Mr. Curtis Garner reports

OTELCO REPORTS THIRD QUARTER 2011 RESULTS

Otelco Inc. has released results for its third quarter ended Sept. 30, 2011. Key highlights for Otelco include:

• Total revenues of $25.3-million for third quarter 2011;
• Operating income of $6.1-million for third quarter 2011;
• Adjusted earnings before interest, taxes, depreciation and amortization of $11.1-million for third quarter 2011.

"Third quarter results softened a bit as we completed the expansion of our CLEC market coverage in New Hampshire, Massachusetts and northern Maine," said Mike Weaver, president and chief executive officer of Otelco. "With all nine of the new collocation sites now operational, our sales and marketing efforts are under way to address each of these new markets. We originally projected these new sites to be operational early in the second quarter and the delay negatively impacted our margins as cost of services increased with little opportunity to increase revenue in these areas for the first nine months of this year.

"We continue to find ways to reduce costs and improve margins in our business," continued Mr. Weaver. "In our CLEC operations, significant changes have been made in our sales and marketing organization this quarter. In addition, we expanded our product offerings with additional hosted IP products. In our RLEC business, we recently consolidated our Alabama business offices resulting in reduced costs and increased efficiencies. There is approximately $150,000 of non-recurring expense in the third quarter related to these changes.

"The acquisition of Shoreham Telephone Company in Vermont was completed on Oct. 14, adding some 5,000 access line equivalents to the Otelco family," added Mr. Weaver. "Shoreham will anchor our CLEC expansion into the fourth New England state next year.

"In 2004, we indicated our intent to build value at Otelco and return cash to our shareholders. Our 27th consecutive IDS dividend is evidence of that continuing commitment," Mr. Weaver concluded.

Distribution to income deposit securityholders

Each quarter, the board will consider the declaration of dividends during its normally scheduled meeting. For this quarter, the board is meeting on Nov. 15, 2011. The scheduled interest and any dividend declared will be paid on Dec. 30, 2011, to holders of record as of the close of business on Dec. 15, 2011. The interest payment will cover the period from Sept. 30, 2011, through Dec. 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 27 quarterly distributions of dividends and interest since its IDSs were originally offered to the public in December, 2004.

             THIRD QUARTER 2011 FINANCIAL SUMMARY 
       (dollars in thousands, except per share amounts) 
                                           
                                      Three months ended Sept. 30, 
                                                2010         2011   

Revenues                                   $  26,145    $  25,303    
Operating income                           $   6,728    $   6,124   
Interest expense                           $  (6,321)   $  (6,222)
Net income available to stockholders       $      63    $     885    
Basic net income per share                 $      --    $    0.07    
Diluted net income per share               $      --    $    0.07    
Adjusted EBITDA (a)                        $  12,671    $  11,094   
             
                                      Nine months ended Sept. 30,
                                               2010         2011    

Revenues                                  $  78,450    $  76,196   
Operating income                          $  19,608    $  18,771    
Interest expense                          $ (18,489)   $ (18,592)
Net income available to stockholders      $      95    $   2,173   
Basic net income per share                $    0.01    $    0.16    
Diluted net income per share              $    0.01    $    0.16   
Adjusted EBITDA (a)                       $  37,891    $  34,393    
                                                       
(a) Adjusted EBITDA is defined as consolidated net income 
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. 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 with 
similarly titled measures used by other companies.  

Financial discussion for third quarter 2011

Revenues

Total revenues decreased 3.2 per cent in the three months ended Sept. 30, 2011, to $25.3-million from $26.1-million in the three months ended Sept. 30, 2010. Decreases in RLEC-voice-access-line-related revenues in 2011 and one-time benefits in 2010 from the resolution of several contingent items accounted for the majority of the difference.

