Mr. Mike Weaver reports

OTELCO REPORTS FIRST QUARTER 2012 RESULTS

Otelco Inc. has released its results for its first quarter ended March 31, 2012. Key highlights for Otelco include:

• Total revenues of $25.4-million for first quarter 2012;
• Operating income of $6.6-million for first quarter 2012;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $11.5-million for first quarter 2012.

"First quarter results produced adjusted EBITDA of $11.5-million, which represented a 6-per-cent increase over the fourth quarter of 2011 and a 0.6-per-cent increase over the same period last year," said Mike Weaver, president and chief executive officer of Otelco. "Some of the other positive aspects of the quarter were an increase of 1 per cent in access line equivalents in the CLEC operations as well as a 1-per-cent growth in broadband subscribers. Our cash balance increased by $3.6-million to $16-million, primarily due to lower capital expenditures in the quarter. For the year, we expect the investment in our business to be in the $7-million range.

"On April 20, 2012, we announced that Time Warner Cable has indicated it will not renew its existing contract for wholesale network connections provided by Otelco. Revenue received directly from Time Warner represented approximately 11.7 per cent of Otelco's consolidated revenue for 2011 and 11.8 per cent in first quarter 2012. Additionally, the company receives access revenue from long-distance carriers for calls destined to Time Warner customers in Maine and New Hampshire. This access revenue represents approximately 3 per cent to 4 per cent of Otelco's consolidated revenue for both the year 2011 and first quarter 2012. The Time Warner contract expires on Dec. 31, 2012, and includes a transition period into 2013. Under the terms of the contract, the revenue stream is unaffected though the end of this year. During the transition period in 2013, the revenue will decline as customers are moved from the Otelco service platform to Time Warner's systems. The length and specific terms of the transition agreement are currently being negotiated," Mr. Weaver explained.

"Also on April 20, 2012, the board of directors decided to suspend the dividends on the common stock portion of the income deposit securities," noted Mr. Weaver. "Holders of the income deposit securities continue to receive quarterly interest payments on the $7.50 subordinated note, which amounts to 97.5 cents per unit per year or 24.375 cents per unit per quarter. The interest for the second quarter will be paid on Monday, July 2, 2012, to holders of record at the close of business on June 15, 2012. The dividend amounted to 70.5 cents per unit for 2011, which equates to approximately $9.3-million for a 12-month period. The immediate suspension of the dividends will conserve approximately $7-million cash in 2012.

"In addition to the dividend suspension, we are conducting a thorough review of our operations and cost structure, and anticipate taking aggressive actions to lower costs over the coming months in anticipation of the changes in revenue expected next year. Over the last few months, we have undergone a number of changes, including office consolidation in Alabama, staff reductions in New England and Missouri, and the acquisition of Shoreham Telephone Company Inc. in Vermont that will help us address the loss of the Time Warner Cable contract. We will continue to make the capital investments necessary to serve our customers and support our growth projects. The existing $162-million senior debt has a maturity date of October, 2013. We may explore the possibility of refinancing this debt before the end of this year. We are in compliance with all of the terms and covenants contained in the credit agreement and associated with the subordinated notes that are part of the IDSs," Mr. Weaver concluded.

Distribution to IDS holders

Each quarter, the board evaluates the company's dividend policy and the declaration of dividends. The board met on April 20, 2012, and announced the suspension of the dividend portion of the IDS distribution. The scheduled interest of 24.375 cents per IDS will be paid on July 2, 2012, to holders of record as of the close of business on June 15, 2012. The normal distribution date would have been June 30, 2012, which is a Saturday. Normal distribution dates that fall on weekends and bank holidays are paid on the next business day. The interest payment covers the period from March 30, 2012, through June 29, 2012.

Financial discussion for first quarter 2012

All financial information includes the acquisition of Shoreham Telephone Company on and as of Oct. 14, 2011.

Revenue

Total revenues of $25.4-million were nominally down in the three months ended March 31, 2012, when compared with the three months ended March 31, 2011.

Local services revenue decreased 2.9 per cent in the first quarter of 2012 to $11.7-million from $12-million in the first quarter ended March 31, 2011. Shoreham added $200,000, which was offset by lower RLEC basic services revenue of $300,000 and lower long-distance revenue of $300,000. Network access revenue decreased 0.6 per cent in the first quarter of 2012 to $7.8-million from $7.9-million in the quarter ended March 31, 2011. Shoreham added $400,000, which was offset by lower access revenue related to RLEC subscriber usage and lower NECA settlements of $500,000. Cable television revenue in the three months ended March 31, 2012, increased 7 per cent to $800,000, compared with just under $800,000 in the same period in 2011. Growth in digital family packages and IPTV of $100,000 was partially offset by a decrease in basic cable services and satellite television installation revenue of less than $100,000. Internet revenue for the first quarter 2012 increased 7.8 per cent to $3.7-million from $3.5-million in the quarter ended March 31, 2011. Shoreham accounted for the growth while the loss of dial-up subscribers was offset by growth in fibre back-haul circuits and RLEC data lines. Transport services revenue increased 4.5 per cent to $1.4-million in the three months ended March 31, 2012, from $1.3-million for the three months ended March 31, 2011. The increase was associated with additional wholesale transport services.

