Otelco Reports Third Quarter 2013 Results

  Otelco Reports Third Quarter 2013 Results

Business Wire

ONEONTA, Ala. -- November 11, 2013

Otelco Inc. (NASDAQ: OTEL), a wireline telecommunications services provider in
Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West
Virginia, today announced results for its third quarter ended September 30,
2013. Key highlights for Otelco include:

  *Total revenues of $19.0 million for third quarter 2013.
  *Operating income of $4.3 million for third quarter 2013.
  *Adjusted EBITDA (a non-GAAP measure defined below) of $7.3 million for
    third quarter 2013.

“Third quarter 2013 results produced Adjusted EBITDA of $7.3 million,” said
Mike Weaver, President and Chief Executive Officer of Otelco. “We invested
$1.6 million in capital equipment, returning to a more typical spending level
after a year of controlled investment during our balance sheet restructuring.

“Business access line equivalents grew in third quarter in both our RLEC and
CLEC markets,” added Weaver. “The quality of our Hosted PBX product is gaining
attention as other carriers are exploring arrangements with Otelco to
potentially white label our product for their customers. We expect to complete
the first installation of these wholesale customers in November, expanding our
enterprise marketing footprint. Our capital equipment investments continue to
increase our capabilities to provide the higher data speeds our customers
require to meet their expanding needs.

“We made our first scheduled principal payment of $1.7 million on our new
senior credit facility, completed the payment of our remaining restructuring
expenses, and ended the third quarter with $10.4 million in cash, down only
$0.8 million from the previous quarter. An additional required principal
payment of $0.3 million was made at the end of October, reflecting the terms
of our senior credit facility as we continue to focus on reducing our
leverage,” Weaver concluded.

                                                            
Third Quarter 2013 Financial Summary
(Dollars in thousands, except per share amounts)
(Unaudited)
                                                                                
                   Three Months Ended September     Change
                   30,
                2012           2013          Amount         Percent
Revenues           $ 24,428         $ 18,980        $ (5,448   )       (22.3    ) %
Operating          $ 6,487          $ 4,301         $ (2,186   )       (33.7    ) %
income
Interest           $ (5,674   )     $ 2,470         $ 8,144            (143.5   ) %
expense
Net income
available to       $ 316            $ 1,472         $ 1,156            365.8      %
stockholders
Basic net
income per         $ 0.12           $ 0.47          $ 0.35             291.7      %
share
                                                                                  
Adjusted           $ 11,369         $ 7,256         $ (4,113   )       (36.2    ) %
EBITDA^(1)
Capital            $ 851            $ 1,551         $ 700              82.3       %
expenditures
                                                                                  
                   Nine Months Ended September      Change
                   30,
                2012           2013          Amount         Percent
Revenues           $ 74,516         $ 59,634        $ (14,882  )       (20.0    ) %
Operating          $ (134,957 )     $ 14,310        $ 149,267        *
income (loss)
Interest           $ (17,162  )     $ (10,248 )     $ (6,914   )       (40.3    ) %
expense
Net income
(loss)             $ (126,876 )     $ 109,346       $ 236,222        *
available to
stockholders
Basic net
income (loss)      $ (47.98   )     $ 38.24         $ 86.22          *
per share
                                                                                  
Adjusted           $ 33,659         $ 24,491        $ (9,168   )       (27.2    ) %
EBITDA^(1)
Capital            $ 3,396          $ 3,133         $ (263     )       (7.7     ) %
expenditures
                                                                                  
* Not a meaningful calculation
                                                                                  
Reconciliation
of Adjusted
EBITDA to Net
Income (Loss)
                   Three Months Ended September     Nine Months Ended September 30,
                   30,
                2012           2013          2012           2013
Net income         $ 316            $ 1,472         $ (126,876 )     $ 109,346
(loss)
Add:                 2,467            2,397           7,942            7,166
Depreciation
Interest
expense - net        5,332            2,217           16,136           9,421
of premium
Interest
expense -            342              253             1,026            828
amortize loan
cost
Income tax
expense              498              (587    )       (24,690  )       4,284
(benefit)
Change in fair
value of             -                -               (241     )       -
derivatives
Loan fees            19               6               57               39
Amortization -       2,147            446             7,076            2,539
intangibles
Goodwill             (344     )       -               143,654          -
impairment
Impairment of
long-lived           -                -               8,622            -
assets
IXC tariff
dispute              -                112             -                181
settlement
Cancellation         -                -               -                (118,209 )
of debt
Restructuring       592            940           953            8,896    
expense
Adjusted           $ 11,369        $ 7,256        $ 33,659        $ 24,491   
EBITDA^(1)
                                                                                  
