Mr. Curtis Garner reports

OTELCO REPORTS FOURTH QUARTER AND YEAR 2011 RESULTS

Otelco Inc. has released its results for the fourth quarter and year ended Dec. 31, 2011. Key highlights for Otelco include:

• Total revenues of $25.6-million for the fourth quarter and $101.8-million for 2011;
• Operating income of $5.9-million for the fourth quarter and $24.6-million for 2011;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $10.9-million for the fourth quarter and $45.3-million for 2011.

"We completed our acquisition of Shoreham Telephone Company Inc. during fourth the quarter, expanding our RLEC and future CLEC presence in New England," said Mike Weaver, president and chief executive officer of Otelco. "The integration process is under way and should be completed by the end of the first quarter. We expect the Shoreham acquisition to be accretive to adjusted EBITDA in 2012.

"Our fourth quarter performance was adversely affected by approximately $400,000 from non-operating items, including Shoreham deal expenses, write-off of obsolete inventory and RLEC cost study adjustments. On an annual basis, after a particularly strong performance in 2010, delays experienced in adding eight new CLEC collocation sites in Maine and New Hampshire dampened 2011 results. Our CLEC markets in New England have become more competitive, including downward pressure on market pricing trends," continued Mr. Weaver. "In response to this more difficult sales climate, we have made changes in our sales organization and leadership, and adjusted our product offering to better position us for growth in 2012.

"The recent FCC access reform order became effective in 2012 and, while the impact of the changes remains unclear, our mix of regulated and non-regulated businesses means we may not have significant exposure to the phase out of the Universal Service Fund," added Mr. Weaver. "Our existing senior debt of $162-million has an October, 2013, maturity date. We may consider refinancing this debt prior to its maturity if favourable market conditions allow us to do so. Based on the terms we see in completed refinancing packages in our industry, we would anticipate the terms of refinanced senior debt to include lower leverage and higher amortization than our existing senior debt.

"We believe that our extensive broadband network is an important element of the network fabric of the future. We are enhancing speeds and options while remaining price competitive in our markets," Mr. Weaver concluded. "We remain focused on delivering value for our customers and our shareholders. The board declared and we paid our 28th consecutive IDS dividend last quarter."

Distribution to income deposit securityholders

Each quarter, the board evaluates the company's dividend policy and the declaration of dividends during its normally scheduled meeting. For this quarter, the next scheduled board meeting is on Feb. 27, 2012. The scheduled interest and any dividend declared will be paid on March 30, 2012, to holders of record as of the close of business on March 15, 2012. The interest payment will cover the period from Dec. 30, 2011, through March 29, 2012. Given its recent acquisition of Shoreham Telephone, the company is currently performing an earnings and profits study to determine how 2012 dividends should be classified for shareowner tax purposes. It is anticipated that a portion of the dividends will be considered qualified dividends and the balance will be treated as a return of capital for tax purposes. The company has made 28 successive quarterly distributions of dividends and interest since its IDS units were originally offered to the public in December, 2004.

Financial discussion for the fourth quarter of 2011 (unaudited)

All financial information includes the acquisition of Shoreham Telephone on and as of Oct. 14, 2011, and for the period from Oct. 14, 2011, through Dec. 31, 2011.

Revenue

Total revenues decreased 1.2 per cent in the three months ended Dec. 31, 2011, to $25.6-million from $25.9-million in the three months ended Dec. 31, 2010. CLEC revenue gains for local services and network access were offset by lower RLEC revenues.

Local services revenue decreased 2.2 per cent in the fourth quarter of 2011 to $11.8-million from $12.1-million in the quarter ended Dec. 31, 2010. Shoreham added just under $200,000, which was offset by lower RLEC basic services revenue of $300,000 and lower CLEC revenue of $100,000. Network access revenue decreased 2.1 per cent in the fourth quarter of 2011 to $8.1-million from $8.3-million in the quarter ended Dec. 31, 2010. Shoreham added $300,000, which was offset by lower access revenue related to RLEC subscriber usage and lower NECA settlements accounted of $500,000, including 2011 cost study estimates. Cable television revenue in the three months ended Dec. 31, 2011, increased 4.7 per cent to $800,000, compared with just over $700,000 in the same period in 2010. Growth in digital family packages and IPTV of $100,000 was partially offset by less than a $100,000 decrease in basic cable services. Internet revenue for the fourth quarter 2011 increased 3.9 per cent to $3.6-million from $3.5-million in the quarter ended Dec. 31, 2010. Shoreham accounted for $200,000, which was partially offset by the loss of dial-up subscribers. Transport services revenue decreased 2.4 per cent to remain at $1.4-million in the three months ended Dec. 31, 2011, and Dec. 31, 2010. The reduction reflects small pricing changes for contract renewals.

