Otelco Reports Third Quarter 2009 Results

ONEONTA, Ala. - (BUSINESS WIRE) - Otelco Inc. (NASDAQ: OTT) (TSX: OTT.un), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire and West Virginia, today announced results for its third quarter ended September 30, 2009. Key quarterly highlights for Otelco include:

• Total revenues of $26.4 million.
• Operating income of $6.2 million.
• Adjusted EBITDA (as defined below) of $12.8 million.

"Otelco delivered another quarterly increase in revenue and EBITDA while the economy continued to struggle," said Mike Weaver, President and Chief Executive Officer of Otelco. "We experienced growth in our revenue of $8.2 million over the third quarter of 2008 and $0.6 million over second quarter 2009. We had our best quarterly results with Adjusted EBITDA at $12.8 million, an increase of $3.8 million and $0.4 million over the same quarter last year and the second quarter of 2009, respectively. Revenue growth and effective cost management, coupled with a focus on the integration of acquisitions, are the drivers behind the results.

"Our capital expenditures for the quarter were $2.8 million, returning to our more typical level of approximately 10% of revenue after a conservative first half of 2009. After reflecting a voluntary prepayment of $5.0 million to reduce our senior debt made during third quarter, cash grew $2.9 million during the quarter.

"The integration of the Country Road entities is complete with the successful billing system conversion this quarter," Weaver concluded. "With the integration behind us, our focus will be on CLEC growth by expanding our operations in northern Maine and neighboring New England states. As evidenced by our nineteenth consecutive IDS dividend, we remain committed to returning cash to our shareholders."

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 November 12, 2009. The scheduled interest and any dividend declared will be paid on December 30, 2009 to holders of record as of the close of business on December 15, 2009. The interest payment will cover the period from September 30, 2009 through December 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 nineteen successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December 2004.

Third Quarter 2009 Financial Summary (Dollars in thousands, except per share amounts)
		Three Months Ended Sept. 30,								Change
			2008				2009			Amount				Percent
Revenues		$	18,238			$	26,403			$	8,165				44.8	%
Operating income		$	5,665			$	6,209			$	544				9.6	%
Interest expense		$	(4,774	)		$	(6,469	)		$	1,695				35.5	%
Net income (loss) available to stockholders		$	789			$	(12	)		$	(801	)		*
Basic net income (loss) per share		$	0.06			$	(0.00	)		$	(0.06	)		*
Diluted net income (loss) per share		$	0.04			$	(0.01	)		$	(0.05	)		*
Adjusted EBITDA(a)		$	9,013			$	12,784			$	3,771				41.8	%
Capital expenditures		$	2,901			$	2,815			$	(86	)			(3.0	)%
		Nine Months Ended Sept. 30,								Change
			2008				2009			Amount				Percent
Revenues		$	53,766			$	77,700			$	23,934				44.5	%
Operating income		$	15,811			$	16,390			$	579				3.7	%
Interest expense		$	(14,230	)		$	(19,515	)		$	5,285				37.1	%
Net income (loss) available to stockholders		$	1,603			$	(1,599	)		$	(3,202	)		*
Basic net income (loss) per share		$	0.13			$	(0.13	)		$	(0.26	)		*
Diluted net income (loss) per share		$	0.10			$	(0.13	)		$	(0.23	)		*
Adjusted EBITDA(a)		$	26,345			$	36,637			$	10,292				39.1	%
Capital expenditures		$	6,849			$	6,392			$	(457	)			(6.7	)%
* Not a meaningful calculation
Reconciliation of Adjusted EBITDA to Net Income (Loss)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
			2008				2009				2008				2009
Adjusted EBITDA
Net income (loss)		$	789			$	(12	)		$	1,603			$	(1,599	)
Add: Depreciation			2,748				3,417				8,276				10,594
Interest expense - net of premium			4,167				5,683				12,443				17,393
Interest expense - caplet cost			253				469				723				1,169
Interest expense - bond premium			(19	)			(21	)			(54	)			(61	)
Interest expense - amortize loan cost		373					338				1,118				1,014
Gain/loss from investment		-				-					(45	)		-
Income tax expense (benefit)			464				(144	)			696				(1,109	)
Change in fair value of derivative			(174	)			(74	)			(100	)			(149	)
Loan fees			19				19				57				57
Amortization - intangibles			393				3,109				1,628				9,328
Adjusted EBITDA		$	9,013			$	12,784			$	26,345			$	36,637
(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)
												June 30 - Sept. 30
		December 31,				March 31,		June 30,		Sept. 30,		% Change
Key Operating Statistics		2007		2008		2009		2009		2009		2009
RLEC access lines:
Voice lines		36,687		51,530		50,807		50,078		48,998		(2.2)%
Data lines		12,160		18,709		19,365		19,596		19,784		1.0%
RLEC access line equivalents (1)
		48,847		70,239		70,172		69,674		68,782		(1.3)%
CLEC access lines:
Voice lines		16,973		26,558		26,744		27,110		28,153		3.8%
Data lines		2,571		3,246		3,228		3,298		3,297		(0.0)%
CLEC access line equivalents (1)
		19,544		29,804		29,972		30,408		31,450		3.4%
Otelco access line equivalents (1)
		68,391		100,043		100,144		100,082		100,232		0.1%
Cable television customers
		4,169		4,082		4,132		4,114		4,126		0.3%
Wholesale network connections
		-		98,187		113,855		122,471		127,317		4.0%
Dial-up internet customers
		15,249		11,864		10,885		10,165		9,651		(5.1)%
(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 THIRD 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 44.8% in the three months ended September 30, 2009 to $26.4 million from $18.2 million in the three months ended September 30, 2008. The growth in revenue was primarily associated with the acquisition and growth in CLEC sales. Local services revenue grew 85.6% in the third quarter to $12.4 million from $6.7 million in the quarter ended September 30, 2008. The acquisition provided an increase of $6.0 million for the quarter, partially offset by lower RLEC lines and the termination of a third-party billing services agreement. Network access revenue increased 27.2% in the third quarter to $8.5 million from $6.7 million in the quarter ended September 30, 2008. The acquisition provided an increase of $2.9 million for the quarter, partially offset by a decrease of $0.8 million in switched and special access. Cable television revenue in the three months ended September 30, 2009 increased 2.2% to just over $0.6 million from $0.6 million in the three months ended September 30, 2008. Internet revenue for the third quarter 2009 increased 15.6% to $3.5 million from $3.0 million in the quarter ended September 30, 2008, primarily associated with the acquisition. Transport services revenue grew 11.3% to $1.4 million in the three months ended September 30, 2009 from $1.2 million in the same period in 2008.

