8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): February 15, 2007

Otelco Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	1-32362	52-2126395
(State of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

505 Third Avenue East, Oneonta, AL 35121

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (205) 625-3574

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On February 15, 2007, Otelco Inc. announced its results of operations for its fourth quarter and year ended December 31, 2006.  A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01Financial Statements and Exhibits.

(d) Exhibits

99.1 Press Release Dated February 15, 2007

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	OTELCO INC.
	(Registrant)
Date: February 15, 2007
	By:	/s/ Curtis L. Garner, Jr.
		Name: Curtis L. Garner, Jr.
		Title: Chief Financial Officer

EX-99.1

Contact: Curtis Garner

Chief Financial Officer

Otelco Inc.

205-625-3571

Curtis@otelcotel.com

Otelco Reports Fourth Quarter and Year 2006 Results

ONEONTA, Alabama (Feb. 15, 2007) - Otelco Inc. (AMEX: OTT; TSX: OTT.un), the sole wireline telephone services provider in several rural communities in Alabama, Maine and Missouri, today announced results for its fourth quarter and year ended December 31, 2006. Key quarterly highlights for Otelco include:

· Total revenues of $17.4 million.

· Operating income of 5.1 million.

· Adjusted EBITDA (as defined below) of $8.7 million.

“The fourth quarter and the year reflected continued growth as we completed the integration of our Mid-Maine acquisition,” said Mike Weaver, President and Chief Executive Officer of Otelco. “Total revenue increased 46.8% in the fourth quarter and 22.6% for the year, reflecting the acquisition and our growth in bundled customers, long distance and digital high-speed access, as well as competitive subscribers in Maine. Adjusted EBITDA (as defined below) increased $1.6 million for the quarter and $2.9 million for the year.

“Our subscriber metrics showed continued growth in competitive customers, digital high-speed access and multi-service bundles,” added Weaver. “Our bundled service offerings have proven to be very attractive to our residential customers in Alabama with over 30% accepting one of our offers in the first year. Our access lines grew by 0.7% in the fourth quarter, reflecting a 4.0% increase in our CLEC lines and a 0.5% decrease in our traditional markets.

“Our prospects for 2007 are exciting as our marketing plans include the expansion of our bundled services for telephone, unlimited long distance services, cable television and digital high-speed Internet,” continued Weaver. “We introduced the bundled plans in our Missouri market in December with some 12% of our residential customers accepting a bundle of services. We plan to add this offering in our Maine ILEC market later this year. In our CLEC operations in Maine, we are concentrating our efforts on obtaining businesses with multiple locations in the areas we serve. Our operating plans include upgrading our cable systems in order to offer a high definition package, expanding the use of our new Alabama soft switch and continuing the expansion of our digital high-speed Internet services.

“We remain very focused on executing our business plan and generating cash flows, allowing us to return cash back to our shareholders. We will also continue to pursue accretive acquisition opportunities that allow us to profitably grow our business, like Mid-Maine,” Weaver concluded. “For 2006, Otelco approved the distribution of over $16.2 million to its Income Deposit Security (IDS) holders, representing combined interest and dividends of $1.68 per IDS.”

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Otelco Reports 2006 Results

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Feb. 15, 2007

Distribution to IDS Holders

Each quarter, the Board will consider the declaration of dividends during its normally scheduled meeting. For the first quarter of 2007, the Board is meeting on February 22, 2007. The scheduled interest and any dividend declared will be paid on April 2, 2007 to holders of record as of the close of business on March 15, 2007. The interest payment will cover the period from December 30, 2006 through March 29, 2007.