^(1) 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 or increasing
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 or consolidated statement of
cash flows 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 Company’s 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.


                                                                             
Key Operating Statistics
(Unaudited)                                                                          Quarterly
                                                                                   % Change
                           December 31,            March      June 30,   September   from
                                                   31,                   30,
                           2011        2012        2013       2013       2013        June 30,
                                                                                     2013
Otelco access line           102,378     99,395      98,839     97,496      96,980   (0.5  ) %
equivalents^(1)
                                                                                             
RLEC and other
services:
  Voice access lines         46,202      43,021      42,274     41,354      41,036   (0.8  ) %
  Data access lines         22,904     22,742     22,718    22,604     22,333   (1.2  ) %
       Access line           69,106      65,763      64,992     63,958      63,369   (0.9  ) %
       equivalents^(1)
                                                                                             
  Cable television           4,201       4,155       4,102      4,027       3,963    (1.6  ) %
  customers
  Satellite television       226         233         235        237         237      0.0     %
  customers
  Security                   -           63          96         111         121      9.0     %
  Additional internet        5,414       4,506       4,312      4,124       2,957    (28.3 ) %
  customers
       RLEC dial-up          301         198         169        153         141      (7.8  ) %
       Other dial-up         2,797       1,895       1,726      1,590       455      (71.4 ) %
       Other data            2,316       2,413       2,417      2,381       2,361    (0.8  ) %
       lines
                                                                                             
CLEC:
  Voice access lines         30,189      30,470      30,589     30,252      30,337   0.3     %
  Data access lines         3,083      3,162      3,258     3,286      3,274    (0.4  ) %
       Access line           33,272      33,632      33,847     33,538      33,611   0.2     %
       equivalents^(1)
  Wholesale network          157,144     162,117     2,608      2,709       2,756    1.7     %
  connections
                                                                                             
                           For the Year Ended      For the Three Months Ended
                           December 31,            March      June 30,   September
                                                   31,                   30,
                           2011        2012        2013       2013       2013
Total Revenues (in         $ 101.8     $ 98.4      $ 21.0     $ 19.7     $  19.0
millions):
  RLEC^(2)                 $ 57.4      $ 62.8      $ 14.5     $ 13.5     $  14.1
  CLEC                     $ 44.4      $ 35.6      $ 6.5      $ 6.2      $  4.9

^(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) Includes regulated and unregulated RLEC revenue.

FINANCIAL DISCUSSION FOR THIRD QUARTER 2013 (unaudited):

Revenue

Total revenues of $19.0 million decreased 22.3% in the three months ended
September 30, 2013, when compared to the three months ended September 30,
2012. The expiration of the Time Warner Cable (“TWC”) contract at the end of
2012 was the primary reason for the decrease in 2013, accounting for 73.2% of
the total revenue decline.

                                                          
                                                                             
                     Three Months Ended September    Change
                     30,
                     2012              2013           Amount         Percent
                     (dollars in thousands)
  Local services     $   11,003        $  7,081       $ (3,922 )     (35.6 ) %
  Network access         7,500            6,112         (1,388 )     (18.5 )
  Internet               3,683            3,630         (53    )     (1.4  )
  Transport              1,454            1,413         (41    )     (2.8  )
  services
  Cable                 788             744          (44    )     (5.6  )
  television
  Total              $   24,428        $  18,980      $ (5,448 )     (22.3 )
                                                                             

