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Executives

Kevin Enda – IR

Mike Weaver – President and CEO

Curtis Garner – CFO

Analysts

Dave Coleman – RBC Capital Markets

Frank Louthan – Raymond James

Austin Hopper – AWH Capital

Eric Will – Fertile Mind Capital

Robert Davis – Round Table Services

Chip Saye – AWH Capital

Patrick Wilson – Private Investor

Neil George – Private Investor

Walt Parnell – Private Investor

Otelco, Inc. (OTT) Q1 2012 Earnings Call May 4, 2012 10:00 AM ET

Operator

Good day everyone and welcome to the Otelco First Quarter 2012 conference call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Enda.

Please go ahead.

Kevin Enda

Thank you Kim, and welcome to this Otelco conference call to review the company's results for the first quarter ended March 31, 2012, which we released yesterday afternoon. 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 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, 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 SEC.

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

Mike Weaver

Thanks Kevin. Good morning and welcome to our call. I want to cover a few highlights for the quarter as well as comment on our April 20th announcement concerning Time Warner Cable. The first quarter produced adjusted EBITDA of $11.5 million which represents an increase of $567,000 over the fourth quarter of 2011 and an increase of $64,000 of the same quarter of last year. Highlighting some of the positive developments of the quarter, we experienced a 1% increase in our CLEC operations for excess line equivalent and total high speed internet subscribers. In addition the rate of decline of total excess line equivalents slowed to 1% for the quarter which we see as an improvement over previous quarters.

Our cash position remains strong as we increase cash by $3.6 million to $16 million at March 31st. CapEx for the quarter was $1.3 million and that's the primary reason our payout ratio was lowered to 80% of EBITDA. For the year we expect CapEx to be in the $7 million to $7.5 million range. On April 20th we announced the expected expiration of the Time Warner contract. After extended negotiations Time Warner elected to follow the path of bringing the network services we provide them in high offs which is consistent with their approach in other parts of the country. The Time Warner contract represented 11.7% of Otelco's consolidated revenue for 2011 and 11.8% of the consolidated revenue in the first quarter.

Additionally the company receives excess revenue from long-distance carriers for calls destined to Time Warner customers in Maine in New Hampshire. This excess revenue represents approximately 3% to 4% Otelco's consolidated revenue for both the year 2011 and the first quarter of 2012. The contract remains in effect through the end of this year with no change in pricing so our revenue stream from this contract is unaffected through the end of this year. The contract also includes a transition period where the services will be moved from our platform to Time Warner's platform. This transition will last at least through the end of the first order of 2013. In anticipation of the reduction of the revenue and income associated with the expiration of the Time Warner contract and with the recent FCC decisions that will lower access rights to all CLEC operators beginning in July of this year management and the board felt the prudent business decision was to take all necessary steps to improve our already positive cash flow. These actions included the suspension of the dividends on the common stock portion of Otelco's RDS units.

Holders of the RDS securities will continue to receive quarterly interest payments on the $7.50 subordinated notes which amounts to $0.975 (ph) per unit per year or approximately $0.24 per quarter. The interest for the second quarter will be paid on Monday July 2nd to holders of record at the close business on June 15th. In an effort to improve our efficiencies we've undergone a number of changes in the last few months including office consolidations in Alabama, staff reductions in New England and Missouri and the acquisition of Shoreham Telephone in Vermont just to name a few.

All of these changes have positioned us to deal with the ending of the Time Warner contract. We are currently reviewing our staffing levels and anticipate taking aggressive action to lower our cost in the months ahead. The existing $162 million in senior debt has a maturity date of October 2013. Now that the Time Warner top or contract issue is resolved we can focus on extending the current agreement or re-financing the debt. We are in compliance with all debt terms and covenants and expect to continue to service our debt in accordance with the terms.

Just to summarize the Time Warner contract remains in effect with no change in expected revenue through the end of this year. The transition period where Otelco will continue to provide services runs at least through the first quarter of 2013, the exact length of the transition period and other details are currently under negotiation with Time Warner. This extended period of service to Time Warner provides us the opportunity might the appropriate changes to our business and were actively working on these arms. We will continue to maintain the integrity, quality and redundancy of our network. We have a great customer base and will continue to provide the excellent service but come to expect from Otelco.

