Otelco (OTEL) 8-K Otelco Reports Second Quarter 2011 Results

Exhibit 99.1

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

Otelco Reports Second Quarter 2011 Results

ONEONTA, Alabama (August 3, 2011) – 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 second quarter ended June 30, 2011.  Key highlights for Otelco include:

·      Total revenues of $25.5 million for second quarter 2011.

·      Operating income of $7.3 million for second quarter 2011.

·      Adjusted EBITDA (as defined below) of $11.9 million for second quarter 2011.

“After a slow start in the first quarter of the year, our second quarter results generated growth in revenue, operating margin and EBITDA when compared to first quarter. The management team focused on delivering superior service and controlling costs. With our expanded CLEC sales and marketing capability finally in place and the completion of our six colocation facilities in New Hampshire, we are in a position to begin to see growth in our non-regulated business.

“Our cash position remains strong,” continued Weaver.  “In May, we made another voluntary repayment on our senior debt of $0.4 million representing a reduction of $11.5 million since the credit facility was renewed in October 2008. Capital investments of $3.5 million in our business infrastructure during the quarter, including approximately $0.7 million to replace assets damaged by spring tornadoes in Alabama, will support both growth and cost improvements in all of our service territories.

“The planned acquisition of Shoreham Telephone Company in Vermont is on schedule to close in fourth quarter,” added Weaver.  “Shoreham will also anchor our CLEC expansion into the fourth New England state.

“The strength of our commitment to building value for and returning cash to our shareholders is unwavering, as evidenced by our twenty-sixth consecutive IDS dividend,” Weaver concluded.

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 August 11, 2011.  The scheduled interest and any dividend declared will be paid on September 30, 2011, to holders of record as of the close of business on September 15, 2011.  The interest payment will cover the period from June 30, 2011 through September 29, 2011.  Currently, it is anticipated that the Company’s dividends in 2011 will continue to be treated as a return of capital for tax purposes.  The Company has made twenty-six successive quarterly distributions of dividends and interest since its IDSs were originally offered to the public in December 2004.

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Otelco Reports Second Quarter 2011 Results

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August 3, 2011

Second Quarter 2011 Financial Summary

(Dollars in thousands, except per share amounts)

		Three Months Ended June 30,						Change
		2010			2011			Amount			Percent
Revenues		$	26,511		$	25,501		$	(1,010	)		(3.8	)	%
Operating income		$	7,011		$	7,327		$	316			4.5		%
Interest expense		$	(6,179	)	$	(6,199	)	$	20			0.3		%
Net income available to stockholders		$	417		$	1,283		$	866			*
Basic net income per share		$	0.03		$	0.10		$	0.07			*
Diluted net income per share		$	0.03		$	0.10		$	0.07			*
Adjusted EBITDA(a)		$	12,890		$	11,887		$	(1,003	)		(7.8	)	%
Capital expenditures		$	2,333		$	3,508		$	1,175			50.4		%
* Not a meaningful calculation
		Six Months Ended June 30,						Change
			2010			2011		Amount			Percent
Revenues		$	52,305		$	50,893		$	(1,412	)		(2.7	)	%
Operating income		$	12,880		$	12,647		$	(233	)		(1.8	)	%
Interest expense		$	(12,168	)	$	(12,369	)	$	201			1.7		%
Net income available to stockholders		$	32		$	1,288		$	1,256			*
Basic net income per share		$	-		$	0.10		$	0.10			*
Diluted net income per share		$	-		$	0.10		$	0.10			*
Adjusted EBITDA(a)		$	25,220		$	23,300		$	(1,920	)		(7.6	)	%
Capital expenditures		$	4,087		$	6,351		$	2,264			55.4		%
* Not a meaningful calculation
Reconciliation of Adjusted EBITDA to Net Income
	Three Months ended June 30,							Six Months ended June 30,
		2010			2011			2010			2011
Net income		$	417		$	1,283		$	32		$	1,288
Add:  Depreciation			3,327			2,307			6,900			5,829
Interest expense - net of premium			5,840			5,857			11,491			11,685
Interest expense - amortize loan cost			339			342			677			684
Income tax expense			262			357			1			359
Change in fair value of derivatives			176			(480	)		1,062			(986	)
Loan fees			19			19			38			38
Amortization - intangibles			2,510			2,202			5,019			4,403
Adjusted EBITDA		$	12,890		$	11,887		$	25,220		$	23,300

 (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.

