##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (MARK ONE)
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-19179
 CT COMMUNICATIONS, INC.
  NORTH CAROLINA
(State or other jurisdiction of
incorporation or organization)
    
    56-1837282
(I.R.S. Employer
Identification No.)1000 Progress Place NE
P.O. Box 227, Concord, NC
(Address of principal executive offices)
    
    28026-0227
(Zip Code)
 
 
 þ o
  o þ o
 þ o




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 INDEX
 Page No.PART I. Financial InformationItem 1. Financial Statements.Condensed
Consolidated Balance SheetsMarch 31, 2006 (Unaudited) and December 31, 2005
    
    2Condensed
Consolidated Statements of Income (Unaudited)Three Months Ended March 31, 2006 and 2005
    
    3Condensed
Consolidated Statements of Comprehensive Income (Unaudited)Three Months Ended March 31, 2006 and 2005
    
    4Condensed
Consolidated Statements of Stockholders Equity (Unaudited)Three Months Ended March 31, 2006 and 2005
    
    5Condensed
Consolidated Statements of Cash Flows (Unaudited)Three Months Ended March 31, 2006 and 2005
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    32Item 4. Controls and Procedures.
    
    32PART II. Other InformationItem 1. Legal Proceedings.
    
    34Item1A. Risk Factors
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    34Item 3. Defaults Upon Senior Securities.
    
    34Item 4. Submission of Matters to a Vote of Security Holders.
    
    34Item 5. Other Information.
    
    34Item 6. Exhibits.
    
    34Signatures
    
    35Exhibit Index
    
    36
 1




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##### 



Part I. FINANCIAL INFORMATION
 Item 1. Financial Statements.
 CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 (Unaudited)March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    46,555
    
    
    $
    23,011Short-term investments
    
    
    61,704
    
    
    
    Accounts receivable and unbilled revenue, net
    
    
    15,058
    
    
    
    16,336Wireless spectrum held-for-sale
    
    
    15,646
    
    
    
    15,646Other
    
    
    8,739
    
    
    
    7,220Total current assets
    
    
    147,702
    
    
    
    62,213Investment securities
    
    
    5,584
    
    
    
    5,845Other investments
    
    
    1,748
    
    
    
    1,690Investments in unconsolidated companies
    
    
    7,324
    
    
    
    15,618Property and equipment, net
    
    
    198,827
    
    
    
    200,179Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    19,989
    
    
    
    19,989Other assets
    
    
    6,306
    
    
    
    5,980Total assets
    
    $
    397,386
    
    
    $
    321,420LIABILITIES AND STOCKHOLDERS EQUITYCurrrent liabilities:Current portion of long-term debt
    
    $
    5,000
    
    
    $
    15,000Accounts payable
    
    
    7,490
    
    
    
    8,482Customer deposits and advance billings
    
    
    2,507
    
    
    
    2,538Income taxes payable
    
    
    39,997
    
    
    
    2,107Other accrued liabilities
    
    
    6,706
    
    
    
    11,814Total current liabilities
    
    
    61,700
    
    
    
    39,941Long-term debt
    
    
    38,750
    
    
    
    40,000Deferred credits and other liabilitiesDeferred income taxes
    
    
    21,845
    
    
    
    25,078Post-retirement and pension
    
    
    15,845
    
    
    
    15,842Other
    
    
    5,275
    
    
    
    4,679Total deferred credits and other liabilities
    
    
    42,965
    
    
    
    45,599Total liabilities
    
    
    143,415
    
    
    
    125,540Stockholders equity:Preferred stock 4.5% series, $100 par value; 614 shares outstanding
at March 31, 2006 and December 31, 2005, respectively
    
    
    61
    
    
    
    61Common stock, 19,158,198 and 18,930,624 shares outstanding
at March 31, 2006 and December 31, 2005, respectively
    
    
    44,865
    
    
    
    42,648Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    
    
    
    
    (307
    )Accumulated other comprehensive income
    
    
    266
    
    
    
    282Retained earnings
    
    
    208,481
    
    
    
    152,898Total stockholders equity
    
    
    253,971
    
    
    
    195,880Total liabilities and stockholders equity
    
    $
    397,386
    
    
    $
    321,420
  2




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005Operating revenue:Telephone
    
    $
    30,728
    
    
    $
    30,105Wireless and internet
    
    
    12,411
    
    
    
    11,292Total operating revenue
    
    
    43,139
    
    
    
    41,397Operating expense:Telephone cost of service (excludes depreciation of $6,178,
and $5,809, respectively)
    
    
    9,155
    
    
    
    9,041Wireless and internet cost of service (excludes depreciation of
$984 and $953, respectively)
    
    
    5,830
    
    
    
    5,248Selling, general and administrative (excludes depreciation of
$958 and $1,104, respectively)
    
    
    14,915
    
    
    
    14,142Depreciation
    
    
    8,120
    
    
    
    7,866Total operating expense
    
    
    38,020
    
    
    
    36,297Operating income
    
    
    5,119
    
    
    
    5,100Other income (expense):Equity in income of unconsolidated companies, net
    
    
    89,840
    
    
    
    1,243Interest, dividend income and gain on sale of investments
    
    
    813
    
    
    
    148Impairment of investments
    
    
    (876
    )
    
    
    (418
    )Interest expense
    
    
    (1,024
    )
    
    
    (1,136
    )Other expense
    
    
    (10
    )
    
    
    (39
    )Total other income (expense)
    
    
    88,743
    
    
    
    (202
    )Income before income taxes
    
    
    93,862
    
    
    
    4,898Income taxes
    
    
    36,373
    
    
    
    1,909Net income
    
    
    57,489
    
    
    
    2,989Dividends on preferred stock
    
    
    
    
    
    
    5Net income for common stock
    
    $
    57,489
    
    
    $
    2,984Earnings per common share:Basic
    
    $
    3.04
    
    
    $
    0.16Diluted
    
    
    3.00
    
    
    
    0.16Basic weighted average shares outstanding
    
    
    18,901
    
    
    
    18,802Diluted weighted average shares outstanding
    
    
    19,187
    
    
    
    18,980
  3




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005Net income
    
    $
    57,489
    
    
    $
    2,989Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on available-for
sale securities
    
    
    (5
    )
    
    
    (86
    )Reclassification adjustment for (gains) losses
realized in net income
    
    
    (11
    )
    
    
    49Comprehensive income
    
    $
    57,473
    
    
    $
    2,952
  4




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity (Unaudited)
 Accum. Other
    
    
    
    
    
    
    Total5% Series
    
    
    4.5% Series
    
    
    Common
    
    
    Other
    
    
    Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersPref Stock
    
    
    Pref Stock
    
    
    Stock
    
    
    Capital
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2004
    
    $
    336
    
    
    $
    61
    
    
    $
    42,222
    
    
    $
    298
    
    
    $
    (268
    )
    
    $
    215
    
    
    $
    145,364
    
    
    $
    188,228Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,989
    
    
    
    2,989Issuance of 152,218 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    1,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,751Issuance of 455 shares for
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Forfeiture and cancellation of
33,511 common shares
    
    
    
    
    
    
    
    
    
    
    (393
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (393
    )Dividends declared:4.5% preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,321
    )
    
    
    (1,321
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )Restricted stock compensation
net of $141 earned in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (693
    )
    
    
    
    
    
    
    
    
    
    
    (693
    )Balance at March 31, 2005
    
    $
    336
    
    
    $
    61
    
    
    $
    43,583
    
    
    $
    298
    
    
    $
    (961
    )
    
    $
    178
    
    
    $
    147,030
    
    
    $
    190,525
 Accum. Other
    
    
    
    
    
    
    Total5% Series
    
    
    4.5% Series
    
    
    Common
    
    
    Other
    
    
    Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersPref Stock
    
    
    Pref Stock
    
    
    Stock
    
    
    Capital
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2005
    
    $
    
    
    
    $
    61
    
    
    $
    42,648
    
    
    $
    298
    
    
    $
    (307
    )
    
    $
    282
    
    
    $
    152,898
    
    
    $
    195,880Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,489
    
    
    
    57,489Issuance of 41,287 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564Issuance of 178,195 shares for
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,878Forfeiture and cancellation of
48,810 common shares
    
    
    
    
    
    
    
    
    
    
    (632
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (632
    )Reversal of unamortized unearned
compensation balance
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    
    
    
    
    Tax benefits from excercised
stock options
    
    
    
    
    
    
    
    
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227Dividends declared:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,906
    )
    
    
    (1,906
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Restricted stock compensation
net of $284 earned in 2006
    
    
    
    
    
    
    
    
    
    
    487
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    487Balance at March 31, 2006
    
    $
    
    
    
    $
    61
    
    
    $
    44,865
    
    
    $
    298
    
    
    $
    
    
    
    $
    266
    
    
    $
    208,481
    
    
    $
    253,971
  5




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    57,489
    
    
    $
    2,989Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    8,120
    
    
    
    7,866Stock
compensation expense
    
    
    284
    
    
    
    141Loss on retirement of equipment
    
    
    4
    
    
    
    Post-retirement benefits
    
    
    4
    
    
    
    33Impairment of fixed assets
    
    
    190
    
    
    
    Impairment of investments
    
    
    876
    
    
    
    418(Gain) loss on sale of investment securities
    
    
    (193
    )
    
    
    77Interest income on short-term investments
    
    
    (45
    )
    
    
    Equity in income of unconsolidated companies
    
    
    (89,840
    )
    
    
    (1,243
    )Undistributed patronage dividends
    
    
    (58
    )
    
    
    (83
    )Deferred income taxes and tax credits
    
    
    (3,225
    )
    
    
    (279
    )Changes in operating assets and liabilities
    
    
    33,277
    
    
    
    (7,255
    )Net cash provided by operating activities
    
    
    6,883
    
    
    
    2,664Cash flows from investing activitiesCapital expenditures
    
    
    (6,987
    )
    
    
    (7,758
    )Proceeds from sale of property, plant and equipment
    
    
    32
    
    
    
    Proceeds from sale of investment securities
    
    
    344
    
    
    
    144Purchases of short-term investments
    
    
    (61,660
    )
    
    
    Purchases of investment securities
    
    
    (91
    )
    
    
    (41
    )Purchases of other investments
    
    
    (25
    )
    
    
    (50
    )Payment for wireless spectrum
    
    
    (300
    )
    
    
    Distribution from unconsolidated companies
    
    
    97,457
    
    
    
    69Net cash provided by (used in) investing activities
    
    
    28,770
    
    
    
    (7,636
    )Cash flows from financing activitiesRepayment of long-term debt
    
    
    (11,250
    )
    
    
    (6,250
    )Dividends paid
    
    
    (1,906
    )
    
    
    (1,323
    )Tax benefits credited to additional paid-in-capital
    
    
    227
    
    
    
    Proceeds from common stock issuances
    
    
    913
    
    
    
    47Net cash used in financing activities
    
    
    (12,016
    )
    
    
    (7,526
    )Net cash used in discontinued operations  operating activities
(revised, see Note 2)
    
    
    (93
    )
    
    
    (121
    )Net increase (decrease) in cash and cash equivalents
    
    
    23,544
    
    
    
    (12,619
    )Cash and cash equivalents at beginning of period
    
    
    23,011
    
    
    
    28,358Cash and cash equivalents at end of period
    
    $
    46,555
    
    
    $
    15,739Supplemental disclosure of non-cash financing activities:Common and nonvested shares issued under annual incentive plan
    
    $
    714
    
    
    $
    831Receivable due from broker related to stock option exercises
    
    
    1,019
    
    
    
    
  6




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1.
    
