105.0% to $6.5 million from $3.2 million in the
quarter ended June 30, 2006. The addition of Mid-Maine accounted for an
increase of $3.2 million, including providing competitive local exchange
services in Maine. The increased cost associated with higher cable television
programming costs, increased long distance usage associated with bundled
services and bandwidth to support increased digital high-speed Internet
customers was offset by savings from handling our Internet help desk
internally and by network and organizational efficiencies. Selling, general
and administrative expenses increased 63.3% to $2.4 million in the quarter
ended June 30, 2007 from $1.5 million in the quarter ended June 30, 2006.
Depreciation and amortization increased 88.0% to $3.8 million from
$2.0 million.

    Interest Expense
    ----------------
    Interest expense increased 18.1% to $5.4 million in the quarter ended
June 30, 2007 from $4.6 million a year ago, reflecting the additional senior
debt associated with the acquisition of Mid-Maine, the increased non-cash
caplet cost associated with our interest rate cap and amortization of loan
costs, partially offset by the reduction in margin cost from 4.0% to 3.25% on
all of our senior debt.

    Adjusted EBITDA
    ---------------
    Adjusted EBITDA for the three months ended June 30, 2007 was
$8.3 million, an increase of 18.6% from $7.0 million the three months ended
June 30, 2006. Adjusted EBITDA was negatively impacted by $.2 million due to a
nonrecurring reduction in our settlements revenue. For the six months ended
June 30, 2007, Adjusted EBITDA was $17.0 million, an increase of 22.5% from
$13.9 million the six months ended June 30, 2006. See financial tables for a
reconciliation of Adjusted EBITDA to net income.

    Balance Sheet
    -------------
    As of June 30, 2007, the Company had cash and cash equivalents of
$16.1 million and total long-term debt of $201.1 million. The second quarter
distribution of $4.1 million in interest and dividends to our share owners
occurred on July 2, 2007.

    Capital Expenditures
    --------------------
    Capital expenditures were $1.5 million for the quarter and $2.9 million
year-to-date 2007. The Company added DSL capacity, competitive customer
specific equipment, and other upgrades to its network and switching
facilities.

    Subsequent Events
    -----------------
    On July 5, 2007, the Company completed its offering of 3,000,000 Income
Deposit Securities (IDS) units through an underwritten public offering at
$19.80 per unit. The price per unit is comprised of $11.68 allocated to each
share of Class A common stock and $8.11 allocated to each senior subordinated
note, plus $0.01 representing accrued interest from June 30, 2007. The Company
used the net proceeds of approximately $55.4 million to repay senior secured
indebtedness under its credit facility, reducing senior debt from
$120.0 million to approximately $64.6 million. The $8.11 allocated to each
senior subordinated note represents a premium of $0.61 over the $7.50 stated
principal amount. The additional IDS units increase senior subordinated debt
by $22.5 million, bringing senior subordinated debt to approximately
$103.6 million. Therefore, total debt was reduced from approximately
$201.1 million to $168.2 million.
    On July 13, 2007, the Company entered into a first amendment to its
amended and restated credit agreement dated July 3, 2006. Among other things,
the amendment reduces the applicable margins on the interest rates under the
credit agreement, initially reducing the applicable LIBOR margin from 3.25% to
1.75% on the $64.6 of senior debt. After September 30, 2007, the margins will
adjust quarterly on a prospective basis based on the total leverage ratio of
the Company.

    Second Quarter Earnings Conference Call
    ---------------------------------------
    Otelco has scheduled a conference call, which will be broadcast live over
the Internet, on Thursday, August 9, 2007, at 11:00 a.m. ET. To participate in
the call, dial 913-981-4903 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.otelco.net 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.otelco.net 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 5164081.

    ABOUT OTELCO

    Otelco Inc., headquartered in Oneonta, Alabama, provides wireline
telephone services in portions of Alabama, Maine and Missouri. 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 65,300 access lines, cable modems
and digital subscriber 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 line. 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
telephone services through several subsidiaries. For more information, visit
the Company's web site at www.otelco.net.