Operating Expenses

Operating expenses in the three months ended September 30, 2009 increased 60.6% to $20.2 million from $12.6 million in the three months ended September 30, 2008. Cost of services increased 56.9% to $10.4 million in the quarter ending September 30, 2009 from $6.7 million in the same period last year, reflecting the acquisition. Increases in long distance and CLEC related costs in the balance of the Company were offset by reduced circuit expense and other network efficiencies. Selling, general and administrative expenses increased 16.1% to $3.2 million in the three months ended September 30, 2009 from $2.8 million in the three months ended September 30, 2008. The acquisition provided for an increase of $0.8 million, which was partially offset by lower external relations, legal and employee costs. Depreciation and amortization for third quarter increased 107.8% to $6.5 million from $3.1 million. Depreciation and amortization included $3.6 million from assets acquired in the acquisition including amortization of intangible assets acquired and a reduction of $0.2 million from the existing units.

Interest Expense

Interest expense increased 35.5% to $6.5 million in the quarter ended September 30, 2009 from $4.8 million a year ago. The results reflect $1.5 million in interest on the increased senior debt associated with the acquisition and $0.2 million in caplet cost amortization associated with the interest rate cap. The Company has 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 September 30, 2009 was $12.8 million compared to $9.0 million for the same period in 2008 and $12.4 million in the second quarter of 2009. Adjusted EBITDA included approximately $4.9 million from the acquisition. See financial tables for a reconciliation of Adjusted EBITDA to net income.

Balance Sheet

As of September 30, 2009, the Company had cash and cash equivalents of $16.7 million compared to $13.5 million at the end of 2008. Total long-term notes payable was reduced to $273.7 million, reflecting a voluntary prepayment of $5.0 million made in August. The Company continues to meet all of its loan covenants. The third 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 September 30, 2009. This represents the nineteenth consecutive quarterly distribution since going public in December 2004.

Capital Expenditures

Capital expenditures were $2.8 million for the quarter, reflecting a return to a more normal level of investment in the business. The Company is upgrading and expanding its soft switching infrastructure in Maine and Missouri; enhancing DSL capacity; expanding IPTV capability in Alabama; and investing in competitive customer specific equipment to support the growth of our CLEC customers.

Third Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Thursday, November 5, 2009, at 11:00 a.m. ET. To participate in the call, dial (913) 312-1236 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 confirmation code 9894405.

ABOUT OTELCO

Otelco Inc., headquartered in Oneonta, Alabama, provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire 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 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, or rural local exchange carriers. 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, 2008				September 30, 2009
						(unaudited)
Assets
Current assets
Cash and cash equivalents		$	13,542,255			$	16,717,829
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $318,446 and $365,076 respectively
			5,207,731				4,707,292
Unbilled receivables			2,567,730				2,488,917
Other			4,348,044				3,327,553
Materials and supplies			2 ,305,755				2,092,842
Prepaid expenses			1,141,908				1,052,704
Income tax receivable			181,644				6,000
Deferred income taxes			827,686				827,686
Total current assets			30,122,753				31,220,823
Property and equipment, net			75,407,062				70,057,795
Goodwill			189,334,837				188,190,078
Intangible assets, net			44,390,644				36,261,961
Investments			2,015,583				1,996,451
Deferred financing costs			8,315,921				7,301,991
Deferred income taxes			5,897,382				6,123,703
Interest rate cap			7,765			-
Other assets			49,540				203,233
Total assets		$	355,541,487			$	341,356,035
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable		$	2,312,920			$	2,304,996
Accrued expenses			6,632,287				5,853,988
Advance billings and payments			2,024,123				1,660,142
Customer deposits			180,582				191,324
Total current liabilities			11,149,912				10,010,450
Deferred income taxes			45,962,402				45,328,310
Interest rate swaps		-					1,318,608
Advance billings and payments			739,736				708,698
Other liabilities			188,346				158,387
Long-term notes payable			278,799,513				273,738,754
Total liabilities			336,839,909				331,263,207
Derivative liability			238,054				89,318
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				12,575,136
Retained deficit			(3,870,923	)			(5,470,262	)
Accumulated other comprehensive loss			(1,160,759	)			(1,318,611	)
Total stockholders' equity			14,378,491				5,918,477
Total liabilities and stockholders' equity		$	355,541,487			$	341,356,035