    In the opinion of management of CT Communications, Inc. (the Company), the
accompanying unaudited financial statements contain all adjustments consisting of only
normal recurring accruals necessary to present fairly the Companys financial position
as of March 31, 2006 and December 31, 2005 and the results of its operations and cash
flows for the three months ended March 31, 2006 and March 31, 2005. These unaudited
financial statements do not include all disclosures associated with the Companys
annual financial statements and should be read along with the Companys Annual Report
on Form 10-K for the year ended December 31, 2005. The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements, as well as the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates. In addition, the results of operations for the three months ended March 31,
2006 are not necessarily indicative of the results to be expected for the full year.2.
    
    In certain instances, amounts previously reported in the 2005 consolidated financial
statements have been reclassified to conform to the presentation of the 2006
consolidated financial statements. Such reclassifications have no effect on net income
or retained earnings as previously reported. In the first quarter of 2006, the Company
disclosed the net cash used in discontinued operations in the first quarters of 2006
and 2005 related to operating activities, which in prior periods was not specifically
identified as related to operating activities.3.
    
    STOCK COMPENSATION PLANSEffective January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123 (R), Share-Based Payment, (SFAS No. 123R) using the
modified-prospective transition method. Under the modified-prospective transition
method, SFAS No. 123R applies to all awards granted, modified, repurchased or cancelled
by the Company since January 1, 2006 and to unvested awards at the date of adoption.
The Company was also required to eliminate any unearned or deferred compensation
related to earlier awards against the appropriate equity account. At December 31, 2005,
the Company had $0.3 million of unearned compensation recorded in the shareholders
equity section of the Consolidated Balance Sheet. This amount was eliminated against
the Companys common stock account on January 1, 2006. The
Company accounts for cash-settled awards as liability awards and
records compensation expense based on the fair value of the award at
the end of each reporting period. The liability is re-measured at
each reporting period based on the then current stock price and the
effects of the stock price changes are recognized as compensation
expense. The Company accounts for equity awards based on the grant
date fair value. The Company records compensation expense and credits
common stock within shareholders equity based on the fair value
of the award at the grant date, which is recognized over the vesting
period of the stock. At March 31, 2006, the Companys stock
compensation expense was included in selling, general and
administrative expense in the Companys Consolidated Statements
of Income.On August 10, 2005, the Companys Compensation Committee of the Board of Directors
approved the immediate and full acceleration of the vesting of each stock option that
was unvested as of such date. The closing price of the Companys common stock on August
10, 2005 was $10.67 per share. Based on the closing price of the Companys common stock
on August 10, 2005, approximately 77,000 of the accelerated options were in-the-money
(i.e., the option exercise price was less than $10.67 per share) and approximately
952,000 of the accelerated options were out-of-the-money (i.e., the option exercise
price was greater than or equal to $10.67 per share). The Company recognized
compensation cost of $0.2 million during the third quarter of 2005 related to the
acceleration of the vesting of stock options.Each officer, at a level of vice-president or higher, agreed pursuant to a lock-up
agreement to refrain from selling shares of common stock acquired upon the exercise of
accelerated options (other than shares needed to cover the exercise price and satisfy
withholding taxes) until the date on which the exercise would have been permitted under
the options pre-acceleration vesting terms or, if earlier, the officers last day of
service or upon a corporate transaction as defined in the Companys Amended and
Restated 2001 Stock Incentive Plan.The decision to accelerate the vesting of these options was made primarily to reduce
compensation expense that would have been recorded in future periods as a result of the
Companys application of SFAS No. 123R. The Company adopted SFAS No. 123R effective
January 1, 2006. The Companys expense that will be eliminated as a result of the
acceleration of the vesting of these options could approximate up to $5.8 million. The
Company believes, based on its consideration of this potential expense savings and the
current intrinsic and perceived value of the accelerated stock options, that the
acceleration was in the best interests of the Company and its shareholders. In
addition, beginning in August 2005, the Company changed its compensation philosophy and
no longer grants stock options.Prior to January 1, 2006, the Company accounted for its stock option plans and its
employee stock purchase plan using the intrinsic value method of accounting provided
under APB Opinion No. 25, Accounting for Stock Issued to
 7




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Employees (APB 25) and
related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). Under this method, no compensation expense
was recognized for issuances of stock pursuant to the employee stock purchase plan, or
for stock option grants, with the exception of the acceleration of the vesting of stock
options during the third quarter of 2005. Accordingly, share-based compensation was
included as a pro forma disclosure in the financial statement footnotes and continues
to be presented as a pro forma disclosure for periods prior to January 1, 2006.At March 31, 2006, the Company had five stock-based compensation plans, which are
described below.Comprehensive Stock Option PlanThe Company has a Comprehensive Stock Option Plan (the Comprehensive Option Plan) to
allow key employees to increase their holdings of the Companys common stock. Under the
Comprehensive Option Plan, 180,000 shares of common stock have been reserved for
issuance. At March 31, 2006, 480 shares of common stock were ungranted. The Company
does not intend to grant additional options under this plan. Options were granted at
prices determined by the Board of Directors, generally the most recent sales price at
the date of grant, and must be exercised within 10 years of the date of grant.Restricted Stock Award ProgramThe Company has a Restricted Stock Award Program (the Program) to provide deferred
compensation and additional equity participation to certain executive management and
key employees. The aggregate amount of common stock that may be awarded to participants
under the Program is 180,000 shares. The Company amortizes the amount of the fair
market value of the stock granted on a straight-line basis over the vesting period,
generally 1 to 10 years. At March 31, 2006, 455 shares of common stock were authorized
but ungranted under the Program. The Company does not intend to grant additional awards
under this plan.Director Compensation PlanIn 1996, a Director Compensation Plan (the Director Plan) was approved to provide
each member of the Board of Directors the right to receive Directors compensation in shares of common stock or cash, at the Directors discretion. An aggregate of 90,000
shares were reserved for issuance under the Director Plan. All compensation for a
Director who elects to receive shares of stock in lieu of cash will be converted to shares of stock based upon the fair market value of the common stock on the issue date.
All subsequent compensation to the Director is converted to shares of common stock
based upon the fair market value of the common stock on the date such compensation is
paid or made available to the Director. During the three months ended March 31, 2006
and 2005, the Company issued 7,954 shares and 13,554 shares under the Director Plan
with an average fair market value of approximately $13 and $11, respectively. These shares related to Directors who elected to received their compensation in shares for
meetings attended during the previous year. Directors compensation expense is accrued
during the year as meetings are attended; therefore, no compensation expense related to
these shares was recognized for the three months ended March 31, 2006 and 2005. At
March 31, 2006, no shares were available for issuance under the Director Plan.Omnibus Stock Compensation PlanDuring 1997, the CT Communications, Inc. Omnibus Stock Compensation Plan (the Stock
Plan) was approved. Under the Stock Plan, 800,000 shares of common stock have been
reserved for issuance. The Stock Plan provides for awards of stock, stock options and
stock appreciation rights. There are no stock appreciation rights outstanding. The
Company issued 49,932 stock awards under the Stock Plan. Shares of common stock
authorized for issuance under the Stock Plan but ungranted as of December 31, 2001 were
transferred to the 2001 Stock Incentive Plan as authorized by the approval of the
Amended and Restated 2001 Stock Incentive Plan. The total shares authorized but
ungranted are discussed below under the Amended and Restated 2001 Stock Incentive Plan.
Options were granted at prices determined by the Board of Directors, generally based on
the most recent sales price at the date of grant, and must generally be exercised
within 10 years of the date of grant.Amended and Restated 2001 Stock Incentive PlanDuring 2004, the Amended and Restated 2001 Stock Incentive Plan (the Stock Incentive
Plan) was approved. The Stock Incentive Plan allows for stock options, stock
appreciation rights, nonvested stock, stock units, dividend equivalent rights and
performance and annual incentive awards. Under the Stock Incentive Plan, 2.6 million
shares,
 8




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 plus any shares remaining available for grant under the Companys Stock Plan,
have been reserved for issuance. At
March 31, 2006, the number of shares of common stock authorized for issuance but
ungranted was approximately 1,148,000 shares. The number of shares authorized but
ungranted includes any shares that have become available due to forfeitures or have
been reacquired by the Company for any reason without delivery of the stock, as allowed
under the terms of the Stock Incentive Plan and the Stock Plan. There have been no
stock appreciation rights or dividend equivalent rights granted by the Company. The
Company issued 59,692 stock units under the Stock Incentive Plan during the three
months ended March 31, 2006 with an average fair market value of approximately $13. The
Company has issued a total of 148,053 stock units under the Stock Incentive Plan, all
of which are outstanding as of March 31, 2006. These stock units are accounted for as
liability awards and any changes to the fair value are recognized in compensation
expense. During the three months ended March 31, 2006, the Company recognized
compensation expense of approximately $0.1 million related to
these stock units.During the three months ended March 31, 2006 and 2005, respectively, the Company
granted 88,496 and 134,126 unrestricted and nonvested shares, of which 56,902 and
121,192 were nonvested shares, respectively, under the Stock Incentive Plan to
participants with a weighted-average fair value of $13 and $11, respectively, measured
at the grant date fair value.
At March 31, 2006, there were 100,351 nonvested shares outstanding. The Company
accounts for the unrestricted and nonvested share awards as equity awards in accordance
with SFAS No. 123R. For both the three months ended March 31, 2006 and 2005, the
Company recognized compensation expense and related tax benefits from nonvested shares
of $0.2 million and $0.1 million, respectively. At March 31, 2006, unrecognized
compensation expense related to nonvested shares was $0.6 million, which will be
recognized over a weighted-average period of 1.6 years.Prior to January 1, 2006, the Company granted stock options under the Stock Incentive
Plan. These options were granted at prices determined by the Board of Directors,
generally the closing price on the date of grant, and must generally be exercised
within 10 years of the date of grant. The Company accounts for its stock options as
equity awards in accordance with SFAS No. 123R. The total intrinsic value of stock
options exercised during the three months ended March 31, 2006
and 2005 was $0.5 million and less than $0.1 million,
respectively. There were
no stock options granted during the three months ended March 31, 2006.The Company adopted the provisions of FASB Staff Position FAS 123R-3 on January 1,
2006. Accordingly, the Company reported the entire amount of excess tax benefits of
$0.2 million credited to additional paid-in capital resulting from its stock
compensation plans in cash flows from financing activities in its Statement of Cash
Flows.Activity under the Companys stock option plans for the three months ended March 31,
2006 is as follows:
 WeightedAverageNumber
    
    
    Exercise
    
    
    Intrinsicof Options
    
    
    Price
    
    
    ValueOptions outstanding and exercisable at December 31, 2005
    
    
    1,704,729
    
    
    $
    13Options exercised
    
    
    178,195
    
    
    
    11Options forfeited
    
    
    2,737
    
    
    
    18Options outstanding and exercisable at March 31, 2006
    
    
    1,523,797
    
    
    $
    14
    
    
    $
    (354,814
    )
 The weighted-average remaining contractual term of the options included in the table
above is approximately 7 years.
 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Nonvested share activity for the three months ended March 31, 2006 is as follows:
 WeightedAverageNumber
    
