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Otelco Reports Second Quarter 2012 Results

“In order to conserve cash, the board of directors suspended dividends on our common stock beginning with second quarter 2012. In addition, the board of directors has exercised its contractual right under the indenture governing our senior subordinated notes to defer interest on the senior subordinated notes for third quarter 2012. Under the indenture, the board is permitted to defer interest on up to four occasions with respect to up to two quarters per occasion before resuming interest payments, including interest on the deferred interest. The deferral of the interest for third quarter will conserve $3.5 million cash.

“In addition to working on cost reductions and cash conservation, we have introduced new products in our service areas. In Alabama, we recently introduced security services to residential and business customers. In addition, we were awarded a five year contract to provide fiber backbone for the school systems in one of the counties we serve. This contract will take us outside our existing RLEC boundaries and provides an opportunity for growth. In New England, we introduced Microsoft hosted Exchange products in partnership with a third party provider. We recently added additional sales professionals to work in our expanded New Hampshire operations. Our Missouri operations continue to see growth in both the wireless Internet products and providing fiber transport for wireless carriers.

“We will continue to review our operations and cost structure, making every effort to improve efficiency and further reduce costs,” concluded Weaver. “Modest price increases have been implemented where allowed by regulatory agencies, existing contractual obligations and market conditions.”

GOODWILL AND LONG-LIVED ASSET IMPAIRMENT

The Company announced on April 20, 2012, the non-renewal of the Time Warner Cable contract. Coupled with the resulting change in the market price of OTT on the NASDAQ Global Market and the expected impact of the FCC reforms, these circumstances are considered a triggering event for reviewing goodwill and other long-term assets on the Company’s balance sheet for impairment. The Company performed the required analysis and determined that long-lived assets should be reduced from $81.7 million to $73.1 million or a reduction of $8.6 million. In addition, goodwill should be reduced from $189.0 million to $45.0 million or an impairment of $144.0 million. The financial statements and tables in this earnings release reflect the impact of these non-cash charges.

 
Second Quarter 2012 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
  Three Months Ended June 30,   Change
    2011   2012   Amount   Percent    
Revenues $ 25,501   $ 24,714 $ (787 )   (3.1 ) %
Operating income (loss) $ 7,327 $ (148,061 ) $ (155,388 ) *

 

Interest expense $ (6,199 ) $ (5,655 ) $ (544 ) (8.8 ) %
Net income (loss) available to stockholders $ 1,283 $ (128,011 ) $ (129,294 ) *

 

Basic net income (loss) per share $ 0.10 $ (9.68 ) $ (9.78 ) *
 
Adjusted EBITDA (a) $ 11,887 $ 10,814 $ (1,073 ) (9.0 ) %
Capital expenditures $ 3,508 $ 1,242 $ (2,266 ) (64.6 ) %
 
* Not a meaningful calculation
 
Six Months Ended June 30, Change
    2011   2012   Amount   Percent    
Revenues $ 50,893 $ 50,088 $ (805 ) (1.6 ) %
Operating income (loss) $ 12,647 $ (141,444 ) $ (154,091 ) *

 

Interest expense $ (12,369 ) $ (11,488 ) $ (881 ) (7.1 ) %
Net income (loss) available to stockholders $ 1,288 $ (127,192 ) $ (128,480 ) *

 

Basic net income (loss) per share $ 0.10 $ (9.62 ) $ (9.72 ) *
 
Adjusted EBITDA (a) $ 23,300 $ 22,290 $ (1,010 ) (4.3 ) %
Capital expenditures $ 6,351 $ 2,545 $ (3,806 ) (59.9 ) %
 
* Not a meaningful calculation
 

Reconciliation of Adjusted EBITDA to Net Income (Loss)