Curtis, if you would discuss the financial results please.

Curtis Garner

Thank you Mike and thanks to everyone on the call for joining us on a little different day. We shifted from the normal Thursday routine to Friday because there were at least half a dozen other telecom companies who were all clustered around the Thursday timeframe. So we appreciate everybody joining us.

I'll provide a brief overview of our financial performance for the quarter and then we can take your questions. As mike mentioned we've acquired Shoreham Telephone last October. The impact of the acquisition is noted for the various revenue and expense categories that that are impacted.

To save you the trouble of adding up the various pieces, Shoreham added over $800,000 in revenue and about $500,000 in cost of goods and SG&A for a quarterly cash generation of just over $300,000 which was pretty much on target with what Mike had in the past mentioned as the expected EBITDA generation of the acquisition.

Total revenue for the first quarters were $25.4 million, essentially the same as a year ago. In general the historical revenue trends continue if you exclude the Shoreham acquisition. Local services revenue decreased 2.9% in the first quarter of 2012 to $11.7 million from $12 million a year ago; Shoreham added $0.2 million which was offset by lower RLEC services revenues of $0.3 million and lower long-distance revenues of $0.3 million.

Network access revenue decreased 0.6% in the first quarter to $7.8 million from $7.9 million in the same quarter a year ago. Shoreham added $0.4 million. This increase was offset by lower access revenue related to RLEC subscriber usage and lower net settlements of $0.5 million.

Cable television revenue in the first quarter increased 7% to $0.8 million from just under $0.8 million in the same period of 2011, continued growth in digital family packages and our IPTV expansion of $100,000 was partially offset by less than $0.1 million decrease in basic cable services and satellite television installation revenue. You may remember that in the first quarter of 2011 we transitioned our cable customers in Missouri to DirecTV with a resultant one-time increase in installation revenue in 2011.

Internet revenue for the first quarter of 2012 increased 7.8% to $3.7 million from $3.5 million in the first quarter of 2011. Shoreham accounted for the growth while the loss of dial-up subscribers was offset by growth in fiber backhaul circuits and RLEC baselines.

During 2011 we had the Shoreham owners invest in improving their broadband capability prior to the sale and we are already the seeing the benefit of that improvement. Transport Services revenue increased 4.5% to $1.4 million from $1.3 million a year ago. This has resulted from more wholesale transport services.

Shifting to expenses, operating expenses in the first quarter decreased 6.5% to $18.8 million from $20.1 million a year ago. Breaking that down cost of services and products was basically flat for both periods at $11.1 million. Shoreham costs added $4 million and a host of CBX (ph) product cost increased $0.2 million which reflects our success with that product in the last year. These increases were offset by lower total costs of $0.4 million and a one-time period neck adjustment in our CLEC $0.2 million.

Selling, General and Administrative expenses decreased 3.6% to $3.2 million in the first quarter from $3.3 million a year ago. Shoreham added $0.1 million. There were offset by lower management expenses of $0.2 million.

Depreciation and amortization for the first quarter of 2012 decreased 21% to $4.5 million from $5.7 million in the first quarter of 2011, an increase related to the acquisition of Shoreham of $0.2 million and the additional CLEC investments in the past year of $0.2 million was offset by an decrease of $0.3 million and the amortization of intangible assets associated with our 2008 Country Road acquisition including a covenant not to compete and contracting customer base intangible assets.

The remaining decrease of $1.3 million related to lower depreciation of plant assets in our regulated properties. Interest expense decreased 5.4% to $5.8 million in the first quarter from $6.2 million a year ago. The decrease in interest expense was driven primarily by lower interest rates on our senior long-term notes with the expiration of our interest rate swaps on February 8th. That effectively lowered our rate from 2% to the current LIBOR rate which has been running around 25 basis points for the one with LIBOR.

Adjusted EBITDA for the first quarter was $11.5 million compared to $11.4 million in the same period of 2011 and $10.9 million in the fourth quarter of 2011. We received our annual co-back dividend that always comes in first quarter that was approximately $0.3 million in both 2011 and 2012.

