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Executives

Mike Weaver - President & CEO

Curtis Garner – CFO

Analysts

Otelco (OTT) Q1 2013 Earnings Conference Call May 9, 2013 11:00 AM ET

Operator

Good day and welcome to the Otelco Co. Conference Call. Today’s conference is being recorded. At this time for opening remarks and introduction I would like to turn the call over to Mr. Kevin Enda. Please go ahead sir.

Kevin Enda

Thank you Melissa and welcome to the Otelco Conference Call to review the company's results for the first quarter ended March 31, 2013, which were released on May 7 after the market closed. Conducting the call today will be Michael Weaver, President and Chief Executive Officer; and Curtis Garner, Chief Financial Officer.

Before we start, let me offer the cautionary note that statements made on this conference call 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 impact company’s restructuring plans or 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 describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms believes, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. There can be no assurance that the restructuring transaction will be consummated. 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 SEC.

With that stated, I'll now turn the call over to Mike Weaver.

Mike Weaver

Thanks Kevin. Good morning everyone and welcome to the call. The first quarter results met our expectations as we generated adjusted EBITDA of 8.8 million. As we mentioned on previous calls our contract Time Warner Cable expired at the end of 2012 and the transfer of services from our network, from Warner’s network was completed in January. Staff productions associated with the completion of the transition have been implemented and other cost reductions for network and facility expenses were underway. Under the terms of the transition agreement we will continue to provide very limited services to Time Warner through June 30th, 2013. In the first quarter we incurred and paid 1.4 million and restructuring expenses related to the bankruptcy filing and we still increased our cash balance by 1.8 million over the year-end balance of December 31.

As of the end of the first quarter we had cash on hand of $34.3 million. We are also encouraged by our first quarter metric as our access line equipment’s which we find is voice lines plus data lines declined by just 1% representing our smallest decline is several quarters. This improvement in our metric was primarily attributable to growth in our CLEC operations as we continue to experience great success with our hosted PBX product and in addition we saw 3% increases in CLEC data lines in the first quarter.

Our restructuring plans remain on schedule as our reorganization plan was confirmed by the court on May 6th and we expect exit bankruptcy in the near future. We are pleased with the results of the solicitation as our plan received overwhelming support from both our senior lenders and subordinated note holders which enabled us to pay vendors and suppliers in full for all of our undisputed invoices. The next steps in the bankruptcy process include the completion of the amendment and extension of our senior credit facility of planning FCC approval for licenses utilized by one of our subsidiaries and the exchange of the senior subordinated notes for new Class A common stock.

Subject to dilution by management equity plan the existence with subordinate note holders will receive approximately 92.5% of the equity of the company which includes 7.3% that will be distributed to the non-IDS holders of subordinated debt. Remaining 7.5% of the equity will be given the senior lenders and move a cash fee or amending and extending the senior credit facility.

Amended senior credit facility will consist of a $5 million revolving line of credit and a term loan of not more than 142 million with both of these facilities having a maturity date of April 30th, 2016. The pricing of the data is LIBOR plus 350 for the LIBOR 43 which results in an effective rate of 6.5%. The term loan has fixed amortization of one in 4% (ph) per quarter and (inaudible) amortization of 75% of the excess cash flow to be paid on a quarterly basis. Based on our most recent cash projections we anticipate reducing the balance of the term debt by approximately 26 million using cash on the balance sheet. This will result in a lone balance of 136 million and total average of 3.2 based on last 12 months EBITDA 42.6 million. As a remainder we anticipate the leverage will be close to four times last 12 months EBITDA at the end of this year due to the declining EBITDA projected for 2013. I want to thank you for your vital support of the restructuring plans.

As I stated on previous calls I remain confident that the plan will result in a stronger company with long term viability. And you simplified capital structure implemented by the reorganization will provide financial flexibility making us more attractive acquisition target and providing potential upside for our investors. Curtis will summarize the financial results now then we can take some questions.

Curtis Garner

Thank you Mike we appreciate the investors that have joined us today for the call. I will provide an abbreviated overview of our financial highlights and then we can open it up to the questions like you suggest. The earnings release on Tuesday provided a fairly detailed picture of the first quarter performance. We expect file our SEC Form 10Q later today which will expand on those details for those that look for more in-depth review. Single largest impact item on results was the exploration of the Time Warner contract on December 31, 2012. Total revenues decreased 17.3%, 21 million from 25.4 million in the same quarter of 2012.

The impacts of the Time Warner transition and the SEC’s InterCarrier compensation order accounted for over 80% of the decrease. The decrease are like access residential access lines was the second largest factor. Press release breaks down the revenue into our traditional five categories, cable and internet revenues were basically flat and transport revenue increased by 9%. Operating expenses decreased 14.2% to 16.1 million from 18.8 million in the same quarter of last year. Cost of services and products decreased 14.1% to 9.5 million from 11.11 million last year. Sales, general and administrative expenses decreased 4.7% to 3.1 million from 3.2 million.

Our employee cost initiatives implemented last June, lower total expenses due to the reduced Time Warner traffic volume coupled with improved total supplier cost for the primary driving forces for the reduction. Appreciation and amortization decreased 21.2% to 3.6 million last quarter from 4.5 million in the first quarter of 2012. The decrease was split between lower (inaudible) plan equipment plan and equipment depreciation and lower intangible asset amortization. As we move through our balance sheet restructuring process as Mile mentioned we spent 1.4 million on legal and advisory reorganization services, these costs are separately shown on the income statement and are excluded from the calculation of EBITDA which was 8.8 million for first quarter 2013 compared to 11.5 million in first quarter of 2012.

Again as Mike mentioned cash balances increased in first quarter by 1.8 million, capital expenditures were at a moderate pace of 0.8 million for the first quarter as we reflected the timing of our Chapter 11 filing into our operational plans. There are few changes to balance sheet line items caused by the March 24; bankruptcy filing that I think it will be obvious to those people that look at it. I think that covers the results points for the quarter Mike. If I can just note one other restructuring related point there may be some confusion among some of our owners of our IDS today they have seen comments that are existing equity will be extinct which is not true and therefore they assume that OTT the IDS trading on NASDAQ has no value and they will get nothing after the restructuring. That understanding is not correct, the IDS holders as you mentioned will have subordinated, also own the subordinated debt that’s part of their IDS and that debt will be exchanged will new Class A shares and as you mentioned they will still own more than 85% of Otelco subject to dilution for many management equity client.

Melissa if you could provide directions we can take questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). And I’m showing that we have no questions in the queue at this time.

Mike Weaver

Thank you Melissa. Those all of you who have joined we appreciate your taking the time to stay current on what’s going on and as we continue to work through the restructuring process and have our quick exit, we hope we will of course keep you informed. Thanks a lot.

Operator

And that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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