Operating expenses

Operating expenses in the three months ended March 31, 2012, decreased 6.5 per cent to $18.8-million from $20.1-million in the three months ended March 31, 2011. The cost of services and products was basically flat at $11.1-million for the three months ended March 31, 2012, and March 31, 2011. Shoreham costs added $400,000 and the hosted PBX product costs increased $200,000, reflecting the success with that product in the last year. These increases were offset by lower toll costs of $400,000 and a one-time NECA adjustment in 2011 of $200,000. Selling, general and administrative expenses decreased 3.6 per cent to $3.2-million in the three months ended March 31, 2012, from $3.3-million in the three months ended March 31, 2011. An increase associated with the Shoreham acquisition of $100,000 was more than offset by lower management expenses of $200,000. Depreciation and amortization for first quarter 2012 decreased 21 per cent to $4.5-million from $5.7-million in the first quarter 2011. Increases associated with the acquisition of Shoreham of $200,000 and for CLEC investment of $200,000 were more than 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, and a decrease of $1.3-million reflecting lower depreciation expense of plant assets in the company's regulated properties.

Interest expense

Interest expense decreased 5.4 per cent to $5.8-million in the quarter ended March 31, 2012, from $6.2-million a year ago. The decrease in interest expense was primarily driven by the lower effective interest rate on the outstanding balance on the company's senior long-term notes payable upon expiration of its interest rate swaps on Feb. 8, 2012.

Change in fair value of derivatives

As a requirement of the existing senior debt, the company had two interest rate swap agreements intended to hedge changes in interest rates on its senior debt. The swap agreements did 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 was zero, with no cumulative impact on net income, adjusted EBITDA or operations. The value of the swaps increased $200,000 in first quarter 2012, compared with an increase of $500,000 in the same period of 2011. The swaps expired on Feb. 8, 2012, effectively lowering the interest rate beginning Feb. 9, 2012, from approximately 2 per cent to the current LIBOR rate.

Adjusted EBITDA

Adjusted EBITDA for the three months ended March 31, 2012, was $11.5-million, compared with $11.4-million for the same period in 2011 and $10.9-million in the fourth quarter of 2011.

Balance sheet

As of March 31, 2012, the company had cash and cash equivalents of $16-million, compared with $12.4-million at the end of 2011. Total long-term notes payable remained constant at $271.1-million when compared with the end of 2011, reflecting the non-amortizing nature of the company's debt. The first quarter distribution of $5.6-million in interest and dividends to stockholders, and $300,000 in interest to bondholders occurred on March 30, 2012.

Capital expenditures

Capital expenditures were $1.3-million for the quarter as the company continues to invest in its infrastructure. The level of capital expenditures is lower than in previous years, reflecting the significant expansion in the last three years of the company's network, broadband and switching infrastructure.

Fourth quarter earnings conference call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Friday, May 4, 2012, at 10 a.m. (ET). To participate in the call, participants should dial 719-325-4767 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, and 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 5368741.

                CONSOLIDATED STATEMENTS OF OPERATIONS                    
                                                                             
                                              Three Months Ended March 31,
                                                        2011          2012 
    
Revenues                                        $ 25,392,000  $ 25,374,241 
Operating expenses                                                           
Cost of services and products                     11,020,212    11,028,833
Selling, general and administrative expenses       3,327,057     3,206,077
Depreciation and amortization                      5,724,018     4,522,593
Total operating expenses                          20,071,287    18,757,503
Income from operations                             5,320,713     6,616,738
Other income (expense)                                                       
Interest expense                                  (6,170,131)   (5,833,650)
Change in fair value of derivatives                  506,155       241,438
Other income                                         349,349       318,169
Total other expenses                              (5,314,627)   (5,274,043)
Income before income tax                               6,086     1,342,695
Income tax expense                                    (1,432)     (524,457)
Net income available to common stockholders     $      4,654  $    818,238
Net income per common share                     $          -  $       0.06
Dividends declared per common share             $       0.18  $       0.18

We seek Safe Harbor.