    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,
                                                     2006           2007
                                                -------------- --------------
                                                                (unaudited)
    Assets
      Current Assets
        Cash and cash equivalents               $  14,401,849  $  16,116,971
        Accounts receivable:
          Due from subscribers, net of
           allowance for doubtful accounts of
           $207,359 and $206,343 respectively       3,105,636      2,650,306
          Unbilled receivables                      2,324,213      2,504,002
          Other                                     1,680,144      1,925,038
        Materials and supplies                      1,962,938      1,748,999
        Prepaid expenses                            1,062,947        774,530
        Deferred income taxes                         766,225        832,946
                                                -------------- --------------
          Total current assets                     25,303,952     26,552,792
                                                -------------- --------------

        Property and equipment, net                60,493,789     56,903,708
        Goodwill                                  134,182,309    134,570,435
        Intangible assets, net                     11,340,806     10,427,789
        Investments                                 1,240,250      1,219,623
        Deferred financing costs                    6,652,393      5,856,148
        Interest rate cap                           4,542,160      4,305,773
        Deferred charges                               96,628        237,654
                                                -------------- --------------
          Total assets                          $ 243,852,287  $ 240,073,922
                                                -------------- --------------
                                                -------------- --------------

    Liabilities and Stockholders' Equity
     (Deficit)
      Current liabilities
        Accounts payable                        $   1,658,911  $   1,613,722
        Dividends payable                           1,705,524      1,705,524
        Accrued expenses                            5,875,863      5,954,465
        Advanced billings and payments              2,119,701      2,118,865
        Customer deposits                             197,496        204,590
                                                -------------- --------------
          Total current liabilities                11,557,495     11,597,166
                                                -------------- --------------

      Deferred income taxes                        24,712,213     24,778,934
      Other liabilities                               187,037        173,127
                                                -------------- --------------
          Total deferred tax and other
           liabilities                             24,899,250     24,952,061
                                                -------------- --------------

      Long-term notes payable                     201,075,498    201,075,498
      Derivative liability                          2,107,877      1,639,460
      Class B common convertible to senior
       subordinated notes                           4,085,033      4,085,033

      Stockholders' equity (Deficit)
        Class A Common stock, $.01 par
         value-authorized 20,000,000 shares;
         issued and outstanding 9,676,733
         shares                                        96,767         96,767
        Class B Common stock, $.01 par
         value-authorized 800,000 shares;
         issued and outstanding 544,671 shares          5,447          5,447
        Additional paid in capital                    284,041              -
        Retained deficit                           (1,137,166)    (4,486,961)
        Accumulated other comprehensive income        878,045      1,109,451
                                                -------------- --------------

          Total stockholders' equity (deficit)        127,134     (3,275,296)
                                                -------------- --------------
          Total liabilities and stockholders'
           equity (deficit)                     $ 243,852,287  $ 240,073,922
                                                -------------- --------------
                                                -------------- --------------



                                 OTELCO INC.
                    Consolidated Statements of Operations
                                 (unaudited)

                             Three Months Ended         Six Months Ended
                                  June 30,                  June 30,
                          ------------------------- -------------------------
                              2006         2007         2006         2007
                          ------------ ------------ ------------ ------------
    Revenues
      Local services      $ 4,290,057  $ 6,530,615  $ 8,593,456  $12,879,111
      Network access        5,170,581    6,140,830   10,315,636   12,578,418
      Cable television        538,565      548,414    1,081,071    1,095,941
      Internet              1,558,610    2,859,407    3,081,047    5,679,704
      Transport services            -    1,038,936            -    2,057,419
                          ------------ ------------ ------------ ------------
        Total revenues     11,557,813   17,118,202   23,071,210   34,290,593
                          ------------ ------------ ------------ ------------
    Operating expenses
      Cost of services
       and products         3,187,114    6,534,399    6,361,801   12,805,456
      Selling, general
       and administrative
       expenses             1,481,324    2,419,527    3,152,664    4,921,328
      Depreciation and
       amortization         2,009,159    3,775,623    3,977,500    7,404,714
                          ------------ ------------ ------------ ------------
        Total operating
         expenses           6,677,597   12,729,549   13,491,965   25,131,498
                          ------------ ------------ ------------ ------------