OTELCO INC. Consolidated Statements of Operations (unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
			2008				2009				2008				2009
Revenues
Local services		$	6,678,826			$	12,396,806			$	20,116,902			$	36,315,205
Network access			6,694,486				8,517,512				19,237,269				24,876,708
Cable television			601,025				614,114				1,713,457				1,833,164
Internet			3,028,963				3,500,870				9,060,822				10,542,696
Transport services			1,234,274				1,373,832				3,637,276				4,132,208
Total revenues			18,237,574				26,403,134				53,765,726				77,699,981
Operating expenses
Cost of services and products			6,654,860				10,445,442				20,052,583				31,245,153
Selling, general and administrative expenses
			2,777,411				3,222,825				7,998,818				10,142,354
Depreciation and amortization			3,140,688				6,525,796				9,903,702				19,922,383
Total operating expenses			12,572,959				20,194,063				37,955,103				61,309,890
Income from operations			5,664,615				6,209,071				15,810,623				16,390,091
Other income (expense)
Interest expense			(4,773,647	)			(6,468,875	)			(14,229,727	)			(19,514,730	)
Change in fair value of derivative			173,842				74,274				99,787				148,736
Other income			188,160				29,540				618,785				267,911
Total other expenses			(4,411,645	)			(6,365,061	)			(13,511,155	)			(19,098,083	)
Income (loss) before income tax			1,252,970				(155,990	)			2,299,468				(2,707,992	)
Income tax (expense) benefit			(463,727	)			144,251				(696,049	)			1,108,652
Net income (loss) available to common stockholders
		$	789,243			$	(11,739	)		$	1,603,419			$	(1,599,340	)
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		$	0.06			$	(0.00	)		$	0.13 $				(0.13	)
Diluted		$	0.04			$	(0.01	)		$	0.10 $				(0.13	)
Dividends declared per share		$	0.18			$	0.18			$	0.53 $				0. 53

OTELCO INC. Consolidated Statements of Cash Flows (unaudited)
		Nine Months Ended
		September 30,
			2008				2009
Cash flows from operating activities:
Net income (loss)		$	1,603,419			$	(1,599,340	)
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation			8,275,580				10,594,257
Amortization			1,628,122				9,328,126
Interest rate caplet			722,527				1,168,521
Amortization of debt premium			(54,117	)			(60,759	)
Amortization of loan costs			1,118,481				1,013,930
Change in fair value of derivative			(99,787	)			(148,736	)
Provision for deferred income taxes			-				114,171
Provision for uncollectible revenue			229,404				271,536
Gain on early lease termination			(121,124	)			-
Changes in assets and liabilities; net of assets and liabilities acquired:
Accounts receivables			(582,528	)			1,147,822
Material and supplies			(268,213	)			212,913
Prepaid expenses and other assets			601,101				89,204
Income tax receivable			255,106				175,644
Accounts payable and accrued liabilities			1,302,625				(616,048	)
Advance billings and payments			(181,015	)			(395,019	)
Other liabilities			5,539				(19,216	)
Net cash from operating activities			14,435,120				21,277,006
Cash flows from investing activities:
Acquisition and construction of property and equipment			(6,848,799	)			(6,392,058	)
Deferred charges			(533,098	)			(6,551	)
Net cash used in investing activities			(7,381,897	)			(6,398,609	)
Cash flows from financing activities:
Cash dividends paid			(6,702,822	)			(6,702,823	)
Repayment of long-term notes payable			-				(5,000,000	)
Net cash used in financing activities			(6,702,822	)			(11,702,823	)
Net increase in cash and cash equivalents			350,401				3,175,574
Cash and cash equivalents, beginning of period			12,810,497				13,542,255
Cash and cash equivalents, end of period		$	13,160,898			$	16,717,829
Supplemental disclosures of cash flow information:
Interest paid		$	12,705,214			$	17,763,703
Income taxes paid (received)		$	(122,606	)		$	53,658
Non-cash gain on early lease termination		$	(121,124	)		$	-

Otelco Inc.
Curtis Garner, 205-625-3571
Chief Financial Officer
Curtis@otelcotel.com