Local services revenue decreased 5.7 per cent in the third quarter to $11.7-million from $12.4-million in the quarter ended Sept. 30, 2010. RLEC revenue decreased $400,000 reflecting the decline in RLEC voice access lines. One-time benefits in 2010 from the resolution of several contingent items accounted for the remaining decline. Network access revenue decreased 0.4 per cent in the third quarter to $8.0-million from $8.1-million in the quarter ended Sept. 30, 2010. A small decline in interstate- and intrastate-switched access revenue was offset by an increase in end-user-related charges. Cable television revenue in the three months ended Sept. 30, 2011, increased 7.4 per cent to $800,000 in the quarter ended Sept. 30, 2011, compared with $700,000 for the same period in 2010. Growth in Internet protocol television subscribers, video-on-demand and the shift to high-definition packages in Alabama was offset by the decline in basic cable revenue and revenue associated with the conversion of the company's Missouri cable customers to satellite services during first quarter 2011. Internet revenue for the third quarter 2011 decreased 2.2 per cent to $3.4-million from $3.5-million in the three months ended Sept. 30, 2010. Growth in broadband data lines partially offset the loss of dial-up subscribers. Transport services revenue decreased 5.6 per cent to $1.3-million in the three months ended Sept. 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 Sept. 30, 2011, decreased 1.2 per cent to $19.2-million from $19.4-million in the three months ended Sept. 30, 2010. Cost of services and products increased 6.3 per cent to $11.0-million in the quarter ended Sept. 30, 2011, from $10.3-million in the quarter ended Sept. 30, 2010. Higher costs associated with the implementation of new hosted PBX customers and the expanded sales organization were partially offset by reduced RLEC expenses, long-distance costs and overhead expenses. Selling, general and administrative expenses decreased 1.8 per cent to $3.2-million in the three months ended Sept. 30, 2011, from $3.3-million in the three months ended Sept. 30, 2010, primarily related to a reduction in employee and benefit costs partially offset by higher legal costs associated with the Shoreham acquisition and uncollectible expenses associated with carrier billing and customer credits. Depreciation and amortization for third quarter 2011 decreased 14.4 per cent to $4.9-million from $5.8-million in third quarter 2010. Amortization of intangible assets associated with the Country Road acquisition decreased $300,000, including contract and customer base intangible assets. Amortization of the telephone plant adjustment associated with the Mid-Maine acquisition was completed at the end of second quarter 2011, accounting for a decrease of $200,000. The remaining decrease of $300,000 reflects lower depreciation of plant assets in Otelco's regulated entities as assets become fully depreciated.

Interest expense

Interest expense decreased 1.6 per cent to $6.2-million in the three months ended Sept. 30, 2011, from $6.3-million in the quarter ended Sept. 30, 2010. The decrease in interest expense reflects lower senior long-term notes outstanding resulting from voluntary principal prepayments of $6.5-million.

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 earnings before interest, taxes, depreciation and amortization or operations. The liability for the swap decreased $700,000 in third quarter 2011 compared with an increase in the liability for the swap of $400,000 in the third quarter of 2010.

Adjusted EBITDA

Adjusted EBITDA for the three months ended Sept. 30, 2011, was $11.1-million compared with $12.7-million for the same period in 2010 and $11.9-million in the second quarter of 2011.

Balance sheet

As of Sept. 30, 2011, the company had cash and cash equivalents of $17.8-million compared with $18.2-million at the end of 2010. The third quarter distribution of $5.6-million in interest and dividends to the company's shareowners and $300,000 in interest to the company's bondholders occurred on Sept. 30, 2011. This represents the 27th consecutive quarterly distribution since going public in December, 2004. The acquisition of Shoreham Telephone Company on Oct. 14, 2011, while not reflected in the current financial statements, was completed with cash from our balance sheet.

Capital expenditures

Capital expenditures were $2.1-million for the quarter, reflecting the completion of infrastructure and cost-saving projects. Capital expenditures were $2.8-million and $3.5-million in first and second quarter 2011, respectively.

Third quarter earnings conference call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Nov. 3, 2011, at 11 a.m. ET. To participate in the call, participants should dial 719-325-2387 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.

To listen to the live call on-line, 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 for 30 days. A one-week telephonic replay may also be accessed by calling 719-457-0820 and using the passcode 4640013.

We seek Safe Harbor.