Cash flow from operating activities was $7.3 million in the first quarter compared to $5.4 million a year ago. Cash used in investing activities amounted to $1.3 million compared $2.8 million a year ago reflecting our continued investments in both CLEC and RLEC business.

Just as a reminder we increased our investment over the last several years adding CLEC co-location capabilities in Maine in New Hampshire increasing and New England fiber network and adding to our soft switching capabilities in Alabama, Missouri and Maine. As Mike mentioned this will lead to a requirement for lower level of investment this year in the $7 million to $7.5 million range.

Cash flow used in financing activities for the first quarter amounted to $2.3 million with the year ago and represented the quarterly dividend to IBS holders that was paid on March 30. As of March 31 the company had cash and cash equivalents of $16 million compared to $12.4 million at the end of last year.

Long-term notes payable remain constant at $271.1 million when compared to the end of 2011 reflecting the fact that our debt is non-amortizing in nature. Our senior credits facility of $162 million has a maturity date of October 2013 and as Mike referenced we may explore the possibility of refinancing this debt prior to its maturity of the market conditions make it prudent for us to then extend the agreement.

The first quarter distribution of $5.6 million in interest and dividends to our shareowners and $0.3 million in interest to our bondholders occurred on March 30, 2012. We should be completing shortly the earnings and profits study to determine what portion of that dividend will be considered a non-taxable return of capital for cash for tax purposes.

As Mike mentioned previously the board met on April 20th and announced the suspension of the dividend portion of the IBS distribution. They went ahead and announced the scheduled interest of 0.24375 per IBS will be paid on July 2nd to holders of record as of June 15th. The normal distribution date as you've become familiar is June 30th but that's a Saturday. When the normal distribution dates fall on a weekend or bank holiday, the amounts due are payable on the next business day. The interest payment covers the period from March 30, 2012 through June 29, 2012.

Kim, with that maybe you can set us up for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today is from Dave Coleman from RBC Capital Markets.

Dave Coleman – RBC Capital Markets

I was wondering if you could talk about the margins on that contract, or put another way what the EBITDA impact would be when that is fully no longer in revenues? I've got another question. You talked about some headcount reductions, how much expense do you think you can get out of the business at this point and then finally just as far as idea structure, mostly the cash flows at the business are acrelian (ph) to at holders. Just wondering if there's any plan or thoughts as far as the battening the idea structure refinancing the 13% subordinated notes and power and sort of restructure more as sequel thanks.

Mike Weaver

Thank you Dave. That's a pretty comprehensive question. Let me see if I can provide some duration for you. the first statement I made to you is and as I mentioned a couple times, we have a fairly long run with the Time Warner contract, meaning they have essentially a 160,000 or approximately rather 160,000 customers that will be transitioned from Otelco's network, to Time Warner's network and that will take some time. The contract, it's important. If we all remember that nothing changes, only revenue stream from that contract through the end of this year and then there will be some changes in 2013 but the contract itself requires Otelco to continue to offer services for that network to Time Warner.

What that has to do with your question is, it gives us a longer runway to assess exactly where we are, make the appropriate business plans and really address a variety of issues. There is absolutely significant expense savings that are available to us from the Time Warner contract. Examples of those with the 160,000 network connections from Time Warner, there is a lot of additional network cost that are dedicated to Time Warner. There is quite a bit of programming and software, not necessary for billing but for maintaining the network and for understanding who are the calls are coming from. And those costs, when they go, it does not affect the integrity of our network to serve our other customers.

So what we're doing in interim is we're spending, as you would imagine, we are spending a great deal of time looking at every aspect of our business and determining what we can do to essentially resize our operations and our administration and we'll take the appropriate actions. I'm not prepared on today's call to lay out exactly what those numbers are only because we are still in the process of doing the work. So I'm going to currently own providing you an exact number for expense savings. At the end, that we're spending a lot of time on this, that's better to find. We'll have an answer for that.

Broader question that you ask is on the CLEC. Is there any thoughts of the banding or changing that structure? And the answer is the same. Again, with the long runway that we have from Time Warner, its business as usual through the end of this year with no effect on the revenue stream and send you management in the board will in regular conversations and will be considering all of our alternatives as it relates to structure and operations and our business. So that's the answer to the very comprehensive question that you asked.