    
    Grant-Dateof Shares
    
    
    ValueNonvested shares at December 31, 2005
    
    
    156,160
    
    
    $
    11Shares granted
    
    
    56,902
    
    
    
    13Shares vested
    
    
    112,457
    
    
    
    11Shares forfeited
    
    
    254
    
    
    
    11Nonvested shares at March 31, 2006
    
    
    100,351
    
    
    $
    12
 The fair value of shares vested during the three months ended
March 31, 2006 was approximately $1.5 million.
 Prior to January 1, 2006, the Company accounted for its stock option plans and its
employee stock purchase plan using the intrinsic value method of accounting provided
under APB 25 and related Interpretations, as permitted by SFAS No. 123. Pro forma
disclosures for the three months ended March 31, 2006 are not applicable. Had
compensation cost for the Companys stock-based compensation plans been determined
consistent with SFAS No. 123, the Companys net income and earnings per share for the
three months ended March 31, 2005, would have been reduced to the pro forma amounts
indicated below (in thousands except per share data):
 Three Months EndedMarch 31, 2005Net income
    
    $
    2,989Additional stock-based compensation expense that
would have been included in net income if the fair
value method had been applied, net of income tax
    
    
    276Pro forma net income
    
    $
    2,713Basic earnings per common shareAs reported
    
    $
    0.16Pro forma
    
    
    0.14Diluted earnings per common shareAs reported
    
    $
    0.16Pro forma
    
    
    0.14Assumptions used in Black Scholes pricing model:Expected dividend yield
    
    
    2.5
    %Risk-free interest rate
    
    
    4.2
    %Weighted average expected life
    
    5 yearsExpected volatility
    
    
    57
    %Fair value per share of options granted
    
    $
    4.73
 10




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 4.
    
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consist of the following (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Equity Method:Palmetto MobileNet, L.P.
    
    $
    3,080
    
    
    $
    10,654Other
    
    
    38
    
    
    
    35Cost Method:Magnolia Holding Company
    
    
    1,239
    
    
    
    1,587PRE Holdings, Inc
    
    
    1,745
    
    
    
    2,100Other
    
    
    1,222
    
    
    
    1,242Total
    
    $
    7,324
    
    
    $
    15,618
 The Company recognized income of $89.8 million and $1.2 million for the three months
ended March 31, 2006 and 2005, respectively, as its share of earnings from
unconsolidated companies accounted for under the equity method. Substantially all of
the income was attributable to the Companys 22.4% interest in Palmetto MobileNet, L.P.
(Palmetto). Palmetto is a partnership that held a 50% interest in 10 cellular rural
service areas (RSAs) in North and South Carolina. On March 15, 2006, Palmetto sold
its ownership interests in the 10 RSAs to Alltel Corporation for approximately $455
million cash. As a result of this transaction, the Company recorded equity in income of
unconsolidated companies of $88.9 million, which includes $10.3 million from the
recognition of the difference in the Companys carrying value of Palmetto and the
Companys percentage share of the underlying assets, and received a pre-tax cash
distribution from Palmetto of $97.4 million as proceeds from the sale. The Company
invested $61.7 million of these proceeds in short-term investments, which are
classified as available-for-sale securities at March 31, 2006. At March 31, 2006, the
Companys remaining carrying value of $3.1 million for Palmetto represented the
Companys percentage shares of the underlying equity of Palmetto, which primarily
included cash, fixed assets and certain liabilities associated with the sale of the
RSAs. Summarized unaudited interim results of operations for Palmetto for the three
months ended March 31, 2006 and 2005 are as follows (in thousands):
 Three Months Ended March 31,2006
    
    
    2005Equity in earnings of RSA partnership interests
    
    $
    3,499
    
    
    $
    5,623Other income (expenses)
    
    
    352,491
    
    
    
    (83
    )Net income
    
    $
    355,990
    
    
    $
    5,540
 Other income shown in the table above for the three months ended March 31, 2006
includes Palmettos $352.4 million gain on the sale of the interests in the RSAs.During the three months ended March 31, 2006, the Company recognized impairment losses
of $0.4 million and $0.3 million on PRE Holdings, Inc. and Magnolia Holding Company,
respectively. The impairment loss was determined based upon fair
value resulting from a pending transaction between the investee and
another company. These impairment losses are included in the caption Impairment of
investments in the accompanying statements of income.
 11




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 5.
    
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and fair value for the
Companys equity investments at March 31, 2006 and December 31, 2005 were as follows
(in thousands):
 Equity Securities
    
    Amortized
    
    
    Gross Unrealized
    
    
    Gross UnrealizedAvailable-for-Sale
    
    Cost
    
    
    Holding Gains
    
    
    Holding Losses
    
    
    Fair ValueMarch 31, 2006
    
    $
    5,144
    
    
    $
    551
    
    
    $
    (111
    )
    
    $
    5,584December 31, 2005
    
    $
    5,379
    
    
    $
    537
    
    
    $
    (71
    )
    
    $
    5,845
 During the three months ended March 31, 2006 and 2005, the Company recognized
impairment losses of $0.2 million and $0.4 million, respectively, on equity investment
securities due to declines in the fair value of those securities that, in the opinion
of management, were considered to be other than temporary. The impairment losses are
included in the caption Impairment of investments on the Condensed Consolidated
Statements of Income.Certain investments of the Company are and have been in continuous unrealized loss
positions. The gross unrealized losses and fair value and length of time the
securities have been in the continuous unrealized loss position at March 31, 2006 is as
follows (in thousands):
 Less than 12 months
    
    
    12 months or more
    
    
    TotalDescription of
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedSecurities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCommon Stock
    
    $
    2,803
    
    
    $
    61
    
    
    $
    89
    
    
    $
    50
    
    
    $
    2,892
    
    
    $
    111Total temporarily
impaired securities
    
    $
    2,803
    
    
    $
    61
    
    
    $
    89
    
    
    $
    50
    
    
    $
    2,892
    
    
    $
    111
 The fair value and unrealized losses noted above that are greater than 12 months relate
to two different investments. The Company will continue to evaluate these investments
on a quarterly basis to determine if the unrealized loss is other-than-temporarily
impaired, at which time the impairment loss would be realized.During the three months ended March 31, 2006, the Company purchased $61.7 million of
tax-exempt auction rate securities, which are classified as short-term, available for
sale securities at March 31, 2006. Auction rate securities are long-term variable rate
bonds tied to short-term interest rates that trade or mature on a shorter term than the
underlying instrument based on a dutch auction process which occurs every 7 to 35
days. The Company receives interest income on these auction rate securities when the
interest rates reset or semiannually. The carrying value of these auction
rate securities approximates the fair value due to the short-term nature of the
securities. There are no unrealized gains or losses on these securities at March 31,
2006.6.
    
    OTHER INVESTMENTSOther investments consist primarily of the Companys investment in CoBank, ACB
(CoBank). The Company receives patronage dividends from its investment in CoBank
which is organized as a cooperative for federal income tax purposes. Patronage
dividends represent both cash distributions of CoBanks earnings and equity
participation
certificates. Non-cash allocations of earnings are included in the Companys carrying
value of the investment and are recognized as other income in the period earned.
 12




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 7.
    
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Land, buildings and general equipment
    
    $
    91,612
    
    
    $
    91,496Central office equipment
    
    
    192,262
    
    
    
    190,220Poles, wires, cables and conduit
    
    
    165,833
    
    
    
    163,868Construction in progress
    
    
    6,927
    
    
    
    4,545456,634
    
    
    
    450,129Accumulated depreciation
    
    
    (257,807
    )
    
    
    (249,950
    )Property and equipment, net
    
    $
    198,827
    
    
    $
    200,179
 For the three months ended March 31, 2006, the Company recognized an impairment charge
of $0.2 million related to certain fixed wireless broadband equipment, which was
recorded in selling, general and administrative expenses.
 8.
    
    COMMON STOCKDuring the three months ended March 31, 2006, the Company issued common stock, the
majority of which was from stock option exercise activity and the issuance of shares
under its various compensation plans.The following table provides a reconciliation of the denominator used in computing
basic earnings per share to the denominator used in computing diluted earnings per
share for the three months ended March 31, 2006 and 2005 (in thousands):
 March 31,
    
    March 31,2006
    
    2005Basic weighted average shares outstanding
    
    
    18,901
    
    
    
    18,802Effect of dilutive stock options and non-vested
stock
    
    
    286
    
    
    
    178Total weighted average diluted shares
outstanding
    
    
    19,187
    
    
    
    18,980
 Anti-dilutive shares of Common Stock totaling 513,000 and 1,067,000 for the three
months ended March 31, 2006 and 2005, respectively, were not included in the
computation of diluted earnings per share and diluted weighted shares outstanding
because the exercise price of these options was greater than the average market price
of the Common
Stock during the respective periods. At March 31, 2006 and March 31, 2005, the Company
had total options outstanding of approximately 1,524,000 and 1,839,000, respectively.The Company adopted the provisions of FASB Staff Position
123R-3 on January 1, 2006. Accordingly, the Company included the entire amount of
excess tax benefits that would be credited to additional paid-in capital upon the
exercise of its dilutive stock options in its diluted weighted share calculation.On April 28, 2005, the Board of Directors approved the continuation of the Companys
existing stock repurchase program. Under this program, the Company is authorized,
subject to certain conditions, to repurchase up to 1,000,000 shares of its outstanding
Common Stock during the twelve-month period from April 28, 2005 to April 28, 2006.
There were no shares repurchased by the Company during the three months ended March 31,
2006.
 13




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
 9.
    
    LONG-TERM DEBTLong-term debt consists of the following (in thousands):
 March 31,
    
    
    December 31,2006
    
    
    2005Line of credit with interest at LIBOR
plus 1.25% (5.56% at
December 31, 2005)
    
    $
    
    
    
    $
    10,000Term loan with interest at 7.32%
    
    
    43,750
    
    
    
    45,00043,750
    
    
    
    55,000Less: Current portion of long-term debt
    
    
    5,000
    
    
    
    15,000Long-term debt
    
    $
    38,750
    
    
    $
    40,000
 At December 31, 2005, the Company had a $70.0 million revolving five-year line of
credit with interest at three month LIBOR plus a spread based on various financial
ratios. On January 25, 2006, the Company reduced its available line of credit to $40.0
million based upon forecasted future cash requirements and to reduce the fees
associated with excess capacity. On March 30, 2006, the Company paid in full the $10.0
million outstanding under the revolving credit facility, prior to its maturity on March
31, 2006.The Company has a 7.32% fixed rate $50.0 million term loan that matures on December 31,
2014. At March 31, 2006, $43.8 million was outstanding. The term loan requires
quarterly payments of interest until maturity on December 31, 2014. Payments of
principal became due beginning March 31, 2005 and will be due quarterly through
December 31, 2014, in equal amounts of $1.25 million.On April 18, 2006, the Company entered into a Master Loan Agreement (MLA), which
provides a revolving loan commitment of $40.0 million and incorporates the Companys
existing term loan. The revolving loan commitment expires on March 31, 2011. The
proceeds of borrowings under the revolving loan commitment will be used by the Company
for working capital, capital expenditures, and other general corporate purposes. The
unpaid principal balance of each advance under the revolving loan commitment will
accrue interest, in the Companys discretion, at a (i) variable base rate option, (ii)
quoted rate option or (iii) LIBOR-based option. Subject to exceptions relating to loans
accruing interest at the LIBOR-based option, interest will be payable on the last day
of each calendar quarter. Under
the MLA, the Companys term loan is $43.8 million, which matures on December 31, 2014.
The term loan will accrue interest at a fixed annual interest rate of 7.32%. The
Company will repay principal on the term loan in equal quarterly payments of $1.25
million, commencing June 30, 2006.The MLA requires that the Company maintain a specified Total Leverage Ratio (defined as
indebtedness divided by the sum of operating income plus depreciation, amortization and
all other non-cash items) and Equity to Assets Ratio (defined as equity divided by
total assets).At December 31, 2005, the Company had one interest rate swap agreement to fix $5.0
million of the amount outstanding under the $70.0 million revolving line of credit at a
rate of 4.53%. This interest rate swap agreement was settled on March 29, 2006 for
approximately $9 thousand.
 14




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 10.
    