Fourth Quarter and Year 2006 Financial Summary

(dollars in thousands, except per share amounts)

							Change
	4Q 2005			4Q 2006			Amount			Percent
Revenue	$	11,843		$	17,381		$	5,538			46.8	%
Operating income	$	4,698		$	5,084		$	386			8.2	%
Interest expense	$	(4,570	)	$	(5,324	)	$	754			16.5	%
Net loss available to stockholders	$	(150	)	$	(772	)	$	(622	)		(414.7	)%
Basic net loss per share	$	(0.02	)	$	(0.08	)	$	(0.06	)		(300.0	)%
Diluted net loss per share	$	(0.01	)	$	(0.01	)	$	0.00			0	%
Adjusted EBITDA(a)	$	7,017		$	8,661		$	1,644			23.4	%
Capital expenditures	$	744		$	1,955		$	1,211			162.8	%

	Year 2005			Year 2006			Amount			Percent
Revenue	$	46,972		$	57,589		$	10,617			22.6	%
Operating income	$	19,439		$	19,802		$	363			1.9	%
Interest expense	$	(17,729	)	$	(20,082	)	$	2,353			13.3	%
Net income available to stockholders	$	1,792		$	1,161		$	(631	)		(35.2	)%
Basic net income per share	$	0.19		$	0.12		$	(0.07	)		(36.8	)%
Diluted net income per share	$	0.12		$	0.18		$	0.06			50.0	%
Adjusted EBITDA(a)	$	28,345		$	31,288		$	2,943			10.4	%
Capital expenditures	$	4,083		$	5,618		$	1,535			37.6	%

Reconciliation of Adjusted EBITDA to Net Income

	Three months ended						Year ended
	December 31,						December 31,
	2005			2006			2005			2006
Adjusted EBITDA
Net income (Loss)	$	(150	)	$	(772	)	$	1,792		$	1,161
Add: Depreciation		1,976			2,836			7,749			9,527
Interest expense		4,061			4,796			16,097			17,698
Interest - caplet cost		127			212			258			756
Interest - loan cost amortization		382			316			1,374			1,628
Other non-operating income		--			--			--			(63	)
Gain/Loss from investments		--			--			--			(2,687	)
Income tax expense		404			(20	)		1,011			1,211
Accretion expense		111			97			443			430
Change in fair value of derivative liability		(38	)		616			(959	)		278
Loan fees		29			19			117			95
Amortization		115			561			463			1,254
Adjusted EBITDA	$	7,017		$	8,661		$	28,345		$	31,288

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Otelco Reports 2006 Results

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Feb. 15, 2007

^(a) Adjusted EBITDA is defined as consolidated net income (loss) 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. It reflects actual results with no pro forma adjustments. Adjusted EBITDA is not a measure calculated in accordance with generally acceptable accounting principles (GAAP). 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 to similarly titled measures used by other companies.

			Third		Year
			Quarter		End		% Change
Key Operating Statistics	2005		2006		2006		Quarter			Year
Access line equivalents (1)
Residential access lines		24,541		29,963		29,832		(0.4	)%		21.6	%
Business access lines		8,036		21,682		22,171		2.3	%		175.9	%
Access lines		32,577		51,645		52,003		0.7	%		59.6	%
Digital high-speed lines		6,314		11,298		11,951		5.8	%		89.3	%
Total access line equivalents		38,891		62,943		63,954		1.6	%		64.4	%
Long distance customers		14,438		21,088		21,370		1.3	%		48.0	%
Cable television customers		4,220		4,187		4,188		0.0	%		(0.8	)%
Dial-up internet customers		12,149		20,999		19,587		(6.7	)%		61.2	%

⁽¹⁾ We define access line equivalents as access lines, cable modems, and digital subscriber lines, including wholesale digital subscriber lines.