Local services revenue decreased 35.6% in the third quarter of 2013 to $7.1
million from $11.0 million in the third quarter ended September 30, 2012. TWC
related revenue decreased $3.2 million. The decline in RLEC voice access lines
and reductions in toll calling decreased revenue by $0.7 million. Network
access revenue decreased 18.5% in the third quarter of 2013 to $6.1 million
from $7.5 million in the quarter ended September 30, 2012. TWC related access
revenue declined $0.8 million. End user-related access revenue, net of
payments from the new Connect America Fund, decreased $0.6 million, reflecting
reduced subscriber usage and lower intrastate calling revenue associated with
the FCC’s InterCarrier Compensation order. Internet revenue for the third
quarter 2013 decreased 1.4% to $3.6 million from just under $3.7 million in
the quarter ended September 30, 2012. The decline in dial-up internet services
and a pricing change for multiple email addresses was partially offset by an
increase in fiber revenue. Transport services revenue decreased 2.9% to $1.4
million in the three months ended September 30, 2013 from just under $1.5
million for the three months ended September 30, 2012. The decrease was
associated with contract renewal pricing. Cable television revenue in the
three months ended September 30, 2013 decreased 5.6% to just over $0.7 million
compared to just under $0.8 million in the same period in 2012. The decrease
was associated with reduced subscriber base which was only partially offset by
increased security services revenue in our Alabama territory.

Operating Expenses

Operating expenses in the three months ended September 30, 2013 decreased
18.2% to $14.7 million from $17.9 million in the three months ended September
30, 2012. Cost of services decreased 14.0% to $8.9 million from $10.4 million
for the three months ended September 30, 2012. Costs in 2012 associated with
TWC were $0.6 million compared to no cost in third quarter 2013. New access
recovery fees in 2013 offset $0.3 million in costs; restructuring of our CLEC
sales force and customer service function reduced costs $0.2 million; lower
circuit and facility expense reduced costs $0.2 million; and other network
efficiencies reduced costs $0.2 million. Selling, general and administrative
expenses decreased 11.7% to $2.9 million in the three months ended September
30, 2013, from $3.3 million in the three months ended September 30, 2012.
Reorganization expenses are separately classified in 2013 but are included in
selling, general and administrative expenses in the amount of $0.6 million in
2012. Other changes include an increase of $0.2 million in compensation
expense and $0.1 million for the settlement of disputed charges in 2013, which
were partially offset by $0.1 million in lower property taxes. Depreciation
and amortization for third quarter 2013 decreased 38.4% to $2.8 million from
$4.6 million in the third quarter 2012. The amortization of intangible assets
associated with the TWC contract decreased $1.6 million. The amortization of a
telephone plant adjustment decreased $0.1 million and RLEC depreciation
decreased $0.1 million.

Interest Expense

Interest expense decreased 56.5% to $2.5 million in the quarter ended
September 30, 2013, from $5.7 million a year ago. The exchange of the
Company’s senior subordinated notes for new Class A common stock during second
quarter 2013 compared to interest accrued on those notes in the same period of
2012 represents a decrease of $3.5 million. Interest on our senior
subordinated notes increased $0.4 million, reflecting the higher interest rate
floor in our new senior credit facility. Amortization of loan costs decreased
$0.1 million.

Reorganization Items

Separate classification of reorganization items began in first quarter 2013
when we filed the Reorganization Cases. All reorganization expenses prior to
that period are reflected in selling, general and administrative expenses. We
expensed approximately $0.9 million during the third quarter of 2013
associated with our balance sheet restructuring process with no comparable
expense in 2012 reflected as reorganization items. This brings the total for
2013 to $7.5 million (excluding cancellation of debt income).

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2013 was $7.3 million
compared to $11.4million for the same period in 2012 and $8.4 million in the
second quarter of 2013. See financial tables for a reconciliation of Adjusted
EBITDA to net income.

Balance Sheet

As of September 30, 2013, the Company had cash and cash equivalents of $10.4
million compared to $32.5million at the end of 2012, reflecting the Company’s
payment of $28.7 million on its long-term notes payable in second quarter and
another $1.7 million in third quarter 2013. The payments reduce the
outstanding notes payable balance to $131.6 million, including the current
portion of $7.0 million which includes $0.3 million for the Company’s first
Excess Cash Flow payment to the senior lenders which was paid on October 31,
2013. The Company’s senior credit facility extends through April 2016 and
includes a $5.0 million undrawn revolver.