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Otelco Reports Second Quarter 2011 Results

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Otelco Inc. - Key Operating Statistics

													Quarterly
	December 31,							March 31,			June 30,		% Change from
	2009			2010			2011			2011			March 31, 2011
Otelco access line equivalents(1)			100,356			99,639			99,271			98,304		(1.0	)	%
RLEC and other services:
Voice access lines			48,215			45,461			44,770			44,113		(1.5	)	%
Data access lines			20,066			20,852			21,158			21,137		(0.1	)	%
Access line equivalents(1)			68,281			66,313			65,928			65,250		(1.0	)	%
Cable television customers			4,195			4,227			4,029			4,054		0.6		%
Satellite television customers			100			125			217			222		2.3		%
Additional internet customers			9,116			6,975			6,435			6,046		(6.0	)	%
RLEC dial-up			786			393			341			307		(10.0	)	%
Other dial-up			6,439			4,300			3,786			3,403		(10.1	)	%
Other data lines			1,891			2,282			2,308			2,336		1.2		%
CLEC:
Voice access lines			28,647			29,944			30,084			29,842		(0.8	)	%
Data access lines			3,428			3,382			3,259			3,212		(1.4	)	%
Access line equivalents(1)			32,075			33,326			33,343			33,054		(0.9	)	%
Wholesale network connections			132,324			149,043			152,101			154,785		1.8		%
	For the Years Ended						For the Three Months Ended
		December 31,						March 31,			June 30,
		2009			2010			2011			2011
Total Revenues (in millions):		$	103.8		$	104.4		$	25.4		$	25.5
RLEC		$	60.8		$	58.4		$	14.2		$	14.3
CLEC		$	43.0		$	46.0		$	11.2		$	11.2

__________________________

(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 SECOND QUARTER 2011:

Revenues

Total revenues decreased 3.8% in the three months ended June 30, 2011, to $25.5 million from $26.5 million in the three months ended June 30, 2010.  A one-time settlement in 2010 accounted for the majority of the difference. In addition, declines from the traditional loss of RLEC voice access line related revenues were not fully offset by growth in CLEC and cable television revenues.  The table below provides the components of our revenues for the three months ended June 30, 2011 compared to the same period of 2010.

	Three Months Ended June 30,				Change
	2010		2011		Amount			Percent
	(dollars in thousands)
Local services	$	12,286	$	11,940	$	(346	)		(2.8) %
Network access		8,604		8,076		(528	)		(6.1)
Cable television		699		707		8			1.1
Internet		3,527		3,458		(69	)		(2.0)
Transport services		1,395		1,320		(75	)		(5.4)
Total	$	26,511	$	25,501	$	(1,010	)		(3.8)

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Local services revenue decreased 2.8% in the second quarter to $11.9 million from $12.3 million in the quarter ended June 30, 2010.  The growth in CLEC revenue accounted for an increase of $0.1 million. RLEC revenue decreased $0.4 million reflecting the decline in RLEC voice access lines. Network access revenue decreased 6.1% in the second quarter to $8.1 million from $8.6 million in the quarter ended June 30, 2010. Interstate and intrastate switched access declined $0.1 million. A one-time settlement in 2010 accounted for the remainder of the difference. Cable television revenue in the three months ended June 30, 2011, increased 1.1% to remain at $0.7 million in the same periods for 2011 and 2010.  Growth in IPTV subscribers and the shift to high-definition packages in Alabama was offset by the decline in revenue associated with the conversion of our Missouri cable customers to satellite services during first quarter 2011. Internet revenue for the second quarter 2011 decreased 2.0% to stay at $3.5 million in the three months ended June 30, 2011 and 2010. Growth in broadband data lines offset the loss of dial-up subscribers.  Transport services revenue decreased 5.4% to $1.3 million in the three months ended June 30, 2011 from $1.4 million for the same period in 2010.  Market price changes for new and existing customers caused the decline.