Operating expenses

Operating expenses in the three months ended Dec. 31, 2011, increased 3.1 per cent to $19.8-million from $19.2-million in the three months ended Dec. 31, 2010. Cost of services and products increased 13.3 per cent to $11.2-million in the three months ended Dec. 31, 2011, from $9.9-million in the three months ended Dec. 31, 2010. The one-time benefits of the settlement of the FairPoint bankruptcy and carrier claims in 2010, Shoreham costs of service of $300,000, increases in cable programming and internet capacity of $200,000, and other operational costs of $200,000 were partially offset by lower toll costs of $300,000. Selling, general and administrative expenses increased 6 per cent to $3.5-million in the three months ended Dec. 31, 2011, from $3.3-million in the three months ended Dec. 31, 2010. The increase reflects the Shoreham expense (including acquisition expenses) of $300,000 and benefits from carrier settlements in 2010 of $400,000 being more than offset by lower management expenses of $500,000. Depreciation and amortization for fourth quarter 2011 decreased 15.4 per cent to $5.1-million from $6-million in the fourth quarter 2010. An increase for the acquisition of Shoreham of $200,000 was offset by a decrease of $300,000 in the amortization of intangible assets associated with the Country Road acquisition, including a covenant not to compete and contract, and customer-base intangible assets. The remaining decrease of $800,000 reflected lower depreciation of plant assets in the company's regulated properties.

Interest expense

Interest expense decreased 1.2 per cent to $6.2-million in the quarter ended Dec. 31, 2011, from $6.3-million a year ago. The decrease in interest expense was driven by a lower outstanding balance on the company's senior long-term notes payable.

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 cumulative impact on net income, adjusted EBITDA or operations. The value of the swaps increased $600,000 in fourth quarter 2011, compared with an increase of $500,000 in the same period of 2010.

Adjusted EBITDA

Adjusted EBITDA for the three months ended Dec. 31, 2011, was $10.9-million, compared with $12.8-million for the same period in 2010 and $11.1-million in the third quarter of 2011.

Balance sheet

As of Dec. 31, 2011, the company had cash and cash equivalents of $12.4-million, compared with $18.2-million at the end of 2010. The company used $5-million in cash to acquire Shoreham Telephone during fourth quarter. Total long-term notes payable was reduced to $271.1-million, reflecting a voluntary prepayment of $400,000 made in May, 2011. The fourth quarter distribution of $5.6-million in interest and dividends to the company's stockholders and $300,000 in interest to the company's bondholders occurred on Dec. 30, 2011. This represents the 28th consecutive quarterly distribution since going public in December, 2004.

Capital expenditures

Capital expenditures were $2.1-million for the quarter as the company continues to grow and invest in its infrastructure. The company is expanding its CLEC capabilities in Maine and New Hampshire, enhancing DSL and wireless broadband capacity, and expanding IPTV capability in Alabama.

Fourth quarter earnings conference call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, for Wednesday, Feb. 22, 2012, at 11:30 a.m. (ET). To participate in the call, participants should dial 719-325-2453 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 3616440.

                                CONSOLIDATED STATEMENTS OF OPERATIONS                                
                                         
                                                        Three months ended               12 months ended    
                                                                  Dec. 31,                      Dec. 31,        
                                                       2010           2011           2010           2011  
   
Revenues                                      $  25,949,837  $  25,647,760  $ 104,400,219  $ 101,843,567
Operating expenses                                                                                  
Cost of services and products                     9,912,225     11,233,414     41,286,418     43,995,953
Selling, general and administrative expenses      3,299,539      3,498,924     13,074,794     12,984,686
Depreciation and amortization                     5,977,344      5,056,804     23,670,243     20,232,833
Total operating expenses                         19,189,108     19,789,142     78,031,455     77,213,472
Income from operations                            6,760,729      5,858,618     26,368,764     24,630,095
Other income (expense)                                                                              
Interest expense                                 (6,257,673)    (6,184,333)   (24,746,542)   (24,776,123)
Change in fair value of derivatives                 542,764        588,861       (878,518)     2,229,893
Other income                                         23,171        (25,204)       556,820        363,482
Total other expenses                             (5,691,738)    (5,620,676)   (25,068,240)   (22,182,748)
Income before income tax                          1,068,991        237,942      1,300,524      2,447,347
Income tax expense                                 (472,974)      (213,916)      (609,809)      (249,929)
Net income available to common stockholders   $     596,017  $      24,026  $     690,715  $   2,197,418
Basic net income per share                    $        0.04  $           -  $        0.05  $        0.17
Diluted net income per share                  $        0.04  $           -  $        0.05  $        0.17
Dividends declared per share                  $        0.18  $        0.18  $        0.71  $        0.71

We seek Safe Harbor.