    GOODWILLOn January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. In accordance with SFAS No. 142, the Company discontinued goodwill
amortization and tested goodwill for impairment as of January 1, 2002, determining that
the recognition of an impairment loss was not necessary. The Company will continue to
test goodwill for impairment at least annually. Goodwill was $9.9 million at December
31, 2005 and unchanged for the quarter ended March 31, 2006.Other intangible assets consist primarily of wireless licenses. Wireless licenses have
terms of 10 years, but are renewable through a routine process involving a nominal fee.
The Company has determined that no legal, regulatory, contractual, competitive,
economic or other factors currently exist that limit the useful life of its wireless
licenses. Therefore, the Company does not amortize wireless licenses based on the
determination that these assets have indefinite lives. In accordance with SFAS No.
142, the Company periodically reviews its determination of indefinite useful lives for
wireless licenses and will test those licenses for impairment at least annually.As described in the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission (SEC) on June 5, 2005, Wireless One of North Carolina, L.L.C.,
Wavetel NC License Corporation, Wavetel, L.L.C., and Wavetel TN, L.L.C. (the Affiliate
Companies), which are the Companys subsidiaries that are the holders of the Companys
Educational Broadband Service (EBS), Broadband Radio Service (BRS), and related
rights and obligations, entered into a Purchase Agreement, dated June 6, 2005 (the
Purchase Agreement), with Fixed Wireless Holdings, LLC, an affiliate of Clearwire
Corporation (Fixed Wireless), pursuant to which Fixed Wireless agreed to purchase all
of the Affiliate Companies BRS spectrum licenses, EBS spectrum lease rights and
related assets and obligations for aggregate consideration of up to $16 million. As a
result of the Purchase Agreement, the carrying value of the spectrum lease rights of
$15.6 million was reclassified from Other Intangibles to Wireless spectrum
held-for-sale, a current asset, in accordance with SFAS No. 144, Accounting for the
Disposal or Impairment of Long-Lived Assets, which requires a long-lived asset to be
classified as held for sale when such sale is expected to be completed within a
one-year period. At March 31, 2006, the Company had met all criteria for recognition of
the spectrum lease rights as long-lived assets held for sale. On April 5, 2006, the
Company completed the sale of the Affiliate Companies BRS spectrum licenses, EBS
spectrum lease rights and other related assets for total consideration of $16 million,
which will be recognized in the Companys second quarter 2006 financial results.11.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn March 2004, the EITF of the Financial Accounting Standards Board (FASB) reached a
consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The consensus addresses how to determine the
meaning of other-than-temporary impairment and its application to investments
classified as either available-for-sale or held-to-maturity under SFAS No. 115
(including individual securities and investments in mutual funds), and investments
accounted for under the cost method or the equity method. EITF Issue No. 03-1 requires
additional disclosures for investments accounted for under SFAS No. 115 and SFAS No.
124 effective for fiscal years ended after December 15, 2003. In September 2004, FASB
Staff Position (FSP) EITF Issue No. 03-1-1 was issued which delayed the effective
date for the measurement and recognition guidance contained in paragraphs 10-20 of
Issue No. 03-1. The adoption of this consensus is not expected to have a material
impact on the Companys current policies.In December 2004, the FASB issued SFAS No. 123R, revising SFAS No. 123, Accounting for
Stock-Based Compensation and superseding APB Opinion No. 25, Accounting for Stock
Issued to Employees. This statement requires a public entity to measure the cost of
services provided by employees and directors received in exchange for an award of
equity instruments, including stock options, at the grant-date fair value. The fair
value cost is then recognized over the period that services are provided. The Company
adopted SFAS No. 123R on January 1, 2006. See Note 3 for further discussion.In April 2005, the staff of the SEC issued Staff Accounting Bulletin (SAB) No. 107 to
provide additional guidance regarding the application of SFAS No. 123R. SAB No. 107
permits registrants to choose an appropriate valuation technique or model to estimate
the fair value of share options, assuming consistent application, and provides guidance
for the development of assumptions used in the valuation process. Additionally, SAB No.
107 discusses disclosures to
 15




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 be made under Managements Discussion and Analysis of Financial Condition and Results of Operations
in registrants periodic reports. Based upon SEC rules issued in April 2005, SFAS No. 123R is
effective for fiscal years that begin after June 15, 2005.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154, which is effective for accounting changes made in fiscal
years beginning after December 15, 2005, requires retrospective application for voluntary changes in an
accounting principle unless it is impracticable to do so. The Company adopted SFAS No. 154 on January 1, 2006,
with no material effect on its consolidated financial statements.12.
    
    PENSION AND POST-RETIREMENT PLANSComponents of net periodic benefit costs for the three months ended March 31 (in
thousands):
 Pension Benefits
    
    
    Post-Retirement Benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    612
    
    
    $
    561
    
    
    $
    12
    
    
    $
    19Interest cost
    
    
    724
    
    
    
    681
    
    
    
    115
    
    
    
    125Expected return on plan assets
    
    
    (899
    )
    
    
    (900
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    1
    
    
    
    (2
    )
    
    
    4Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    (29
    )Net periodic benefit cost
    
    $
    437
    
    
    $
    343
    
    
    $
    94
    
    
    $
    119
 The Company does not expect to contribute to the pension plan in 2006. The Company
contributed $0.5 million to its post-retirement benefit plan during the first quarter
of 2006. The Company does not expect to make further contributions in 2006.At March 31, 2006, the Companys pension and post-retirement liabilities were $6.2
million and $10.2 million, respectively. The current portion of the Companys
post-retirement liability at March 31, 2006 was $0.5 million.In December 2003, the Medicare Act was signed into law. The Medicare Act introduced a
prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to
sponsors of retirement health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In May 2004, the FASB issued FSP 106-2,
providing final guidance on accounting for the Medicare Act. In accordance with FSP
106-2, the Company determined that the net periodic benefit costs do not reflect any
amount associated with the subsidy since insurance is not provided; rather the plan
provides a reimbursement of premiums paid by the retiree.13.
    
    SEGMENT INFORMATIONThe Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory
environment, services offered and/or customers served. The segments and a description
of their businesses are as follows: the incumbent local exchange carrier (ILEC),
which provides local telephone services; the wireless group (Wireless), which
provides wireless phone services; the competitive local exchange carrier (CLEC),
which provides competitive local telephone services to customers outside the ILECs
operating area; the Greenfield business (Greenfield), which provides full
telecommunications services to developments outside the ILECs operating area; Internet
and data services (IDS), which provides dial-up and high-speed internet access and
other data related services; and Palmetto, which is a limited partnership in which the
Company has an equity interest through the Companys subsidiary, CT Cellular, Inc. All
other business units, investments and operations of the Company that do not meet
reporting guidelines and thresholds are reported under Other.
 16




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Accounting policies of the segments are the same as those described in the summary of
significant accounting policies included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2005. The Company evaluates performance based on
operating income. Intersegment transactions have been eliminated for purposes of
calculating operating income. All segments reported below, except Palmetto, provide
services primarily within North Carolina. The remaining operations of Palmetto are
limited to South Carolina. Selected data by business segment as of and for the three
months ended March 31, 2006 and 2005, is as follows (in thousands):
  ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    23,587
    
    
    $
    9,127
    
    
    $
    4,630
    
    
    $
    2,511
    
    
    $
    3,284
    
    
    $
    
    
    
    $
    43,139External expense
    
    
    12,575
    
    
    
    7,971
    
    
    
    4,549
    
    
    
    2,304
    
    
    
    2,095
    
    
    
    406
    
    
    
    29,900Depreciation
    
    
    5,202
    
    
    
    635
    
    
    
    658
    
    
    
    973
    
    
    
    374
    
    
    
    278
    
    
    
    8,120Operating income(loss)
    
    $
    5,810
    
    
    $
    521
    
    
    $
    (577
    )
    
    $
    (766
    )
    
    $
    815
    
    
    $
    (684
    )
    
    $
    5,119Segment assets
    
    $
    248,420
    
    
    $
    33,260
    
    
    $
    14,190
    
    
    $
    30,168
    
    
    $
    13,357
    
    
    $
    57,991
    
    
    $
    397,386
  ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    22,679
    
    
    $
    8,492
    
    
    $
    5,135
    
    
    $
    2,291
    
    
    $
    2,800
    
    
    $
    
    
    
    $
    41,397External expense
    
    
    12,152
    
    
    
    7,183
    
    
    
    4,622
    
    
    
    2,153
    
    
    
    2,124
    
    
    
    197
    
    
    
    28,431Depreciation
    
    
    5,109
    
    
    
    504
    
    
    
    629
    
    
    
    810
    
    
    
    479
    
    
    
    335
    
    
    
    7,866Operating income(loss)
    
    $
    5,418
    
    
    $
    805
    
    
    $
    (116
    )
    
    $
    (672
    )
    
    $
    197
    
    
    $
    (532
    )
    
    $
    5,100Segment assets
    
    $
    165,520
    
    
    $
    33,821
    
    
    $
    14,018
    
    
    $
    27,300
    
    
    $
    13,725
    
    
    $
    65,222
    
    
    $
    319,606
 The Companys Palmetto segment is not consolidated and is accounted for under the
equity method. The Companys net investment in Palmetto of $3.1 million and $12.2
million as of March 31, 2006 and 2005, respectively, is included as part of the assets
of the Companys Other segment. The Company records its share of earnings from
Palmetto as equity in income of unconsolidated companies on the Condensed Consolidated
Statements of Income. For summarized results of operations for Palmetto see Note 4.Reconciliation to income before income taxes (in thousands):
 Three Months EndedMarch 31,2006
    
    
    2005Segment operating income
    
    $
    5,119
    
    
    $
    5,100Total other income (expense)
    
    
    88,743
    
    
    