Dave Coleman – RBC Capital Markets

But just going back to the Time Warner contract, if there were no change to the parts of the business that you were going to seek any off savings because of losing this contract. What were the margins associated with that?

Mike Weaver

The revenue associated with it, we've done a good job I think of disclosing that. In the past it was 11.48% and I'm really not prepared to talk about EBITDA margins on any specific, on the Time Warner contract or any specific aspects of our business.

Operator

Our next question today is from Frank Louthan from Raymond James.

Frank Louthan – Raymond James

Can you quantity it all so you said this network cost in building software, is there any way to quantify that or sort of a ballpark situation of what sort of costs are associated with that. And is there any CapEx that's associated with the Time Warner Cable business that might go away to that we aren't factoring in?

Mike Weaver

I really can't quantify exactly what goes away with that. Again, not because we are not working on it, but because our working ain't finished yet. As an example, Time Warner network, we had approximately 10,000 trunks that were dedicated to Time Warner traffic. Now the Otelco traffic travels on some of those signed networks. Of course. That's the practical and the normal way to handling your traffic. So not all of those facilities go away but we made the sign number of trunks without once Time Warner has exited, no we don't.

Do we need the sign number of switches and those top facilities? May be not. But what we're very, very careful of is that we keep the integrity and the redundancy of our network in place. So it's not a situation where you come in now that the announcement is made and you start taking out facilities. Again, we are very grateful that the contract runs through the end of this year and into early 2013. Because of that, that network will remain in place. But there are certainly, there are other costs in looking in our business that we can take out and we will. But until we have the exact plan worked out, so that I know exactly what I am talking about, I don't want to speculate on that.

Frank Louthan – Raymond James

Can you comment on your NOL situation? What exactly is the status of your current NOLs and at what point are you facing any more significant cash taxes? Is that anything that we should be concerned about over the extra two years?

Mike Weaver

I think Curtis is probably in a better position to answer that than I am.

Curtis Garner

We're quite frankly working on the model that will include the change for Time Warner and as Mike gets, as we work all of the other cost changes in, once we do that, I'll have a better answer for it, but I think over the next two years, the NOLs will still leave us in a decent position to remain a very efficient cash tax payer. We also changed our structure as of the end of 2011 so that all of our subsidiaries are now single member LLCs. And that structure will allow us to use some tax assets in Alabama in particular and reduce some of our cash tax responsibilities in Missouri which will have a positive impact on the cash tax situation and use up those assets. So for the next two years, we're in decent debt.

Frank Louthan – Raymond James

Okay and then what are your best opportunities for growth to grow back this. I understand that the rapid change in the model is really the problem here and I see where the cost cutting and all is the only short term address that, but it doesn’t make up for all of it. At some point you need to get some more revenue in the door, some more growth. Where do you see those opportunities? Are there any other wholesale opportunities with other carriers or other cable companies in and around the main area, New England? CLEC opportunities, what are your plans as you address the revenue shift here rather than just the cost side?

Mike Weaver

Let me tell you what we are working off and all this was started some time ago right before the Time Warner announcement. First thing is, just too sort of state the obvious, there is not another Time Warner around in our service area. There is just simply no one of their size in our space. Having said that, we have other wholesale arrangements with much smaller customers and we'll look to expand those. That's not new to our objectives. It's something that we work on regularly and this will make us redouble our efforts in that space. But in addition these are the things that are on the drawing board and will be coming out for us later this year. We in association with another firm, we'll be introducing a suite of managed service products later this year. We're currently in training for that and that will be services that we think our great customer base has expressed an interesting and a desire for us to provide. So that will be coming out later this year. You've heard us on past calls talking about our hosted PBX product which is simply put, just an off-beat telephony phone service that continues to show great growth. We recently streamlined, we have a whole department set up and dedicated to that service, we've recently streamlined those with the idea of reducing the deployment time and making us more efficient. Once those orders are place we have in that service time. As you have heard again on prior calls and as Curtis alluded to, in 2011, we installed, I think it was eight new co-location sites with six of those being in New Hampshire. We were working to gain market share, that again was a Greenfield opportunity for Otelco as far as being in the state of New Hampshire. So we have sales people working in that area every day and there's an opportunity for us to take market share in New Hampshire.