FINANCIAL DISCUSSION FOR FOURTH QUARTER AND YEAR 2006 (including the acquisition of Mid-Maine at July 3, 2006)

Revenue

Total revenues grew 46.8% in the three months ended December 31, 2006 to $17.4 million from $11.8 million in the three months ended December 31, 2005. Total revenues grew 22.6% in the year ended December 31, 2006 to $57.6 million from $47.0 million in the year ended December 31, 2005. The growth in revenue was primarily driven by the acquisition of Mid-Maine. Local services revenue grew 23.4% in the year ended December 31, 2006 to $21.5 million from $17.4 million in the year ended December 31, 2005. Total access line equivalents increased more than 25,000 during 2006, primarily from the acquisition of Mid-Maine and the growth in digital high-speed lines, partially offset by the loss of some second access lines used by customers for dial-up Internet access and wireline customer attrition. Network access revenue in the year ended December 31, 2006 grew 7.4% to $23.5 million from $21.9 million in the year ended December 31, 2005. Cable television revenue in the year ended December 31, 2006 increased 5.0% to $2.2 million from $2.1 million in the year ended December 31, 2005. Internet revenue in the year ended December 31, 2006 increased 53.0% to $8.5 million from $5.6 million in the year ended December 31, 2005. This increase included the acquisition of Mid-Maine and the addition of over 2,400 new digital high-speed Internet customers in Alabama and Missouri.

Operating Expenses

Operating expenses in the three months ended December 31, 2006 increased 72.1% to $12.3 million from $7.1 million in the three months ended December 31, 2005. Operating expenses in the year ended December 31, 2006 increased 37.2% to $37.8 million from $27.5 million in the year ended December 31, 2005. The increase was primarily attributable to the purchase of Mid-Maine, including amortization of intangible assets for its customer bases and a non-compete agreement. Cost of services increased 48.5% to $18.7 million in the year ended December 31, 2006 from $12.6 million in the year ended December 31, 2005. Selling, general and administrative expenses increased 23.3% to $8.3 million in the year ended

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Otelco Reports 2006 Results

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Feb. 15, 2007

December 31, 2006 from $6.7 million in the year ended December 31, 2005. Depreciation and amortization increased 31.3% to $10.8 million in the year ended December 31, 2006 from $8.2 million in the year ended December 31, 2005.

Interest Expense

Interest expense increased 13.3% to $20.1 million in the year ended December 31, 2006 from $17.7 million in the year ended December 31, 2005, reflecting the additional senior debt associated with the acquisition of Mid-Maine, the increased non-cash caplet cost associated with our interest rate cap and amortization of loan costs, partially offset by the reduction in margin cost from 4.0% to 3.25% on all of our senior debt.

Adjusted EBITDA

Adjusted EBITDA for the three months ended December 31, 2006 was $8.7 million, an increase of 23.4% from $7.0 million the three months ended December 31, 2005. For the year ended December 31, 2006, EBITDA was $31.3 million, an increase of 10.4% from $28.3 million for the year ended December 31, 2005. See financial tables for a reconciliation of Adjusted EBITDA to net income.

Balance Sheet

As of December 31, 2006, the Company had cash and equivalents of $14.4 million and total long-term debt of $201.1 million. The fourth quarter distribution of $4.1 million in interest and dividends to our share owners occurred on January 2, 2007.

Capital Expenditures

Capital expenditures were $5.6 million for the year. The Company added DSL capacity, competitive customer specific equipment, a soft switch in Alabama and other upgrades to its network and switching facilities.

Fourth Quarter Earnings Conference Call

Otelco has scheduled a conference call, which will be broadcast live over the Internet, on Friday, February 16, 2007, at 11:00 a.m. ET. To participate in the call, dial 913-981-5533 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 Web site at www.otelco.net or www.earnings.com. To listen to the live call online, please visit the Web site at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live Web cast, a replay of the Web cast will be available on the Company's website at www.otelco.net or www.earnings.com for 30 days. A one-week telephonic replay may also be accessed by calling 719-457-0820 and using the passcode 6124763.