    (202
    )Income before income taxes
    
    $
    93,862
    
    
    $
    4,898
 17




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 IntroductionCT Communications, Inc. and its subsidiaries provide a broad range of telecommunications and
related services to residential and business customers located primarily in North Carolina.
The Companys primary services include local and long distance telephone service, Internet
and data services and wireless products and services.The Company has worked to expand its core businesses through the development of integrated
product and service offerings, investment in growth initiatives that exceed certain
projected return thresholds and targeted marketing efforts to efficiently identify and
obtain customers. In addition, the Company has made certain strategic investments intended
to complement its core businesses.During 2006, the Company anticipates a significant increase in competition in its ILEC
territory due to the expected launch of cable telephone service. The Company has taken, and
will continue to take, several steps to position it to meet the competitive demand that will
be presented by the introduction of this competitive service. During 2005, the Company
completed its previously announced plan to enhance the broadband capabilities in its ILEC
territory. The Company now offers broadband speeds of up to 10 Mbps throughout much of its
ILEC service area, a significant improvement over current DSL and cable modem speeds offered
by other providers. Broadband customer growth has continued to accelerate in the ILEC with
the availability of higher bandwidth services.DSL customers increased by 6,187 or 39.9% from March 31, 2005, to end the quarter with
21,710. DSL penetration was 17.3% of ILEC lines and 17.2% of Greenfield lines at March 31,
2006. Maintaining superior broadband service capabilities has and will continue to be
central to the Companys on-going competitive strategy.The Company has also been working internally and with consultants to develop the next
evolution of its network architecture and the services that will be delivered over its
network. The plan will define the voice, data, video and entertainment products and services
to be delivered to the Companys customers, as well as the network design and bandwidth
necessary to provide those products and services. The Company expects to complete this
product, service and network plan in the next several months to build upon the network
enhancements completed in 2005.In addition, the Company is developing plans to transition from a circuit switched network
technology to an IP technology capable of delivering these products and services. After
complete transition, the Company believes an IP network design will result in expanded
service capabilities that can be delivered at lower costs.The Company also continues to focus on maximizing the ILEC business in its current markets
by cross-selling bundled products and packages and growing its customer base through its
CLEC, Greenfield, Internet and data services, and Wireless businesses.On March 15, 2006, Palmetto MobileNet, L.P. (Palmetto) sold its ownership interests in 10
cellular rural service areas (RSAs) to Alltel Corporation for approximately $455 million.
As a result of this transaction, the Company recorded equity in income of unconsolidated
companies of $88.9 million and received a pre-tax cash distribution from Palmetto of $97.4
million as proceeds from the sale.For the three months ended March 31, 2006, net income for the Company was $57.5 million
compared to $3.0 million for the three months ended March 31, 2005. Diluted earnings per
share were $3.00 and $0.16 for the three months ended March 31, 2006 and 2005, respectively.Industry and Operating TrendsThe telecommunications industry is highly competitive and characterized by increasing price
competition, technological development and regulatory uncertainty. Industry participants are
faced with the challenge of adapting their organizations, services, processes and systems to
this environment.The Companys ILEC is facing more competitive pressure than at any other time in its
history. Wireless providers and CLECs have targeted the Companys customers and will
continue to promote low cost,
 18




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##### 



flexible communications alternatives. Cable telephone and
Voice over Internet Protocol (VoIP) providers are significant threats to the Companys
business. Service providers utilizing these technologies are capable of delivering a
competitive voice service to the Companys customers. These service providers are not
subject to certain regulatory constraints that have impacted the Companys business model
and will become more significant impediments to its ability to successfully compete in the
coming years.The ILEC must provide basic telephone service as well as most tariffed services to all
customers in its regulated service area, regardless of the cost to provide those services.
Although the Company does benefit from certain universal service fund (USF) payments
intended to offset certain costs to provide service, such reimbursements are increasingly at
risk while the service obligations remain unchanged.VoIP and cable telephone service are becoming more available to customers and could result
in increased customer churn throughout the Companys businesses. Time Warner currently
offers cable television and high-speed Internet service in much of the Companys service
territory and cable telephone service in many of the Companys Greenfield and CLEC areas.
Time Warner is expected to offer cable telephony in the ILEC service area in the second
quarter of 2006. Cable telephone service in the ILEC service area could result in a loss of
access lines, a reduction in ILEC revenue including long distance and access revenue and a
reduction in Internet revenue. In addition, wireless substitution is also a trend that is
impacting the ILEC business as well as the Companys long distance revenue. Some customers
are choosing to substitute their landline service with wireless service. The Company
believes this has contributed to the access line decrease in the ILEC over the past several
years, although the Companys Wireless business has benefited from such substitution.Access line losses in recent years have also been impacted by the adoption of DSL and other
high-speed Internet services by customers that had traditionally subscribed to dial-up
Internet service. As customers switch to DSL or other high-speed Internet services, they no
longer need a second landline for use with their dial-up Internet service. If such landline
is replaced with a Company DSL line, then the Company can offset, at least partially, the
lost landline revenue through its DSL service to the customer.In the Companys Wireless business, competition and high customer penetration rates have
caused and will likely continue to cause the wireless industrys subscriber growth rate to
moderate in comparison to historical growth rates. While the wireless telecommunications
industry does continue to grow, a high degree of competition exists among carriers. This
competition will continue to put pressure on pricing and margins as carriers compete for
customers. Future carrier revenue growth is highly dependent upon the number of net customer
additions a carrier can achieve and the average revenue rates derived from its customers.Regulatory requirements have grown in certain areas of the Companys business and have added
complexity and expense to its business model. The Companys telecommunications services are
regulated by the Federal Communications Commission (FCC) at the federal level, and state
utility commissions, principally the North Carolina Utilities Commission (NCUC).The FCC frequently undertakes matters that could have a significant impact on the Company.
The FCC is in the process of evaluating the current USF and intercarrier compensation
structures. These sources of revenue have been under increasing pressure and scrutiny, and
many have expressed concerns over the continued viability of the USF program as currently
configured. Intercarrier compensation, which is also received by the Companys CLEC and
Greenfield businesses, has also been subject to increasing pressures due to the introduction
of new technologies, such as VoIP, that many carriers have utilized in an attempt to avoid
the payment of appropriate access charges. Concord Telephone currently receives a material
portion of its revenue from the USF, in the form of Interstate Common Line Support (ICLS),
and from intercarrier compensation. The FCC, and possibly Congress, is expected to devote
resources to the consideration of USF and intercarrier compensation reform in 2006 and
future years, and it is possible that action taken by those governmental entities would
result in a reduction in the amount of revenue Concord
Telephone receives from those sources. On February 10, 2005, the FCC announced adoption of
a Further Notice of Proposed Rule Making for Intercarrier Compensation Reform and
subsequently issued a press release. The text of the FCCs notice was released on March 3,
2005. Initial comments were filed in May 2005 and reply comments were filed on July 20,
2005. The Company is currently participating in industry associations that are working to
develop and advocate an industry proposal.
 19




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##### 



The FCC is also considering the appropriate regulatory treatment of VoIP services. Despite
providing voice services similar to those offered by the Company, VoIP providers have to
date avoided many regulatory requirements that currently apply to the Company in the
provision of those services. This disparate regulatory treatment provides VoIP providers
with a competitive advantage. Although several state commissions have attempted to assert
jurisdiction over VoIP services, federal courts in New York and Minnesota have rejected
those efforts as preempted by federal law. On November 12, 2004, the FCC ruled that
Internet-based service provided by Vonage Holdings Corporation (Vonage) should be subject
to federal rather than state jurisdiction. Several state commissions have appealed the
FCCs Vonage decision. On February 12, 2004, the FCC announced a rulemaking to examine
whether certain regulatory requirements, such as 911 services, universal service, disability
access and access charges, should be applicable to VoIP services. On March 10, 2004, the
FCC released a notice of proposed rulemaking seeking comment on the appropriate regulatory
treatment of IP-enabled communications services. On June 3, 2005, the FCC released an order
requiring VoIP providers to provide 911 service to their customers in the fourth quarter of
2005.Since September 1997, the ILECs rates for local exchange services have been established
under a price regulation plan approved by the NCUC. Under the price regulation plan, the
Companys charges are no longer subject to rate-base, rate-of-return regulation. The price
regulation plan has allowed flexibility for adjustments based on certain external events
outside of the Companys control, such as jurisdictional cost shifts or legislative
mandates. In previous years, the Company has rebalanced certain rates under the price
regulation plan with the primary result being an increase in the monthly basic service
charges paid by residential customers, a decrease in access charges paid by interexchange
carriers and a decrease in rates paid by end users for an expanded local calling scope.In December 2004, the Company filed a petition with the NCUC in which it requested, among
other things, deregulation of certain competitive services, additional pricing flexibility
for regulated services, elimination of a productivity offset and an initial, limited
increase in local calling rates in exchange for providing customers with a larger local
calling scope. On September 9, 2005, the NCUC released an order approving many of the
modifications requested by the Company. The approved modifications eliminate a restriction
on rate adjustments resulting in recovery increases that exceed the rate of inflation less a
2% productivity offset, allow the Company to increase rates annually for basic local
exchange services up to 12% and allow the Company to increase rates for more competitive
services by up to 20% annually. The Companys new price regulation plan also permits
annual, total revenue increases of up to 2.5 times the change in inflation. The plan
further allows the Company to increase or decrease prices on an annual basis, and to make
additional price changes in certain circumstances to meet competitive offerings. In exchange
for this increased flexibility, the Company agreed to certain financial penalties if it
fails to meet service quality standards established by the Commission.As its first step under this new plan, on September 14, 2005 the Company submitted an annual
filing seeking approval for, among other things, local service rate increases in exchange
for providing ILEC customers with a larger local calling scope that does not require the
payment of usage charges. Such rate changes were effective beginning in late October 2005,
and have resulted in simpler calling plans and billing. The Company believes that the new
plan will permit it to more effectively address increasing competition in its ILEC market,
but otherwise does not anticipate that the changes will have a material impact on its
financial results.The Companys CLEC and Greenfield relies in part on unbundled network elements obtained from
the applicable incumbent local exchange carrier. The FCC has relieved some of the
unbundling obligations on incumbent local exchange carriers that required those carriers to
make some of such elements available at
cost-based rates. The FCCs order will result in increases in the cost of some of the
unbundled network elements currently leased by the Company from incumbent local exchange
carriers, including high capacity transport elements and unbundled network element platform
(UNE-P). The Company has identified, and is continuing to evaluate and taken advantage of
certain opportunities to use alternative transport elements to minimize cost increases
relating to the Companys use of high capacity transport elements. The Company has executed
an interconnection agreement amendment with BellSouth to implement FCC and subsequent NCUC
decisions stemming from the FCC proceeding with respect to those elements that remain
subject to the federal interconnection rules. The Company also has executed commercial
agreements with the incumbent local exchange carriers that will continue to permit the
Company to
 20




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##### 



maintain and lease additional UNE-P lines from the applicable incumbent at higher
rates than the previous cost-based rates. In addition, the Company continues to pursue
opportunities to expand its network facilities to bring currently leased elements on to the
Companys network in order to lower expenses and improve service levels. The Company is
also targeting new CLEC and Greenfield customers that can be served primarily through the
use of the Companys own network or co-located facilities.As of March 31, 2006, the Company, through one or more affiliates, held licenses and other
rights (including lease agreements) to certain wireless spectrum, including Broadband Radio
Service (BRS) and Educational Broadband Service (EBS). As described in the Companys
Current Report on Form 8-K filed with the SEC on April 5, 2006, Wireless One of North
Carolina, L.L.C., Wavetel NC License Corporation, Wavetel, L.L.C. and Wavetel TN, L.L.C.
sold, pursuant to a previously announced purchase agreement, their BRS spectrum licenses,
EBS spectrum lease rights and related assets and obligations to Fixed Wireless Holdings,
LLC, an affiliate of Clearwire Corporation for total consideration of $16 million in cash,
which will be recognized in the Companys second quarter 2006 financial results.Results of OperationsThe Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory environment,
services offered and/or customers served. The identified reportable segments are: ILEC,
CLEC, Greenfield, Wireless, IDS and Palmetto. All other businesses that do not meet
reporting guidelines and thresholds are reported under Other Business Units. Summarized
results of operations for Palmetto are included in Note 4 of the Condensed Consolidated
Financial Statements.The following discussion reviews the results of the Companys consolidated operations and
specific results within each reportable segment.
 21