In Alabama, we will roll out in June or July an ancillary business where we provide security services that make sense for telephone companies like us to provide. We continue to see growth in the request for fiber transport for schools and education systems particularly in Alabama. In Missouri, we were successful last year in obtaining contracts to provide fiber to sales sites. We expect growth in that in 2012 and 2013. So those are the positive aspects of what we are on and the new revenue opportunities that we see. As you compare, we're attacking that issue on a number of fronts and I think as a result of those efforts, we should see some growth in those areas.

Frank Louthan – Raymond James

Okay, is there any way to accelerate any of the matter to quantify how much sort of what percentage over multi-year period you think you could add to your top line with these initiatives and can you accelerate faster than maybe you would have excluding the loss of the Time Warner business?

Mike Weaver

Well we certainly have already moved up the dates on the roll out of some of those services and we will accelerate that. The other thing that we're trying to do is in New Hampshire. We're currently looking for additional sales people to fill the roll in New Hampshire in an effort to grow that process faster. So yes, the answer to the question is can we accelerate? We're already trying to do that. And that's in place. As far as quantifying, I am not in a position to do that today.

Operator

(Operator Instructions). We'll go next to Chip Saye from AWH Capital.

Austin Hopper – AWH Capital

You mentioned in your prepared comments some FCC changes impacting your asset charge of business starting in July. Can you just comment on that a little further?

Mike Weaver

The recent FCC reform that is for the industry that you are aware of, it affects both RLEC and CLECs and its interesting that most of the attention have been devoted to the RLEC side of the business. But the CLEC side has been affected as well. Very specifically, what I am referring to is starting July 1st, there will be the FCC order requires that the state rates start or move on their access rate where over time the state rates equal the federal rates. Now it sounds like a lot of gobbled goo, what does it mean? It means that in our case, in the state of Maine, the state rates are higher than the federal. So over a period of time, that rate will move down and I want to say that the period of time is two years. Don't call me to that 24 months exact, but I think that's pretty close. So the calculation will be, is always the minutes of use toll minutes that terminate us, is what our access revenue comes from times the rate. As that rate declines, the revenue generated from that will naturally decline as well. This situation is not unique to Otelco. It’s a federal. It’s the SEC, so it's federal so to fix. Every CLEC in the US. There are certainly things we'll do as far as price increases and every CLEC will be forced to take similar action on that. But specifically, that's what I was referencing when I said changes to the FCC order.

Operator

Our next question today is from Eric Will from Fertile Mind Capital.

Eric Will – Fertile Mind Capital

Just a quick clarification, it says 3 to 4% of access revenues also come from Time Warner. So is that fair to add that on to the 11.7% of revenues loss. So is it fair to say like 15 to 16% overall revenues will be lost by 2013?

Mike Weaver

Let me thank you for your question Eric. Let me explain what I meant. The access revenue that we're referred to the 3 to 4% is paid to us by long distance carriers and its derived from the minutes of use of calls that terminate on our network in Maine in New Hampshire that originate from Time Warner customers. So if those calls go away then that revenue will decline. We will continue to receive some amount of minutes from Time Warner particularly as once the transition is in place, as their network, as they expand their existing network to handle those calls. So some of those minutes go away. Frankly it's not possible to estimate what percentage of those stay and what percentage of those go away. Again we will always handle their calls as we do today for any carrier that chooses to terminate calls to us. But some of that revenue goes away. I don't know that you can take and do the math and add those together and have an accurate number. It’s a very difficult process to estimate. If there's a lot of moving parts, you just heard the comments on the rate change that will be affected by the FCC, that's certainly one factor in that. So even if the minutes remain exactly the same, it's logical to expect that the revenue from all, not just Time Warner but from all terminating minutes would decline.

Eric Will – Fertile Mind Capital

Okay, with regards to the senior debt, I know you can't comment on exactly how much cost will you can reduce from the Time Warner deal but do you feel like there is enough to reduce to the point where you won't be violating the 4:1 maximum consolidated leverage ratio covenant?