ABOUT OTELCO

Otelco Inc., headquartered in Oneonta, Alabama, provides wireline telephone services in portions of Alabama, Maine and Missouri. The Company’s services include local and long distance telephone, network access, transport, digital high-speed and dial-up Internet access, cable television and other telephone related services. With more than 63,900 access lines, cable modems and digital subscriber lines, which are collectively referred to as access line equivalents, Otelco is among the top 40 largest local exchange carriers in the United States based on number of access line. Otelco operates six incumbent telephone companies serving rural markets, or rural local exchange carriers, each of which can trace its history as a local telecommunications provider as far back as the early 1900s. It also provides competitive telephone services through several subsidiaries. For more information, visit the Company’s web site at www.otelco.net.

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Otelco Reports 2006 Results

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Feb. 15, 2007

FORWARD LOOKING STATEMENTS

Statements in this press release 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 describe such risks and uncertainties, readers 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 Securities and Exchange Commission.

OTELCO INC.

Consolidated Balance Sheets

	As of			As of
	December 31, 2005			December 31, 2006
Assets
Current Assets
Cash and cash equivalents	$	5,569,233		$	14,401,849
Accounts receivable:
Due from subscribers, net of allowance
for doubtful accounts of $160,270 and
$207,359 respectively		1,212,909			3,105,636
Unbilled revenue		1,828,104			2,324,213
Other		1,482,171			1,685,144
Materials and supplies		932,861			1,962,938
Prepaid expenses		504,256			1,057,947
Income tax receivables		749,591			--
Deferred income taxes		872,675			766,225
Total current assets		13,151,800			25,303,952
Property and equipment, net		44,555,611			60,493,789
Goodwill		119,431,993			134,182,309
Intangible assets, net		1,588,079			11,340,806
Investments		1,108,249			1,240,250
Deferred financing costs		6,971,610			6,652,393
Interest rate cap		5,318,728			4,542,160
Deferred charges		--			96,628
Total assets	$	192,126,070		$	243,852,287
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,106,114		$	1,658,911
Dividends payable		--			1,705,524
Accrued expenses		1,692,841			5,875,863
Advanced billings and payments		1,204,680			2,119,701
Customer deposits		213,524			197,496
Total current liabilities		4,217,159			11,557,495
Deferred income taxes		15,345,890			24,712,213
Other liabilities		192,769			187,037
Total deferred tax and other liabilities		15,538,659			24,899,250
Long-term notes payable		161,075,498			201,075,498
Derivative liability		1,830,095			2,107,877
Class B common convertible to senior
subordinated notes		3,655,454			4,085,033
Stockholders’ equity
Class A Common stock, $.01 par value-authorized
20,000,000 shares; issued and outstanding
9,676,733 shares		96,767			96,767
Class B Common stock, $.01 par value-authorized
800,000 shares; issued and outstanding
544,671 shares		5,447			5,447
Additional paid in capital		5,613,703			284,041
Retained deficit		(805,731	)		(1,137,166	)
Accumulated other comprehensive income		899,019			878,045
Total stockholders’ equity		5,809,205			127,134
Total liabilities and stockholders’ equity	$	192,126,070		$	243,852,287

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Otelco Reports 2006 Results

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Feb. 15, 2007

OTELCO INC.