    Income from operations  4,880,216    4,388,653    9,579,245    9,159,095
                          ------------ ------------ ------------ ------------

    Other income (expense)
      Interest expense     (4,584,505)  (5,412,345)  (9,133,980) (10,788,609)
      Change in fair value
       of derivative          130,721      250,549      310,462      468,417
      Other income          2,809,272      165,581    2,996,511      447,033
                          ------------ ------------ ------------ ------------
        Total other
         expense           (1,644,512)  (4,996,215)  (5,827,007)  (9,873,159)
                          ------------ ------------ ------------ ------------

    Income (loss) before
     income taxes and
     accretion expense      3,235,704     (607,562)   3,752,238     (714,064)

    Income tax (expense)
     benefit               (1,071,400)     502,981   (1,232,610)     491,276
                          ------------ ------------ ------------ ------------

    Income (loss) before
     accretion expense      2,164,304     (104,581)   2,519,628     (222,788)

    Accretion of Class B
     common convertible to
     senior subordinated
     notes                   (110,731)           -     (221,463)           -
                          ------------ ------------ ------------ ------------
    Net income (loss)
     available to common
     stockholders         $ 2,053,573  $  (104,581) $ 2,298,165  $  (222,788)
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Weighted average
     shares outstanding:
      Basic                 9,676,733    9,676,733    9,676,733    9,676,733
      Diluted              10,221,404   10,221,404   10,221,404   10,221,404

    Net income (loss)
     per share:
      Basic               $      0.21  $     (0.01) $      0.24  $     (0.02)
      Diluted             $      0.20  $     (0.03) $      0.22  $     (0.07)

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



                                 OTELCO INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (unaudited)

                                                       Six month ended
                                                           June 30,
                                                     2006           2007
                                                -------------- --------------
    Cash flows from operating activities:
      Net income (loss)                         $   2,298,165  $    (222,788)
      Adjustments to reconcile net income to
       cash flows from operating activities:
        Depreciation                                3,874,647      6,107,336
        Amortization                                  102,853      1,297,378
        Interest rate caplet                          344,946        467,793
        Amortization of loan costs                    686,875        796,245
        Accretion expense                             221,463              -
        Change in fair value of derivative
         liability                                   (310,462)      (468,417)
        Provision for uncollectible revenue            60,903         78,231
        Gain on disposition of other assets        (2,686,745)             -
        Changes in assets and liabilities; net
         of assets and liabilities acquired:
          Accounts receivables                       (358,856)      (224,145)
          Material and supplies                       (42,213)        59,352
          Prepaid expenses and other assets            66,930        288,417
          Accounts payable and accrued
           liabilities                              1,461,447     (1,716,412)
          Advance billings and payments               (19,941)          (836)
          Other liabilities                            (5,158)        (6,816)
                                                -------------- --------------
            Net cash from operating activities      5,694,854      6,455,338
                                                -------------- --------------
    Cash flows from investing activities:
      Acquisition and construction of property
       and equipment                               (1,968,233)    (2,875,642)
      Proceeds from retirement of investment        3,226,651          7,871
      Deferred charges                                (85,940)      (166,921)
                                                -------------- --------------
            Net cash from investing activities      1,172,478     (3,034,692)
                                                -------------- --------------
    Cash flows from financing activities:
      Cash dividends paid                          (3,411,048)    (1,705,524)
                                                -------------- --------------

            Net cash from financing activities     (3,411,048)    (1,705,524)
                                                -------------- --------------
    Net increase (decrease) in cash and cash
     equivalents                                    3,456,284      1,715,122
    Cash and cash equivalents, beginning of
     period                                         5,569,233     14,401,849
                                                -------------- --------------

    Cash and cash equivalents, end of period    $   9,025,517  $  16,116,971
                                                -------------- --------------
                                                -------------- --------------
    Supplemental disclosures of cash flow
     information:
      Interest paid                             $   8,058,647  $   9,547,279
                                                -------------- --------------
                                                -------------- --------------

      Income taxes paid (received)              $      40,000  $    (173,718)
                                                -------------- --------------
                                                -------------- --------------

      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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