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##### 



Consolidated Operating Results(in thousands, except lines and customers)
 Three months ended March 31,2006
    
    
    2005
    
    
    ChangeCustomer recurring revenue
    
    $
    27,641
    
    
    $
    27,116
    
    
    $
    525
    
    
    
    1.9
    %NECA/USF revenue
    
    
    1,130
    
    
    
    997
    
    
    
    133
    
    
    
    13.3
    %Access and interconnection revenue
    
    
    6,793
    
    
    
    6,294
    
    
    
    499
    
    
    
    7.9
    %Wireless roaming/settlement revenue
    
    
    2,917
    
    
    
    2,455
    
    
    
    462
    
    
    
    18.8
    %Other revenue
    
    
    4,658
    
    
    
    4,535
    
    
    
    123
    
    
    
    2.7
    %Total operating revenue
    
    
    43,139
    
    
    
    41,397
    
    
    
    1,742
    
    
    
    4.2
    %Cost of service expense
    
    
    14,985
    
    
    
    14,289
    
    
    
    696
    
    
    
    4.9
    %Selling, general & admin. expense
    
    
    14,915
    
    
    
    14,142
    
    
    
    773
    
    
    
    5.5
    %Depreciation
    
    
    8,120
    
    
    
    7,866
    
    
    
    254
    
    
    
    3.2
    %Total operating expense
    
    
    38,020
    
    
    
    36,297
    
    
    
    1,723
    
    
    
    4.7
    %Operating income
    
    
    5,119
    
    
    
    5,100
    
    
    
    19
    
    
    
    0.4
    %Other income
    
    
    88,743
    
    
    
    (202
    )
    
    
    88,945
    
    
    
    N/AIncome before taxes
    
    
    93,862
    
    
    
    4,898
    
    
    
    88,964
    
    
    
    1816.3
    %Income taxes
    
    
    36,373
    
    
    
    1,909
    
    
    
    34,464
    
    
    
    1805.3
    %Net income
    
    $
    57,489
    
    
    $
    2,989
    
    
    $
    54,500
    
    
    
    1823.4
    %Operating margin
    
    
    11.9
    %
    
    
    12.3
    %Capital expenditures
    
    $
    6,987
    
    
    $
    7,758
    
    
    $
    (771
    )
    
    
    -9.9
    %Total assets
    
    
    397,386
    
    
    
    319,606
    
    
    
    77,780
    
    
    
    24.3
    %Wired access lines
    
    
    158,585
    
    
    
    158,133
    
    
    
    452
    
    
    
    0.3
    %Wireless subscribers
    
    
    47,145
    
    
    
    44,091
    
    
    
    3,054
    
    
    
    6.9
    %Internet and data customers
    
    
    28,457
    
    
    
    24,634
    
    
    
    3,823
    
    
    
    15.5
    %
 Operating revenue for the three months ended March 31, 2006 increased 4.2% compared to the
three months ended March 31, 2005. The increase in revenue was primarily attributable to a
$0.5 million increase in customer recurring revenue, a $0.5 million increase in access and
interconnection revenue related to facility billings and a $0.5 million increase in Wireless
roaming and settlement revenue due to an increase in roaming minutes of use on the Companys
network. The increase in customer recurring revenue was driven by a 39.9% increase in DSL
customers, a 13.9% increase in Greenfield access lines and a 6.9% increase in Wireless
subscribers. Offsetting the growth in these businesses was a 2.6% decrease in ILEC access
lines.The Company has diversified operating revenue over the past several years through the growth
in its non-ILEC businesses. For the three months ended March 31, 2006, ILEC represented
54.7% of total revenue compared to 54.8% in the same 2005 period, while Wireless represented
21.2% of total revenue in 2006 compared to 20.5% in 2005. The combined CLEC and Greenfield
businesses represent 16.5% of total revenue for the three months ended March 31, 2006 down
from 17.9% in the same 2005 period, and Internet has increased to 7.6 % in 2006 compared to
6.8% in 2005.Operating expense for the three months ended March 31, 2006 increased 4.7% compared to the
three months ended March 31, 2005. The increase in operating expense was attributable to a
$0.7 million increase in cost of service expense, a $0.8 million increase in administrative
expense and a $0.3 million increase in depreciation expense. The increase in cost of service
expense was due to a $0.5 million increase in cost of materials sold driven by an increase
in Wireless handset and accessories expense associated with retention and contract renewal
programs targeted to improve customer churn and a $0.2 million increase in Wireless roaming
and settlement expense related to higher minutes of use on other carriers networks by
 22




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##### 



Wireless subscribers. The increase in administrative expense was largely due to an increase
in medical benefit costs, changes made during 2005 to certain incentive programs for stock
based compensation and an asset impairment charge of $0.2 million.Operating income of $5.1 million remained flat for the three months ended March 31, 2006
compared to the same 2005 period.Other income for the three months ended March 31, 2006 was $88.7 million compared to an
expense of $0.2 million for the three months ended March 31, 2005. During the first quarter
of 2006, Palmetto sold its ownership interests in ten cellular RSAs to Alltel for $455
million. The Company recognized $88.9 million, its portion of the gain on sale of these
assets, through the equity income of its investment in Palmetto.Income tax expense increased to $36.4 million as a result of the Palmetto transaction, for
an effective tax rate of 38.8% for the three months ended March 31, 2006 compared to $1.9
million for an effective tax rate of 39.0% for the three months ended March 31, 2005.ILEC(in thousands, except lines)
 Three months ended March 31,2006
    
    
    2005
    
    

ChangeCustomer recurring revenue
    
    $
    13,235
    
    
    $
    13,351
    
    
    $
    (116
    )
    
    
    (0.9
    %)NECA/USF revenue
    
    
    1,130
    
    
    
    997
    
    
    
    133
    
    
    
    13.3
    %Access and interconnection revenue
    
    
    5,328
    
    
    
    4,537
    
    
    
    791
    
    
    
    17.4
    %Other revenue
    
    
    3,894
    
    
    
    3,794
    
    
    
    100
    
    
    
    2.6
    %Total operating revenue
    
    
    23,587
    
    
    
    22,679
    
    
    
    908
    
    
    
    4.0
    %Cost of service expense
    
    
    5,070
    
    
    
    4,936
    
    
    
    134
    
    
    
    2.7
    %Selling, general & admin. expense
    
    
    7,505
    
    
    
    7,216
    
    
    
    289
    
    
    
    4.0
    %Depreciation
    
    
    5,202
    
    
    
    5,109
    
    
    
    93
    
    
    
    1.8
    %Total operating expense
    
    
    17,777
    
    
    
    17,261
    
    
    
    516
    
    
    
    3.0
    %Operating income
    
    $
    5,810
    
    
    $
    5,418
    
    
    $
    392
    
    
    
    7.2
    %Operating margin
    
    
    24.6
    %
    
    
    23.9
    %Capital expenditures
    
    $
    3,558
    
    
    $
    4,459
    
    
    $
    (901
    )
    
    
    (20.2
    %)Total assets
    
    
    248,420
    
    
    
    165,520
    
    
    
    82,900
    
    
    
    50.1
    %Business access lines
    
    
    28,241
    
    
    
    28,647
    
    
    
    (406
    )
    
    
    (1.4
    %)Residential access lines
    
    
    81,630
    
    
    
    84,174
    
    
    
    (2,544
    )
    
    
    (3.0
    %)Total access lines
    
    
    109,871
    
    
    
    112,821
    
    
    
    (2,950
    )
    
    
    (2.6
    %)
 Operating revenue for the three months ended March 31, 2006 increased 4.0% compared to the
three months ended March 31, 2005. The increase in operating revenue was mainly due to a
$0.8 million increase in access and interconnection revenue and a $0.1 million increase in
NECA/USF revenue. Partially offsetting these increases in operating revenue was a $0.1
million reduction in customer recurring revenue. The decrease in customer recurring revenue
was due to a 2.6% decline in access lines coupled with customers moving to long distance
calling plans bundled with basic service plans. These bundled products should improve the
Companys ability to retain customers targeted by other providers. The decline in access
lines was due in part to increased competition from wireless and other competitive
providers, and an increase in broadband Internet adoption by customers that have cancelled
second lines previously used for dial-up Internet service.
 23




---



##### 



During the three months ended March 31, 2006, ILEC long distance lines in service increased
slightly while access lines decreased 2.6%. At March 31, 2006, 78.3% of ILEC access lines
subscribed to the Companys long distance service, up from 75.3% at March 31, 2005. The
stability in long distance lines was driven by the increase in customer acceptance of the
Companys bundled product offerings, which include flat rate unlimited long distance calling
plans. Despite the stability in long distance lines in service, long distance revenue
declined. The decline in long distance revenue was primarily due to lower revenue per
minute from the Companys flat rate calling plans in conjunction with lower rates for
contract renewals for its larger business customers. Although long distance revenue on a per
minute basis has been negatively impacted by flat rate calling plans, these bundled plans
are expected to reduce churn with respect to these customers.Operating expense for the three months ended March 31, 2006 increased 3.0% compared to the
three months ended March 31, 2005. The increase in administrative expense was mainly due to
an increase in medical benefit costs and changes made during 2005 to certain incentive
programs for stock based compensation. Operating margin for the three months ended March
31, 2006 increased to 24.6% from 23.9% during the three months ended March 31, 2005.Capital expenditures for the three months ended March 31, 2006 were 15.1% of ILEC operating
revenue compared to 19.7% of revenue for the three months ended March 31, 2005. Included in
the first quarter of 2005 were capital expenditures related to the Companys $9.0 million
initiative to enhance its broadband capabilities in its ILEC service territory. The
broadband initiative was completed during 2005 and has enabled the Company to offer
broadband service speeds of up to 10 Mbps throughout much of its ILEC territory, a
significant improvement over current DSL and cable modem speeds offered by other providers.
The Company is currently working internally and with consultants to develop the next
evolution of its network architecture and the services that will be delivered over its
network. The plan will define the voice, data, video and entertainment products and services
to be delivered to the Companys customers, as well as the network design and bandwidth
necessary to provide those products and services. The Company expects
to complete this product, service and network plan in the next several months to build upon
the network enhancements completed in 2005. The 2006 consolidated capital plan has reserved
approximately $8.0 million to support the initial product and network requirements to be
finalized upon completion of the plan that will enable the Company to maintain its superior
broadband service capabilities.The Companys ILEC derives its interstate access revenue through tariffed access charges and
from the federal universal service programs administered by the National Exchange Carrier
Association (NECA), a quasi-governmental non-profit organization formed by the FCC in 1983
for such purpose. The FCC governs the ILECs rates for interstate access services under a
rate-of-return form of regulation, and those rates are set forth in tariffs filed with the
FCC. A portion of this revenue may be subject to potential over-earnings claims if ILEC
interstate rates result in earnings over the FCCs prescribed rate of return. The Company
maintains that, aside from any other defense it may have to a refund claim, such claims
should be rejected if such revenues were earned through the application of rates that were
deemed lawful because they were in accordance with FCC-approved tariffs. On April 11,
2006, the U.S. Court of Appeals for the District of Columbia reversed a lower court finding
that upheld the FCCs attempts to impose refund obligations due to an alleged loss of deemed
lawful status based on the FCCs temporary suspension and then subsequent acceptance without
modification of a tariff filed on a streamlined basis. The Court of Appeals held that such
an action by the FCC did not impact the deemed lawful status of such a tariff. As a result,
the Company does not believe that it has any liability for over-earnings at this time.
Management periodically assesses the ILECs potential over-earnings liability and will
establish a reserve, and make adjustments to that reserve, when it is deemed appropriate by
the Company.The Companys ILEC also receives intrastate intercarrier compensation for the use of its
facilities for origination and termination of interexchange and local calls from other
telecommunications providers, including long distance companies, wireless carriers, and
other local exchange carriers, through access and reciprocal compensation charges
established in accordance with state laws. Such intercarrier compensation constitutes a
material portion of the Companys revenues and is increasingly subject to regulatory
uncertainty and carrier efforts to avoid payment through the use of alternative technologies
such as VoIP.
 24