Mike Weaver

Currently we are in complete compliance with all of our co-owners on debt agreements. The suspension of the dividends will conserve $7 million in cash in 2012 and on an annual basis, that case conservation will be $9.3 million. So the point of that is that we will be accumulating significant case relative to our size for that. And at the present, we're in complete compliance with all of our debt covenants.

Operator

Our next question today is from Robert Davis from Round Table Services.

Robert Davis – Round Table Services

My question, you stated earlier that it's really business as usual in light of the Time Warner contract. Yet the board slashed the dividend immediately. So one, what was the greatest fear that you had given the board's action. And I think you may have just answered my second part of the question, which is what do you intend to do with the cash given that you are not paying out the dividend. Are you going to just build up cash and make the metrics look better so you can refinance the debt or are there other areas where you are going to invest in? What should we expect?

Mike Weaver

I think essentially what you are asking me is, walk up to dividend, but the answer to that is that the reasons for that were two fold, it's just in anticipation of the expiration of the Time Warner contract and the revenue that goes away with that coupled with the decline, the FCC decisions that we referenced early where they are going to lower access right. It’s the right business decision. I think it's clearly the prudent thing to just save the case, conserve the cash and use it for put it to the best use for all of our shareholders now. The board will make that determination, that will be a decision that's made at the board level with what happens to case.

Robert Davis – Round Table Services

Okay and perhaps you can answer it but what are you looking for in terms of scenarios where you had reinstated because from what you just said it sounds like it wasn’t just the Time Warner but there is other areas of your business that are experiencing some weakness that would lead you to reduce the (inaudible) as well. Under what scenarios might you see the company's reinstating.

Mike Weaver

Here is what we're going to cost in trying to doing. And let me expand just a little bit and I'll try to answer that as specifically as I can. We'll remind, and you mentioned that I referenced it is business as usual with Time Warner, and it is. Again that revenue stream remains intact through the end of this year. So I think the most important thing we can do is continue to operate the business to the best of our ability and try to produce consistent results which generates cash that we will have available for the appropriate uses. So that's kind of statement one, as we continue to work through, you heard me talk about some of the business opportunities, that we have for new functions. There will be some growth coming of those businesses. Will it be enough to offset the loss of Time Warner? No. it won't. But we are in the process of resizing our company to an appropriate size anticipating the loss of Time Warner. The FCC impact again is more than Otelco. It impacts all of our competitors and it impacts everywhere. So we're all going to be grappling with that decision. The return to dividends would be, once those things are worked through and we see the results of operations come back to a point where the cash is there to pay the dividends and still have an appropriate level of cash left and so at that point that the board will consider reinstating the dividends.

Operator

And moving on, we'll hear from Peter Brieger (ph) from BonaVista Asset Management.

Unidentified Analyst

If I understand the idea structure correctly, the portion of that is the 7.5 coupon, 7.5 par value of the bond, correct?

Mike Weaver

Yes.

Unidentified Analyst

Well with the market trading at 534 for these units which is 70% of that coupon, you could make an argument that the market currently evaluating the business at zero or negative, obviously a discount on the bond, but my point is you talk like there is a pretty good future here. Are we going to see any endorsements from the officers, the boards in terms of stepping up to the plate or buybacks or our involvement both here for takeout because of this low valuation and just kind of like to hear some comments on that.

Mike Weaver

I am not certain what you mean by, are we going to step up?

Unidentified Analyst

By stock because they really believe in the company this is an incredibly low once-in-a-lifetime opportunity, not all the board members don't stock. So anyway I have to address this unbelievably low valuation versus some of the metrics.

Mike Weaver

I understand. Thank you for clarifying. You already know, with all public companies that I am aware of, there is trading wind, this is where management can buy and they are committed to buy and sell at that point in time. And any trades we make, we have to be reported in that period of time. If you are asking me essentially, do I intend to buy more stock, the answer to that is, I haven't even thought about it, it would have been so busy managing the business. But on a personal level, I have not given it any thought at all. So that's the answer. And those are personal decisions and I don't know what the board may or may not do.

Unidentified Analyst

I was just that, if we really believe the valuation and see it was good under leadership it might be a strong consideration by everyone making their own decision. That's my only point. So thank you.