Operating Expenses

Operating expenses in the three months ended June 30, 2011, decreased 6.8% to $18.2 million from $19.5 million in the three months ended June 30, 2010.  Cost of services and products increased 3.2% to $10.8 in the quarter ended June 30, 2011, from $10.4 million in the quarter ended June 30, 2010. Higher costs associated with the hosted PBX product support were partially offset by reduced overhead expenses. Selling, general and administrative expenses decreased 10.1% to $2.9 million in the three months ended June 30, 2011, from $3.2 million in the three months ended June 30, 2010, primarily related to a non-recurring reduction in employee and benefit costs and operating taxes plus lower legal expenses, partially offset by higher uncollectible expenses associated with carrier billing and customer credits. Depreciation and amortization for second quarter 2011 decreased 22.7% to $4.5 million from $5.8 million in second quarter 2010.  Amortization of intangible assets associated with the Country Road acquisition decreased $0.3 million, including contract and customer base intangible assets. The remaining decrease of $1.0 million reflects lower depreciation of plant assets in Otelco’s regulated entities as assets become fully depreciated.

Interest Expense

Interest expense was constant at $6.2 million in the quarter ended June 30, 2011 compared to a year ago. The increase in interest expense associated with the additional senior subordinated notes issued in the exchange of our Class B shares in June 2010 was offset by lower interest costs on our senior long-term notes resulting from voluntary principal prepayments of $6.5 million since second quarter 2010.

Change in Fair Value of Derivatives

As a requirement of the existing senior debt, the Company has two interest rate swap agreements intended to hedge changes in interest rates on its senior debt. The swap agreements do not qualify for hedge accounting under the technical requirements of Accounting Standards Codification 815. Changes in value for the two swaps are reflected in change in the fair value of derivatives on the income statement and have no impact on cash. Over the life of the swaps, the change in value will be zero, with no impact on Adjusted EBITDA or operations.  The liability for the swap decreased $0.5 million in second quarter 2011 compared to an increase in the liability for the swap of $0.2 million in the second quarter of 2010.

Adjusted EBITDA

Adjusted EBITDA for the three months ended June 30, 2011, was $11.9 million compared to $12.9 million for the same period in 2010 and $11.4 million in the first quarter of 2011.  A one-time settlement in 2010 was a significant factor in the difference. See financial tables for a reconciliation of Adjusted EBITDA to net income.

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Balance Sheet

As of June 30, 2011, the Company had cash and cash equivalents of $16.4 million compared to $18.2 million at the end of 2010.  The Company made a $0.4 million voluntary prepayment in May 2011 on its senior long-term notes payable, reducing the balance to $162.0 million. This represents a combined reduction of $11.5 million since October 2008. The second quarter distribution of $5.6 million in interest and dividends to our shareowners, and $0.3 million in interest to our bond holders, occurred on June 30, 2011.  This represents the twenty-sixth consecutive quarterly distribution since going public in December 2004.

Capital Expenditures

Capital expenditures were $3.5 million for the quarter as the Company continues to grow and invest in its infrastructure; implement cost saving projects; and complete the repairs associated with the spring tornados in Alabama and Missouri.

Second Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the internet, on Thursday, August 4, 2011, at 11:00 a.m. ET.  To participate in the call, participants should dial (719) 457-2679 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 (719) 457-0820 and using the passcode 5292035.

ABOUT OTELCO

Otelco Inc. 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 98,000 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 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.

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OTELCO INC.

CONSOLIDATED BALANCE SHEETS

		December 31,			June 30,
		2010			2011
Assets					(unaudited)
Current assets
	Cash and cash equivalents	$	18,226,374		$	16,433,171
	Accounts receivable:
	Due from subscribers, net of allowance for doubtful
	accounts of $230,752 and $280,924, respectively		4,406,257			3,981,258
	Unbilled receivables		2,161,277			2,182,458
	Other		4,299,088			5,209,607
	Materials and supplies		1,817,311			1,905,575
	Prepaid expenses		1,305,028			946,894
	Deferred income taxes		626,267			626,267
	Total current assets		32,841,602			31,285,230
Property and equipment, net			63,887,213			63,644,065
Goodwill			188,190,078			188,190,078
Intangible assets, net			25,934,042			22,312,111
Investments			1,967,095			1,954,340
Deferred financing costs			5,757,825			5,073,776
Deferred income taxes			4,415,097			4,415,097
Other assets			183,946			142,326
	Total assets	$	323,176,898		$	317,017,023
Liabilities and Stockholders' Deficit
Current liabilities
	Accounts payable	$	768,055		$	657,999
	Accrued expenses		7,926,954			6,769,695
	Advance billings and payments		1,595,133			1,525,201
	Deferred income taxes		353,285			353,285
	Customer deposits		172,479			183,349
	Total current liabilities		10,815,906			9,489,529
Deferred income taxes			42,512,576			42,512,576
Interest rate swaps			2,471,331			1,485,090
Advance billings and payments			656,968			636,276
Other liabilities			368,349			350,543
Long-term notes payable			271,595,855			271,159,708
	Total liabilities		328,420,985			325,633,722
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
	Additional paid in capital		921,718			-
	Retained deficit		(6,298,019	)		(8,748,913	)
	Total stockholders' deficit		(5,244,087	)		(8,616,699	)
		$	323,176,898		$	317,017,023