---



##### 



At least three companies, AT&T Corp. (AT&T), Pulver.com, and Level 3 Communications, Inc.
(Level 3), filed petitions with the FCC seeking a ruling allowing them to avoid payment of
access charges for VoIP traffic. On February 12, 2004, the FCC, in ruling on Pulver.coms
petition, held that strictly computer-to-computer VoIP service that does not utilize the
public switched telephone network is not a regulated telecommunications service. On April
21, 2004, the FCC denied a waiver petition filed by AT&T requesting that its IP telephony
service be exempt from access charges. The FCC ruled that AT&Ts IP telephony service, which
converted voice calls to IP format for some portion of the routing over the public switched
telephone network prior to converting the calls back to their original format, is a
regulated telecommunications service subject to interstate access charges. Level 3 withdrew
its petition requesting the FCC to forbear from imposing interstate or intrastate access
charges on Internet-based calls that originate or terminate on the public switched telephone
network.The FCC has had an open docket on intercarrier compensation since 2001. On February 10,
2005, the FCC announced adoption of a Further Notice of Proposed Rule Making for
Intercarrier Compensation Reform and subsequently issued a press release. The text of the
FCCs notice was released on March 3, 2005. Initial comments were filed in May 2005 and
reply comments were filed on July 20, 2005. The Company is currently participating in
industry associations that are working to develop and advocate an industry proposal.The Companys ILEC derives certain of its interstate network access revenue from USF
mechanisms administered by NECA. NECA administers the funding through revenue pooling
arrangements in which local exchange carriers participate. As of March 31, 2006, the
Companys ILEC participated in the NECA common line and traffic sensitive interstate access
pools and received ICLS funds. The ICLS support mechanism was implemented in July 2002. As
of July 2004, long-term support became part of the ICLS support mechanism.Effective July 1, 2005, the Companys ILEC expanded its participation in the NECA pool by
joining the NECA traffic sensitive pool. The Company had previously filed its own traffic
sensitive rates. By joining the traffic sensitive pool, the ILECs interstate access
revenues will be based on expenses plus a return on investment. The Company will share the
risk of reductions or increases in demand for its services with hundreds of other telephone
companies in a number of different markets. The NECA tariff for the one-year period
beginning on July 1, 2005, went into effect as filed, and is therefore deemed lawful.NECAs pooling arrangements are based on nationwide average costs that are applied to
certain projected demand quantities, and therefore revenues are initially recorded based on
estimates. These estimates involve a variety of complex calculations, and the ultimate
amount realized from the pools may differ from the Companys estimates. Management
periodically reviews these estimates and makes adjustments as applicable.The federal universal service program is under increasing scrutiny from legislators,
regulators and service providers due to the growth in the size of, and the demands on, the
fund and changes in the telecommunications industry. An increasing number of wireless
carriers are seeking, and have received, designation as Eligible Telecommunications Carriers
(ETC) entitled to receive USF, and an increasing number of customers are migrating to
service providers, such as VoIP, that currently do not contribute to the program. The FCC
is currently considering changes to the ETC certification process and the services eligible
for USF. Until a final order is released on these matters, the Company cannot determine
what, if any, impact the FCCs actions will have on the Companys USF revenue.
 25




---



##### 



CLEC(in thousands, except lines)
 Three months ended March 31,2006
    
    
    2005
    
    

ChangeCustomer recurring revenue
    
    $
    3,595
    
    
    $
    3,804
    
    
    $
    (209
    )
    
    
    (5.5
    %)Access and interconnection revenue
    
    
    955
    
    
    
    1,259
    
    
    
    (304
    )
    
    
    (24.1
    %)Other revenue
    
    
    80
    
    
    
    72
    
    
    
    8
    
    
    
    11.1
    %Total operating revenue
    
    
    4,630
    
    
    
    5,135
    
    
    
    (505
    )
    
    
    (9.8
    %)Cost of service expense
    
    
    2,733
    
    
    
    2,869
    
    
    
    (136
    )
    
    
    (4.7
    %)Selling, general & admin. expense
    
    
    1,816
    
    
    
    1,753
    
    
    
    63
    
    
    
    3.6
    %Depreciation
    
    
    658
    
    
    
    629
    
    
    
    29
    
    
    
    4.6
    %Total operating expense
    
    
    5,207
    
    
    
    5,251
    
    
    
    (44
    )
    
    
    (0.8
    %)Operating loss
    
    $
    (577
    )
    
    $
    (116
    )
    
    $
    (461
    )
    
    
    397.4
    %Operating margin
    
    
    (12.5
    %)
    
    
    (2.3
    %)Capital expenditures
    
    $
    1,242
    
    
    $
    223
    
    
    $
    1,019
    
    
    
    457.0
    %Total assets
    
    
    14,190
    
    
    
    14,018
    
    
    
    172
    
    
    
    1.2
    %Access lines
    
    
    33,390
    
    
    
    31,861
    
    
    
    1,529
    
    
    
    4.8
    %Long distance lines
    
    
    23,485
    
    
    
    24,443
    
    
    
    (958
    )
    
    
    (3.9
    %)
 Operating revenue for the three months ended March 31, 2006 decreased
$0.5 million compared to the three months ended March 31, 2005. The decrease in
operating revenue was driven by a $0.3 million decrease in access and interconnection
revenue and a $0.2 million decrease in customer recurring revenue. Access and interconnection
revenue in the first quarter of 2005 included $0.5 million in recoveries of previously
disputed billings, while the decrease in customer recurring revenue related to lower average rates for customer contract renewals.Operating expense for the three months ended March 31, 2006 was flat compared to the same period last year. Operating margin for the three months ended March 31, 2006 decreased to (12.5%), compared to (2.3%) for the three months ended March 31, 2005.Capital expenditures for the three months ended March 31, 2006 were 26.8% of CLEC operating revenue compared to 4.3% of operating revenue for the three months ended March 31, 2005. The increase in capital expenditures related to infrastructure components required for the Companys migration of its switching networks to an IP-packet based design.The CLEC and Greenfield businesses have historically used certain unbundled network
elements (UNEs) leased from the applicable incumbent local exchange carrier,
such as UNE-P, which is an element that bundles unbundled network element switching and loops,
dedicated transport and combinations of high capacity loops and dedicated transport called enhanced
extended links (EELs). As of March 31, 2006, approximately 25% of the
Companys current CLEC access lines utilize EELs, and the Company currently has approximately
4,500 UNE-P lines. On December 15, 2004, the FCC adopted final rules with regard to the
treatment of such elements.The FCCs order will result in increases in the cost of some of the unbundled network
elements currently leased by the Company from incumbent local exchange carriers, including
high capacity transport elements and UNE-P. The Company has identified, and is continuing to
evaluate and, in some cases, implement, opportunities to use alternative transport elements to
minimize cost increases relating to the Companys use of high capacity transport elements.
The Company has executed an interconnection agreement amendment with BellSouth to implement FCC
and subsequent NCUC decisions stemming from the FCC proceeding with respect to those elements
that remain subject to the federal interconnection rules. The Company also
 26




---



##### 



Greenfield
 Three months ended March 31,2006
    
    
    2005
    
    

ChangeCustomer recurring revenue
    
    $
    1,940
    
    
    $
    1,711
    
    
    $
    229
    
    
    
    13.4
    %Access and interconnection revenue
    
    
    510
    
    
    
    498
    
    
    
    12
    
    
    
    2.4
    %Other revenue
    
    
    61
    
    
    
    82
    
    
    
    (21
    )
    
    
    (25.6
    %)Total operating revenue
    
    
    2,511
    
    
    
    2,291
    
    
    
    220
    
    
    
    9.6
    %Cost of service expense
    
    
    1,352
    
    
    
    1,236
    
    
    
    116
    
    
    
    9.4
    %Selling, general & admin. expense
    
    
    952
    
    
    
    917
    
    
    
    35
    
    
    
    3.8
    %Depreciation
    
    
    973
    
    
    
    810
    
    
    
    163
    
    
    
    20.1
    %Total operating expense
    
    
    3,277
    
    
    
    2,963
    
    
    
    314
    
    
    
    10.6
    %Operating loss
    
    $
    (766
    )
    
    $
    (672
    )
    
    $
    (94
    )
    
    
    14.0
    %Operating margin
    
    
    (30.5
    %)
    
    
    (29.3
    %)Capital expenditures
    
    $
    1,592
    
    
    $
    1,348
    
    
    $
    244
    
    
    
    18.1
    %Total assets
    
    
    30,168
    
    
    
    27,300
    
    
    
    2,868
    
    
    
    10.5
    %Access lines
    
    
    15,324
    
    
    
    13,451
    
    
    
    1,873
    
    
    
    13.9
    %Long distance lines
    
    
    9,088
    
    
    
    7,326
    
    
    
    1,762
    
    
    
    24.1
    %Total projects
    
    
    122
    
    
    
    110
    
    
    
    12
    
    
    
    10.9
    %
 ProjectedLines in
    
    
    Marketable
    
    
    TotalGreenfield Projects By Year
    
    Service
    
    
    Lines
    
    
    ProjectsPrevious years
    
    
    13,622
    
    
    
    40,000
    
    
    
    752003
    
    
    1,003
    
    
    
    5,000
    
    
    
    182004
    
    
    614
    
    
    
    4,000
    
    
    
    122005
    
    
    85
    
    
    
    4,000
    
    
    
    132006
    
    
    
    
    
    
    1,000
    
    
    
    4Total
    
    
    15,324
    
    
    
    54,000
    
    
    
    122
   27




---



##### 



Wireless
 Three months ended March 31,2006
    
    
    2005
    
    

ChangeCustomer recurring revenue
    
    $
    5,623
    
    
    $
    5,472
    
    
    $
    151
    
    
    
    2.8
    %Wireless roaming/settlement revenue
    
    
    2,917
    
    
    
    2,455
    
    
    
    462
    
    
    
    18.8
    %Other revenue
    
    
    587
    
    
    
