Otelco Reports Third Quarter 2012 Results

Interest Expense

Interest expense decreased 8.8% to 5.7 million in the three months ended September 30, 2012, from $6.2 million in the quarter ended September 30, 2011. The decrease in interest expense was primarily driven by the lower effective interest rate on the outstanding balance on our long-term notes payable upon the expiration of our interest rate swaps in first quarter 2012.

Change in Fair Value of Derivatives

The Company had two interest rate swap agreements intended to hedge changes in interest rates on its senior debt that expired during first quarter 2012. The liability for the swap decreased $0.7 million in third quarter 2011, accounting for the difference.

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2012, was $11.4 million compared to $11.1 million for the same period in 2011 and $10.8 million in the second quarter of 2012. See financial tables for a reconciliation of Adjusted EBITDA to net income (loss).

Balance Sheet

As of September 30, 2012, the Company had cash and cash equivalents of $27.2 million compared to $12.4 million at the end of 2011. The second quarter distribution of $3.2 million in interest to our IDS shareowners, and $0.3 million in interest to our bond holders, occurred on July 2, 2012 as June 30, 2012 was a non-banking day. The third and fourth quarter interest to our IDS shareowners and bond holders has been deferred by the Board of Directors.

Capital Expenditures

Capital expenditures were $0.9 million for the quarter, reflecting continued investment in infrastructure and cost saving projects.

Third Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Wednesday, November 7, 2012, at 10:30 a.m. ET. To participate in the call, participants should dial [phone] 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 website at www.OtelcoInc.com or www.earnings.com. To listen to the live call online, please visit the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast 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 [phone] and using the Confirmation Code 8646648.

ABOUT OTELCO

Otelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia. The Company’s services include local and long distance telephone, network access, transport, digital high-speed data lines and dial-up internet access, cable television and other telephone related services. With approximately 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 eleven incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services through several subsidiaries. For more information, visit the Company’s website 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, including as a result of the inherent unreliability of guidance. In addition to statements which explicitly describe such risks and uncertainties, such as guidance related to Adjusted EBITDA, 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
(unaudited)
			December 31,					September 30,
			2011					2012
Assets
Current assets
Cash and cash equivalents			$	12,393,792				$	27,184,689
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $260,568 and $246,683, respectively				4,355,632					4,637,315
Unbilled receivables				2,183,465					2,068,608
Other				5,449,074					5,053,612
Materials and supplies				1,780,820					1,999,700
Prepaid expenses				1,328,475					1,505,162
Deferred income taxes				726,310					816,933
Total current assets				28,217,568					43,266,019
Property and equipment, net				65,881,975					57,925,140
Goodwill				188,954,840					44,956,840
Intangible assets, net				20,545,691					8,278,909
Investments				1,943,805					1,924,672
Deferred financing costs				4,485,324					4,058,049
Deferred income taxes				7,454,443					7,575,073
Other assets				240,667					505,358
Total assets			$	317,724,313				$	168,490,060
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable			$	1,490,717				$	1,228,228
Accrued expenses				6,034,104					11,331,331
Advance billings and payments				1,590,689					1,566,957
Deferred income taxes				353,285					387,720
Customer deposits				143,657					119,027
Total current liabilities				9,612,452					14,633,263
Deferred income taxes				48,112,384					23,179,653
Interest rate swaps				241,438					-
Advance billings and payments				615,584					801,921
Other liabilities				403,823					428,932
Long-term notes payable				271,106,387					271,020,389
Total liabilities				330,092,068					310,064,158
Stockholders' Deficit
Class A Common Stock, $.01 par value-authorized 20,000,000 shares; issued and outstanding 13,221,404 shares				132,214					132,214
Retained deficit				(12,499,969	)				(141,706,312	)
Total stockholders' deficit				(12,367,755	)				(141,574,098	)
Total liabilities and stockholders' deficit			$	317,724,313				$	168,490,060

OTELCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
			Three Months Ended September 30,										Nine Months Ended September 30,
			2011					2012					2011					2012
Revenues			$	25,302,747				$	24,427,896				$	76,195,806				$	74,515,910
Operating expenses
Cost of services				10,985,814					10,360,737					32,762,538					32,038,028
Selling, general and administrative expenses				3,248,746					3,310,285					9,485,763					10,140,303
Depreciation and amortization				4,944,033					4,613,756					15,176,030					15,018,751
Long-lived assets impairment - PP&E				-					-					-					2,874,000
Long-lived assets impairment - intangibles				-					-					-					5,748,000
Goodwill impairment				-					(344,256	)				-					143,653,744
Total operating expenses				19,178,593					17,940,522					57,424,331					209,472,826
Income (loss) from operations				6,124,154					6,487,374					18,771,475					(134,956,916	)
Other income (expense)
Interest expense				(6,222,487	)				(5,673,925	)				(18,591,790	)				(17,162,230	)
Change in fair value of derivatives				654,791					-					1,641,032					241,438
Other income				6,189					1,293					388,686					311,505
Total other expenses				(5,561,507	)				(5,672,632	)				(16,562,072	)				(16,609,287	)
Income (loss) before income tax				562,647					814,742					2,209,403					(151,566,203	)
Income tax benefit (expense)				322,815					(498,436	)				(36,013	)				24,690,134
Net income (loss) available to common stockholders			$	885,462				$	316,306				$	2,173,390				$	(126,876,069	)
Common shares outstanding				13,221,404					13,221,404					13,221,404					13,221,404
Net income (loss) per common share			$	0.07				$	0.02				$	0.16				$	(9.60	)
Dividends declared per common share			$	0.18				$	-				$	0.53				$	0.18

OTELCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
			Nine Months Ended
			September 30,
			2011					2012
Cash flows from operating activities:
Net income (loss)			$	2,173,390				$	(126,876,069	)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Depreciation				8,751,166					7,942,242
Amortization				6,424,864					7,076,507
Long-lived assets impairment - PP&E				-					2,874,000
Long-lived assets impairment - intangibles				-					5,748,000
Goodwill impairment				-					143,653,744
Amortization of debt premium				(76,595	)				(85,998	)
Amortization of loan costs				1,026,072					1,026,072
Change in fair value of derivatives				(1,641,032	)				(241,438	)
Provision for deferred income taxes				-					(24,765,293	)
Provision for uncollectible revenue				545,338					351,856
Changes in operating assets and liabilities; net of operating assets and liabilities acquired:
Accounts receivables				(1,654,102	)				(123,220	)
Material and supplies				(182,086	)				(218,880	)
Prepaid expenses and other assets				111,735					(443,247	)
Accounts payable and accrued liabilities				(17,338	)				4,840,028
Advance billings and payments				(141,154	)				162,605
Other liabilities				39,841					195,186
Net cash from operating activities				15,360,099					21,116,095
Cash flows used in investing activities:
Acquisition and construction of property and equipment				(8,448,004	)				(3,396,129	)
Net cash used in investing activities				(8,448,004	)				(3,396,129	)
Cash flows used in financing activities:
Cash dividends paid				(6,990,817	)				(2,330,272	)
Principal repayment of long-term debt				(385,828	)				-
Loan origination costs				-					(598,797	)
Net cash used in financing activities				(7,376,645	)				(2,929,069	)
Net (decrease) increase in cash and cash equivalents				(464,550	)				14,790,897
Cash and cash equivalents, beginning of period				18,226,374					12,393,792
Cash and cash equivalents, end of period			$	17,761,824				$	27,184,689
Supplemental disclosures of cash flow information:
Interest paid			$	17,642,313				$	13,058,959
Income taxes paid			$	165,061				$	76,749

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