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OTELCO INC.
 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2010			2011			2010			2011
Revenues	$	26,510,944		$	25,501,062		$	52,305,153		$	50,893,060
Operating expenses
Cost of services and products		10,427,781			10,756,512			21,037,973			21,776,724
Selling, general and administrative expenses		3,236,515			2,909,960			6,467,512			6,237,017
Depreciation and amortization		5,835,311			4,507,979			11,919,602			10,231,997
Total operating expenses		19,499,607			18,174,451			39,425,087			38,245,738
Income from operations		7,011,337			7,326,611			12,880,066			12,647,322
Other income (expense)
Interest expense		(6,179,470	)		(6,199,172	)		(12,168,112	)		(12,369,303	)
Change in fair value of derivatives		(176,279	)		480,086			(1,062,449	)		986,241
Other income		24,027			33,148			382,859			382,497
Total other expenses		(6,331,722	)		(5,685,938	)		(12,847,702	)		(11,000,565	)
Income before income tax		679,615			1,640,673			32,364			1,646,757
Income tax expense		(262,339	)		(357,396	)		(744	)		(358,828	)
Net income available to common stockholders	$	417,276		$	1,283,277		$	31,620		$	1,287,929
Weighted average common shares outstanding:
Basic		12,812,901			13,221,404			12,747,540			13,221,404
Diluted		13,221,404			13,221,404			13,221,404			13,221,404
Basic net income per common share	$	0.03		$	0.10		$	-		$	0.10
Diluted net income per common share	$	0.03		$	0.10		$	-		$	0.10
Dividends declared per common share	$	0.18		$	0.18		$	0.35		$	0.35

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OTELCO INC.
 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended
	June 30,
	2010			2011
Cash flows from operating activities:
Net income	$	31,620		$	1,287,929
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation		6,900,218			5,829,266
Amortization		5,019,383			4,402,731
Amortization of debt premium		(44,820	)		(50,319	)
Amortization of loan costs		677,302			684,048
Change in fair value of derivatives		1,062,449			(986,241	)
Provision for uncollectible revenue		65,581			322,029
Changes in operating assets and liabilities; net of operating assets and liabilities acquired:
Accounts receivable		(16,151	)		(778,135	)
Material and supplies		(25,002	)		(88,264	)
Prepaid expenses and other assets		373,651			345,828
Income tax receivable		389,486			-
Accounts payable and accrued liabilities		(358,957	)		(1,267,317	)
Advance billings and payments		(58,444	)		(90,624	)
Other liabilities		(2,041	)		(6,935	)
Net cash from operating activities		14,014,275			9,603,996
Cash flows used in investing activities:
Acquisition and construction of property and equipment		(4,087,263	)		(6,350,827	)
Deferred charges		(1,041	)		-
Net cash used in investing activities		(4,088,304	)		(6,350,827	)
Cash flows used in financing activities:
Cash dividends paid		(4,564,546	)		(4,660,544	)
Direct cost of exchange of Class B shares for Class A common shares		(194,053	)		-
Principal repayment of long-term debt		-			(385,828	)
Loan origination costs		(155,160	)		-
Net cash used in financing activities		(4,913,759	)		(5,046,372	)
Net increase (decrease) in cash and cash equivalents		5,012,212			(1,793,203	)
Cash and cash equivalents, beginning of period		17,731,044			18,226,374
Cash and cash equivalents, end of period	$	22,743,256		$	16,433,171
Supplemental disclosures of cash flow information:
Interest paid	$	11,535,629		$	11,735,574
Income taxes paid (received)	$	(289,163	)	$	158,003

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