Operator

We'll take another question from Chip Saye from AWH Capital.

Chip Saye – AWH Capital

In regards to the senior debt refinancing, I think that you're probably going to look to get ahead of the October 2, 2013 deadline. Are you guys making progress on that right now?

Mike Weaver

A lot of the questions, progress in the sense that we are working to put the financial plan together, that answers, that provides information for the amount of cost we can tuck out and quantifying some of the business opportunities that we see on the new services that we're going to roll out. We'll finish that work and we will take some time and figure out what the best options for us are and I think there is quite a few options on the table and then we will be as always, we're talking to the lenders now, we'll continue to have conversations with them. I think your expectation that we'd like to get in front of that is correct, meaning proud of that day and as Curtis mentioned opinion on market conditions and other factors, yes, we'd like to do that sooner rather than later, sure. Again, we're working on preparing the necessary projections in business model that would give us the tools to how meaningful conversations with the lenders.

Chip Saye – AWH Capital

So it's fair to say that right now, you are still working through what your costs will be in New England and the lower revenues associated with Time Warner and Daniel will be more active with the lenders. Is that correct?

Mike Weaver

I think that's an accurate statement.

Operator

And we'll take another question that comes from Patrick Wilson of Private Investor.

Patrick Wilson – Private Investor

Several questions, firstly as the total potential of resigning Time Warner totally dead? Was the reduction in the state rates that you mentioned because of the SEC changes, is there any feeling why Time Warner wanted to become their own provider? And I guess lastly, was there any real inclination coming from Time Warner that this potential ending of their contract was eminent. Thank you.

Mike Weaver

Thank you Patrick. Let me see if I can answer those in the order that you asked them. As to the potential of Time Warner coming back to this, I don't think so. As you might imagine, we had very extended negotiations. We met them in person, we had presentations, we had numerous phone calls, it was a fairly lengthy process. And I think their decision is firm. I would love to give that phone call that said for whatever the reason, I changed their mind. I think that's not going to happen. I think that's highly unlikely. It's interesting. It’s a great question and so why didn’t they want to protect their service in house and I think the answer to that would be from our discussions that it's consistent with what they've done elsewhere in the country. They had similar arrangements with other carriers that performed essentially the same functions as Otelco and they brought those in house already and are in the process, that process continues and so I think in their world it just makes sense to do that. So how reconcile it is that it’s a matter of control where they want all that in their domain and they don’t want any what I'd refer to as one off systems meaning where they have to treat some of the traffic differently than others and I'm sorry, remind me what your third question was?

Patrick Wilson – Private Investor

Was there and kind of inclination coming up before you really initiated your talks that this was a potential for them to leave us.

Mike Weaver

No. That contract, Otelco, we brought Country Road in 2008 and Country Road had been providing services to Time Warner prior to that for some period of time and so the contract had gone through several renewals prior to Otelco being to our acquisition of Country Road and it had always been renewed. So we had no inclination at all that they weren’t going to renew the contract.

Operator

Moving on we'll hear from Neil George, another Private Investor.

Neil George – Private Investor

Some of those upcoming costs; to me obviously it's many of the market that Otelco now is sort of in a triage mode pending the change in contract with Time Warner. At the same time you did speak a little bit, just any other queries as well as in the filing as well as in your opening statement that you are looking for some additional revenue sources. It seems to me that given that there is a fairly large retail investor base that either directly or indirectly has a Telco share but there seem to be, a need for a much more I'd say transparent and more forthcoming about some of the ongoing developments, not just conserving cash and trying to effectively get the company through what's coming across as a crisis and get it through back into the growth mode and again I'd like to have you kind of address what you are planning and doing as far as being a little bit more transparent, a little more communicative going forward.

Second of all along that line we've got this term loan coming up which we've addressed in the filing as well as in the statement on some of the queries earlier. Some of the primary creditors that we have, we get General Electric, AIG and CoBank and a private syndication deal. In these two major cases chiefly General Electric has been pulling back on a lot of this type of credit and secondly AIG obviously has some of its other issues.