Three Months ended June 30, Six Months ended June 30,
    2011   2012   2011   2012
Net income (loss) $ 1,283 $ (128,011 ) $ 1,288 $ (127,192 )
Add: Depreciation 2,307 2,747 5,829 5,475
Interest expense - net of premium 5,857 5,313 11,685 10,804
Interest expense - amortize loan cost 342 342 684 684
Income tax expense (benefit) 357 (25,713 ) 359 (25,189 )
Change in fair value of derivatives (480 ) - (986 ) (241 )
Loan fees 19 19 38 38
Amortization - intangibles 2,202 3,136 4,403 4,930
Goodwill impairment - 143,998 - 143,998
Impairment of long-lived assets - 8,622 - 8,622
Restructuring expense   -     361     -     361  
Adjusted EBITDA $ 11,887   $ 10,814   $ 23,300   $ 22,290  
               

Reconciliation of Projected Adjusted EBITDA to Net Loss

Twelve months ended December 31,
2012 2013 2014
Low   High Low   High Low   High
Net loss $ (154,904 ) $ (152,904 ) $ (2,334 ) $ (1,334 ) $ (5,414 ) $ (1,414 )

Add: Depreciation and amortization

21,897 21,897 16,075 16,075 13,201 13,201
Interest expense 21,510 21,510 21,461 21,461 21,940 21,940
Income tax benefit (180 ) (180 ) (853 ) (853 ) (904 ) (904 )
Change in fair value of derivatives (241 ) (241 ) - - - -
Goodwill impairment 143,998 143,998 - - - -
Impairment of long-lived assets 8,622 8,622 - - - -
Loan fees   76       76     76       76     76       76  
Projected Adjusted EBITDA $ 40,778     $ 42,778   $ 34,425     $ 35,425   $ 28,899     $ 32,899  
 

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

     

Otelco Inc. - Key Operating Statistics ⁽²⁾

(Unaudited)   Quarterly
% Change
December 31, March 31, June 30, from
2010 2011 2012 2012 March 31, 2012
Otelco access line equivalents (1) 99,639 102,378 101,885 101,184 (0.7) %
 
RLEC and other services:
Voice access lines 45,461 46,202 45,200 44,546 (1.4) %
Data access lines   20,852   22,904   23,105   23,156 0.2 %
Access line equivalents (1) 66,313 69,106 68,305 67,702 (0.9) %
Cable television customers 4,227 4,201 4,216 4,163 (1.3) %
Satellite television customers 125 226 229 231 0.9 %
Additional internet customers 6,975 5,414 5,159 4,896 (5.1) %
RLEC dial-up 393 301 273 248 (9.2) %
Other dial-up 4,300 2,797 2,501 2,266 (9.4) %
Other data lines 2,282 2,316 2,385 2,382 (0.1) %
 
CLEC:
Voice access lines 29,944 30,189 30,476 30,355 (0.4) %
Data access lines   3,382   3,082   3,104   3,127 0.7 %
Access line equivalents (1) 33,326 33,271 33,580 33,482 (0.3) %
Wholesale network connections (3) 149,043 157,144 159,560 161,766 1.4 %
 
For the Years Ended For the Three Months Ended
December 31, March 31, June 30,
2010 2011 2012 2012
Total Revenues (in millions): $ 104.4 $ 101.8 $ 25.4 $ 24.7
RLEC $ 58.4 $ 57.4 $ 14.2 $ 14.1
CLEC   $ 46.0   $ 44.4   $ 11.2   $ 10.6      

(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).

(2) We acquired STC on October 14, 2011. At December 31, 2011, STC had 3,309 voice access lines and 1,672 data access lines, or 4,981 access line equivalents, and 55 dial-up internet customers which are included in the Key Operating Statistics.

(3) Time Warner Cable is the source for approximately 98% of wholesale network connections.

 

FINANCIAL DISCUSSION FOR SECOND QUARTER 2012:

All financial information includes the acquisition of Shoreham Telephone Company Inc. (“Shoreham”) on and as of October 14, 2011.

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