Capital Expenditures

Capital expenditures were $1.6 million for the third quarter as the Company
continues to invest in its infrastructure, including enhancing available
broadband speeds in its service area.

Third Quarter Investors Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the
internet, on Tuesday, November12, 2013, at 11:30 a.m. ET. To participate in
the call, participants should dial (719)457-2697 and ask for the Otelco call
10 minutes prior to the start time. Investors 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. 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 for 30 days. A two-week telephonic
replay may also be accessed by calling (719) 457-0820 and using the
confirmation code 5382593.

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, digital
high-speed data lines, transport services, network access, cable television
and other related services. With approximately 97,000 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. 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
(unaudited)
(in thousands, except share par value and share amounts)

                                           December 31,   September 30,
                                                2012             2013
Assets
  Current assets
    Cash and cash equivalents                   $ 32,516         $  10,350
    Accounts receivable:
    Due from subscribers, net of allowance
    for doubtful accounts of $239 and $298,       4,206             3,893
    respectively
    Unbilled receivables                          2,004             1,941
    Other                                         5,336             2,639
    Materials and supplies                        1,845             1,794
    Prepaid expenses                              1,982             1,841
    Deferred income taxes                        1,843           2,960    
           Total current assets                  49,732          25,418   
                                                                 
  Property and equipment, net                     58,243            53,939
  Goodwill                                        44,957            44,957
  Intangible assets, net                          6,671             4,420
  Investments                                     1,919             1,900
  Deferred financing costs, net                   4,037             2,340
  Deferred income taxes                           6,276             1,556
  Other assets                                   490             569      
           Total assets                         $ 172,325       $  135,099  
                                                                 
Liabilities and Stockholders' Deficit
  Current liabilities
    Accounts payable                            $ 2,007          $  935
    Accrued expenses                              14,901            5,904
    Advance billings and payments                 1,560             1,460
    Deferred income taxes                         431               469
    Customer deposits                             91                84
    Current maturity of long-term notes          270,990         7,000    
    payable
           Total current                         289,980         15,852   
           liabilities
                                                                 
                                                                 
  Deferred income taxes                           22,670            23,182
  Advance billings and payments                   789               749
  Other liabilities                               484               159
  Long-term notes payable, less current          -               124,634  
  maturities
           Total liabilities                     313,923         164,576  
                                                                 
  Stockholders' deficit
    Class A Common Stock, $.01 par
    value-authorized 20,000,000 shares;           132               -
    issued and outstanding 13,221,404
    shares
    Class A Common Stock, $.01 par
    value-authorized 10,000,000 shares;           -                 29
    issued and outstanding 2,870,948 shares
    Class B Common Stock, $.01 par
    value-authorized 250,000 shares; issued       -                 2
    and outstanding 232,780 shares
    Additional paid in capital                    -                 2,876
    Retained deficit                             (141,730 )       (32,384  )
           Total stockholders'                   (141,598 )       (29,477  )
           deficit
           Total liabilities and                $ 172,325       $  135,099  
           stockholders' deficit


                     
OTELCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
                                                                     
                        Three Months Ended                  Nine Months Ended
                        September 30,                       September 30,
                        2012              2013              2012              2013
                                                                              
Revenues                $ 24,428          $ 18,980          $ 74,516          $ 59,634
                                                                              
Operating
expenses
     Cost of              10,361            8,912             32,038            27,318
     services
     Selling,
     general and          3,310             2,924             10,140            8,300
     administrative
     expenses
     Depreciation
     and                  4,614             2,843             15,019            9,706
     amortization
     Long-lived
     assets
     impairment -         -                 -                 2,874             -
     property,
     plant and
     equipment
     Long-lived
     assets               -                 -                 5,748             -
     impairment -
     intangibles
     Goodwill            (344      )      -               143,654         -         
     impairment
          Total
          operating      17,941          14,679          209,473         45,324    
          expenses
                                                                              