Consolidated Statements of Income

	Three Months Ended						Year-Ended
	December 31,						December 31,
	2005			2006			2005			2006
Revenues
Local services	$	4,292,153		$	6,464,074		$	17,445,233		$	21,523,406
Network access		5,584,262			6,632,111			21,873,485			23,481,490
Cable television		540,865			559,225			2,086,854			2,191,210
Internet		1,426,007			2,772,040			5,566,650			8,515,899
Transport		--			953,762			--			1,877,387
Total revenues		11,843,287			17,381,212			46,972,222			57,589,392
Operating expenses
Cost of services and products		3,255,118			6,226,772			12,611,499			18,727,806
Selling, general and administrative
expenses		1,798,263			2,673,308			6,710,542			8,277,449
Depreciation and amortization		2,091,972			3,397,044			8,211,552			10,781,333
Total operating expenses		7,145,353			12,297,124			27,533,593			37,786,588
Income from operations		4,697,934			5,084,088			19,438,629			19,802,804
Other income (expense)
Interest expense		(4,570,135	)		(5,324,442	)		(17,728,834	)		(20,082,037	)
Change in fair value of derivative		38,127			(615,478	)		958,621			(277,782	)
Other income		198,416			160,846			577,769			3,358,860
Total other expense		(4,333,592	)		(5,779,074	)		(16,192,444	)		(17,000,959	)
Income before income tax and
accretion expense		364,342			(694,986	)		3,246,185			2,801,845
Income tax expense		(403,853	)		19,966			(1,011,675	)		(1,211,269	)
Income (loss) before accretion expense		(39,511	)		(675,020	)		2,234,510			1,590,576
Accretion of Class B common
convertible to senior subordinated notes		(110,732	)		(97,385	)		(442,926	)		(429,579	)
Net income (loss) available to common
stockholders		(150,243	)		(772,405	)		1,791,584			1,160,997
Weighted average shares outstanding:
Basic		9,676,733			9,676,733			9,676,733			9,676,733
Diluted		10,221,404			10,221,404			10,221,404			10,221,404
Net income per share:
Basic	$	(0.02	)	$	(0.08	)	$	0.19		$	0.12
Diluted	$	(0.01	)	$	(0.01	)	$	0.12		$	0.18
Dividends declared per share	$	0.18		$	0.18		$	0.71		$	0.71

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OTELCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2005			2006
Cash flows from operating activities:
Net income	$	1,791,584		$	1,160,997
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation		7,748,687			9,527,319
Amortization		462,865			1,254,014
Interest rate caplet		258,291			755,594
Amortization of loan costs		1,373,747			1,627,960
Accretion expense		442,924			429,579
Change in fair value of derivative liability		(958,621	)		277,782
Gain on disposition of other assets		--			(2,686,745	)
Provision for deferred income taxes		2,072,614			983,786
Provision for uncollectible revenue		124,367			193,561
Changes in assets and liabilities; net of assets and
liabilities acquired:
Accounts receivables		(61,126	)		(327,129	)
Material and supplies		107,049			3,385
Prepaid expenses and other assets		33,531			(365,795	)
Income tax receivables		(749,591	)		1,037,395
Accounts payable and accrued liabilities		(1,754,002	)		2,757,784
Advance billings and payments		63,667			(110,253	)
Other liabilities		(10,561	)		(22,029	)
Net cash from operating a activities		10,945,425			16,497,205
Cash flows from investing activities:
Proceeds from retirement of investment		165,094			3,224,913
Deferred charges /acquisition		--			(44,296	)
Purchase interest rate cap		--			--
Acquisition and construction of property and equipment		(4,083,222	)		(5,618,295	)
Cash paid for the purchase of Mid-Maine, net of cash acquired		--			(16,000,040	)
Payments for the purchase of Mid-Missouri
Holding Corp, net of cash acquired		29,683			--
Payment for the purchase of Page & Kiser
Communications, Inc., net of cash acquired		252,418			--
Net cash from investing activities		(3,636,027	)		(18,437,718	)
Cash flows from financing activities:
Cash dividends paid		(6,822,097	)		(5,116,572	)
Proceeds from long-term notes payable		--			40,000,000
Loan origination costs and transaction cost		(324,613	)		237,000
Repayment of long-term notes payable		--			(24,347,299	)
Net cash from financing activities		(7,146,710	)		10,773,129

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Otelco Reports 2006 Results

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Feb. 15, 2007

OTELCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

	2005			2006
Net increase (decrease) in cash and cash equivalents		162,688			8,832,616
Cash and cash equivalents, beginning of period		5,406,545			5,569,233
Cash and cash equivalents, end of period	$	5,569,233		$	14,401,849
Supplemental disclosures of cash flow information:
Interest paid	$	16,343,237		$	14,284,165
Income taxes paid (received)	$	(651,536	)	$	(698,336	)
Dividends declared but not paid	$	--		$	1,705,524

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