    565
    
    
    
    22
    
    
    
    3.9
    %Total operating revenue
    
    
    9,127
    
    
    
    8,492
    
    
    
    635
    
    
    
    7.5
    %Cost of service expense
    
    
    5,170
    
    
    
    4,431
    
    
    
    739
    
    
    
    16.7
    %Selling, general & admin. expense
    
    
    2,801
    
    
    
    2,752
    
    
    
    49
    
    
    
    1.8
    %Depreciation
    
    
    635
    
    
    
    504
    
    
    
    131
    
    
    
    26.0
    %Total operating expense
    
    
    8,606
    
    
    
    7,687
    
    
    
    919
    
    
    
    12.0
    %Operating income
    
    $
    521
    
    
    $
    805
    
    
    $
    (284
    )
    
    
    (35.3
    %)Operating margin
    
    
    5.7
    %
    
    
    9.5
    %Capital expenditures
    
    $
    196
    
    
    $
    1,093
    
    
    $
    (897
    )
    
    
    (82.1
    %)Total assets
    
    
    33,260
    
    
    
    33,821
    
    
    
    (561
    )
    
    
    (1.7
    %)Wireless subscribers
    
    
    47,145
    
    
    
    44,091
    
    
    
    3,054
    
    
    
    6.9
    %
  28




---



##### 



Internet
 Three months ended March 31,2006
    
    
    2005
    
    
    ChangeCustomer recurring revenue
    
    $
    3,248
    
    
    $
    2,778
    
    
    $
    470
    
    
    
    16.9
    %Other revenue
    
    
    36
    
    
    
    22
    
    
    
    14
    
    
    
    63.6
    %Total operating revenue
    
    
    3,284
    
    
    
    2,800
    
    
    
    484
    
    
    
    17.3
    %Cost of service expense
    
    
    660
    
    
    
    817
    
    
    
    (157
    )
    
    
    (19.2
    %)Selling, general & admin. expense
    
    
    1,435
    
    
    
    1,307
    
    
    
    128
    
    
    
    9.8
    %Depreciation
    
    
    374
    
    
    
    479
    
    
    
    (105
    )
    
    
    (21.9
    %)Total operating expense
    
    
    2,469
    
    
    
    2,603
    
    
    
    (134
    )
    
    
    (5.1
    %)Operating income
    
    $
    815
    
    
    $
    197
    
    
    $
    618
    
    
    
    313.7
    %Operating margin
    
    
    24.8
    %
    
    
    7.0
    %Capital expenditures
    
    $
    250
    
    
    $
    428
    
    
    $
    (178
    )
    
    
    (41.6
    %)Total assets
    
    
    13,357
    
    
    
    13,725
    
    
    
    (368
    )
    
    
    (2.7
    %)DSL lines
    
    
    21,710
    
    
    
    15,523
    
    
    
    6,187
    
    
    
    39.9
    %Dial-up accounts
    
    
    6,031
    
    
    
    8,494
    
    
    
    (2,463
    )
    
    
    (29.0
    %)High-speed accounts
    
    
    716
    
    
    
    617
    
    
    
    99
    
    
    
    16.0
    %
     29




---



##### 



Other
 Three months ended March 31,2006
    
    
    2005
    
    
    ChangeCost of service expense
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    NASelling, general & admin. expense
    
    
    406
    
    
    
    197
    
    
    
    209
    
    
    
    106.1
    %Depreciation
    
    
    278
    
    
    
    335
    
    
    
    (57
    )
    
    
    -17.0
    %Total operating expense
    
    $
    684
    
    
    $
    532
    
    
    $
    152
    
    
    
    28.6
    %Capital expenditures
    
    $
    149
    
    
    $
    207
    
    
    $
    (58
    )
    
    
    -28.0
    %Total assets
    
    
    57,991
    
    
    
    65,222
    
    
    
    (7,231
    )
    
    
    -11.1
    %
  Liquidity and Capital Resources
      30




---



##### 



Payments Due by YearLess than
    
    
    
    
    
    
    
    
    
    
    After 5Total
    
    
    one Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsContractual obligationsTerm loan
    
    $
    43,750
    
    
    $
    5,000
    
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    18,750Fixed interest payments
    
    
    14,938
    
    
    
    3,065
    
    
    
    5,216
    
    
    
    3,569
    
    
    
    3,088Operating leases
    
    
    12,113
    
    
    
    2,455
    
    
    
    4,223
    
    
    
    3,275
    
    
    
    2,160Capital leases
    
    
    422
    
    
    
    388
    
    
    
    34
    
    
    
    
    
    
    
    Other service contracts
    
    
    1,906
    
    
    
    892
    
    
    
    885
    
    
    
    129
    
    
    
    $
    73,129
    
    
    $
    11,800
    
    
    $
    20,358
    
    
    $
    16,973
    
    
    $
    23,998
  Cautionary Note Regarding Forward-Looking Statements
   
    
    the Companys ability to respond effectively to the issues surrounding the
telecommunications industry caused by state and federal legislation and
regulations,
    
    the impact of economic conditions related to the financial performance of
customers, business partners, competitors and peers within the telecommunications
industry,
    
    the Companys ability to recover the substantial costs incurred over the past
few years in connection with the expansion into new businesses,
    
    the Companys ability to attract and retain key personnel,
    
    the Companys ability to retain its existing customer base against wireless
competition and cable telephony in all areas of the business including local and
long distance and Internet and data services,
    
    the Companys ability to maintain its margins in a highly competitive industry,
    
    the performance of the Companys investments,
    
    the Companys ability to effectively manage rapid changes in technology and
control capital expenditures related to those technologies, and
    
    the impact of economic and political events on the Companys business, operating
regions and customers, including terrorist attacks.
 31




---



##### 



In some cases, these forward-looking statements can be identified by the use of words such
as may, will, should, expect, intend, plan, anticipate, believe, estimate,
predict, project or potential or the negative of these words or other comparable
words.
 In making forward-looking statements, the Company claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995. The Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors discussed in documents
filed by us with the Securities and Exchange Commission, including those matters summarized
under the caption Risk Factors in the Companys Annual Report on Form 10-K for the year
ended December 31, 2005. All forward-looking statements should be viewed with caution.
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
 At December 31, 2005, the Company had a $70.0 million revolving five-year line of credit
with interest at three month LIBOR plus a spread based on various financial ratios. On
January 25, 2006, the Company reduced its available line of credit to $40.0 million based
upon forecasted future cash requirements and to reduce the fees associated with excess
capacity. On March 30, 2006, the Company paid in full the $10.0 million outstanding under
the revolving credit facility, prior to the maturity on March 31, 2006. The Company also has
a 7.32% fixed rate $50.0 million term loan that matures on December 31, 2014. At March 31,
2006, $43.8 million was outstanding.
 At December 31, 2005, the Company had one interest rate swap agreement to fix $5.0 million
of the amount outstanding under the $70.0 million revolving line of credit at a rate of
4.53%. This interest rate swap agreement was settled on March 29, 2006 for approximately $9
thousand.
 At March 31, 2006, the Company has $61.7 million in tax-exempt auction rate securities,
which are classified as short-term, available for sale securities. Auction rate securities
are long-term variable rate bonds tied to short-term interest rates that trade or mature on
a shorter term than the underlying instrument based on a dutch auction process which
occurs every 7 to 35 days. The underlying investments are in municipal bonds, which have
low market risk.
 Management believes that reasonably foreseeable movements in interest rates will not have a
material adverse effect on the Companys financial condition or operations.
 Item 4.
    
    Controls and Procedures.
 (a)
    
    Disclosure Controls and Procedures
 The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed by the Company in the reports it files under the
Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC. These
disclosure controls and procedures are designed to ensure that appropriate information is
accumulated and communicated to the Companys management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding
disclosure.
 As required by the SEC rules, the Companys management, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Companys disclosure controls and procedures as of March
31, 2006. This evaluation included consideration of the facts and circumstances, and
subsequent remediation efforts, relating to the material weaknesses identified in the
Companys Annual Report on Form 10-K for the year ended December 31, 2005. The Companys
management previously concluded in such Annual Report on Form 10-K that as of December 31,
2005, its disclosure controls and procedures were not effective as a result of material
weaknesses in internal control over financial reporting as further described below.
 During the first quarter of 2006, the Company implemented controls to remediate the material
weaknesses in its internal control over financial reporting and its disclosure controls and
procedures. The Companys
 32




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##### 



remediation efforts with respect to these matters are described
below.
 In designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management necessarily
was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Also, the Company has investments in certain unconsolidated
entities, including Palmetto MobileNet, L.P. As the Company neither controls nor manages
these entities, its disclosure controls and procedures with respect to these entities are
necessarily substantially more limited than those it maintains with respect to its
consolidated subsidiaries.
 Based upon the foregoing evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that the Companys disclosure controls and procedures were
not effective at March 31, 2006, due to a material weakness identified as of December 31,
2005 regarding the classification of balance sheet accounts that is currently being
remediated by the Company as discussed in Item 4(b) below.
 (b)
    
    Changes in Internal Control Over Financial Reporting
 The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f)
and 15d-15(f). The Companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 In the Companys Annual Report on Form 10-K for the year ended December 31, 2005, the
Company identified material weaknesses (as defined by the Public Company Accounting
Oversight Boards Auditing Standard No. 2) in its internal control over financial reporting
relating to its classification of balance sheet accounts and accounting for equity method
investments. During the quarter ended March 31, 2006, the Company implemented various
improvements to internal controls, which included: (i.) a process to review and document the
classification of balance sheet accounts to ensure proper classification as either current
or non-current assets or liabilities and (ii.) additional policies and procedures associated
with the review of support and reconciliations of the differences between the Companys
carrying value of its investments in unconsolidated companies and its underlying equity in
the investees accounted for under the equity method.
 The Company believes that these changes will provide adequate controls. The Company was not
able to sufficiently test the effectiveness of the controls implemented related to the
classification of balance sheet accounts during the quarter ended March 31, 2006 because the
related controls had not been in place for a sufficient period of time as of March 31, 2006
to conclude on their operating effectiveness.
 Other than as described above, during the fiscal quarter ended March 31, 2006, there have
been no changes in the Companys internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, the Companys
internal control over financial reporting.
 33




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PART II.
    
    OTHER INFORMATION
 Item 1.
    
    Legal Proceedings.
 None
 Item 1A.
    
    Risk Factors.
 There are no material changes from the risk factors previously disclosed in Item 1A
to Part I of the Companys Form 10-K for the year ended December 31, 2005.
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
 None
 Item 3.
    
    Defaults Upon Senior Securities.
 None
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
 None
 Item 5.
    
    Other Information.
 None
 Item 6.
    
    Exhibits.
 (a) Exhibits
 Exhibit No.
    
    Description of Exhibit10.1
    
    Agreement with CoBank.31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. 1350.
 34




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##### 



CT COMMUNICATIONS, INC.

(Registrant)/s/ Ronald A. MarinoRonald A. Marino
Vice President Finance and
Chief Accounting OfficerMay 10, 2006Date
  35




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EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibit10.1
    
    Agreement with CoBank.31.1
    
    Certification of Chief
Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.31.2
    
    Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.32
    
    Certification of Chief
Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(b) under the Securities Exchange Act of 1934
and 18 U.S.C. 1350.
 36