     Income (loss)
     from                6,487           4,301           (134,957  )      14,310    
     operations
                                                                              
Other income
(expense)
     Interest             (5,674    )       (2,470    )       (17,162   )       (10,248   )
     expense
     Change in fair
     value of             -                 -                 241               -
     derivatives
     Other income        1               (6        )      312             255       
     (expense)
          Total
          other          (5,673    )      (2,476    )      (16,609   )      (9,993    )
          expenses
                                                                              
Income (loss)
before
reorganization            814               1,825             (151,566  )       4,317
items and income
tax
                                                                              
     Reorganization      -               (940      )      -               109,313   
     items
                                                                              
Income (loss)             814               885               (151,566  )       113,630
before income tax
Income tax benefit       (498      )      587             24,690          (4,284    )
(expense)
                                                                              
Net income              $ 316            $ 1,472          $ (126,876  )     $ 109,346   
(loss)
                                                                              
                                                                              
Weighted average
number of common          2,644,281         3,103,728         2,644,281         2,859,699
shares outstanding
(restated for 2012)
Net income (loss)       $ 0.12            $ 0.47            $ (47.98    )     $ 38.24
per common share
                                                                              
Dividends declared      $ -               $ -               $ 0.18            $ -
per common share
                                                                              


OTELCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
                                           Nine Months Ended
                                                 September 30,
                                                 2012           2013
Cash flows from operating activities:
  Net income (loss)                              $ (126,876 )     $ 109,346
  Adjustments to reconcile net income (loss)
  to cash flows provided by operating
  activities:
              Depreciation                         7,942            7,166
              Amortization                         7,077            2,540
              Long-lived assets impairment -       2,874            -
              property, plant and equipment
              Long-lived assets impairment -       5,748            -
              intangibles
              Goodwill impairment                  143,654          -
              Amortization of loan costs           1,026            827
              Amortization of notes payable        (86      )       (31      )
              premium
              Change in fair value of              (242     )       -
              derivatives
              Provision (benefit) for              (24,765  )       4,154
              deferred income taxes
              Provision for uncollectible          352              304
              accounts receivable
              Changes in operating assets
              and liabilities
                      Accounts receivable          (123     )       2,768
                      Material and supplies        (219     )       51
                      Prepaid expenses and         (443     )       62
                      other assets
                      Accounts payable and         4,840            480
                      accrued expenses
                      Advance billings and         162              (140     )
                      payments
                      Other liabilities            195              (331     )
              Reorganization adjustments:
                      Non-cash                    -              (114,210 )
                      reorganization income
                         Net cash from
                         operating                21,116         12,986   
                         activities
                                                                  
Cash flows used in investing activities:
  Acquisition and construction of property        (3,396   )      (3,133   )
  and equipment
                                                                  
                         Net cash used in
                         investing                (3,396   )      (3,133   )
                         activities
                                                                  
Cash flows used in financing activities:
  Cash dividends paid                              (2,330   )       -
  Principal repayment of long-term notes           -                (30,366  )
  payable
  Loan origination costs                          (599     )      (1,653   )
                                                                  
                         Net cash used in
                         financing                (2,929   )      (32,019  )
                         activities
                                                                  
Net increase (decrease) in cash and cash           14,791           (22,166  )
equivalents
Cash and cash equivalents, beginning of           12,394         32,516   
period
                                                                  
Cash and cash equivalents, end of period         $ 27,185        $ 10,350   
                                                                  
Supplemental disclosures of cash flow
information:
  Interest paid                                  $ 13,059        $ 6,395    
                                                                  
  Income taxes paid                              $ 77            $ 163      
                                                                  
  Loan fees paid via issuance of Class B         $ -             $ 2,772    
  common stock
                                                                  
  Cancellation of Class A common stock           $ -             $ 132      
                                                                  
  Issuance of Class A common stock               $ -             $ 29       
                                                                  


Contact:

Otelco Inc.
Curtis Garner, 205-625-3580
Chief Financial Officer
Curtis@otelcotel.com