It seems to me that there really sort of an issue with potential refinancing given the appearance of the triage that's going through Otelco. We talked about this. Mike and Curtis, in past quarterly discussions about the need for sort of setting up the refinance. I know you are saying you are starting discussions or you're going to be starting discussions after you sort of work through the problem with Time Warner but again the transparency of communication is going to be much more necessary as far as how you are going to work this year and I'd like to have you address that. And then it's also evident to me, like you talked about the contract negotiations with Time Warner have been going on for some time, just over a few days and obviously given the fact that this was such a major portion of the cash flows for the firm, again I guess I'm either surprised to upset that we didn’t get more transparency in more occasions of the potential problems that could result from this contract not going as favorably as it had been in the past years, in past contract negotiations.

And on that same line, Mike when the other callers on this thing talked about the idea of management setting up and buying shares, we actually see from 144 showing a fairly large block of shares that you had sold back on February 23rd. I had assumed that Time Warner was obviously in discussions at that point. I wonder if could address that filing and then lastly, we talked earlier about sort of the potential let's say restructuring of the IDS structure for the firm, I know we are way far in advance but again (inaudible) comments as far as the commitment to the retail investor. Going forward through this triage process as well as getting us through to the growth level. I appreciate either Mike or you commenting as well as Curtis commenting.

Mike Weaver

That was a good job of getting a lot of questions in a short period of time Neil. Let me tackle those in a different order than you got them. First of all I have not sold any shares. I have approximately 50,000 shares of Otelco stock that's public information and I have not sold any of those shares. There was a form filed. It was in air. As soon as that was discovered it was corrected. There should be a filing showing zero shares. So that's an error. You are correct that the form was filed again and it was an error. It was corrected very, very quickly.

As far as transparency most of your other comments centered around the fact of transparency. As soon as we know the outcome of the Time Warner contract and we acted appropriately and disclosed that in the press release that we issued. It's completely inappropriate for us to disclose any contract negotiation that we're going through not just with Time Warner but with anybody. Those are sensitive issues as you already know and those are not negotiated in press releases and I think we acted exactly as I would expect any company to act and exactly appropriately in that. What would I tell you, that we're talking to them? I don’t find much value in that and I would hope that as opposed to having a two or three day conversation about that, my purpose in mentioning the lengthy negotiations, we worked very, very hard throughout those negotiations to try to reach an agreement with Time Warner and it didn’t work. They elected to bring that in house consistent with their other operations in the country.

So there is nothing to report when we were talking to them until we had a decision at which time we disclosed it completely and appropriately. So as far as management's, what people intend to do about buying back shares as I said earlier, that's an individual decision and I don’t care to speculate on that.

Operator

And it looks like we have time for one more question. That will come from Walt Parnell, a Private Investor.

Walt Parnell – Private Investor

I've been a shareholder for many years and I've ridden the ups and downs. I think I understand your financial structure. I think the biggest challenge you had is not just cutting some expense. It's an administrative expense but doing something about some of your debt, your market right now is offering you an opportunity to buy back some of your IDSs at $0.70 on the dollar for the bond. That's a 20% return on investment. That would seem to me to be not call because then you have to pay that premium but just finding these shares in the open market, as long as the market is presenting you with this opportunity to minimize your debt. Have you thought about that?

Mike Weaver

We thought about a lot of things and I'm not avoiding your question but yes, we have thought about it and the Board will look at everything and make those decisions. Again that's how we'll approach it. That's how we will approach the buyback and a lot of the other issues that are being brought up today with the somewhat long runway in France before the expiration of the contract an again the significant thing about that is not the expiration of contract but the revenue stream from that remains constant through the end of this year. So we have a bit of time. It's a great question. It's something that the board will consider and has considered and will continue to think about. There is no decision been made on that today.

Walt Parnell – Private Investor

Well as a shareholder it doesn’t thrill me that the dividend has been cut but if that money is used for the good purposes dramatically reducing your debt I'd be a happy shareholder.

Operator

And that's all the time we have for questions today. Speakers I'll turn the conference back to you for any additional or closing remarks.

Mike Weaver

Thank you for participating in the call and thank you for your questions and we will talk to you again if not before at the end of the next quarter. Thank you.

Operator

And that does conclude our conference for today. Thank you all for your participation.

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