##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 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 NEP.O. Box 227, Concord, NC
    
    28026-0227(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
  o þ o
 o þ




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 INDEX
 Page No.PART I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance SheetsJune 30, 2007 (Unaudited) and December 31, 2006
    
    
    2Condensed Consolidated Statements of Income (Unaudited)Three and Six Months Ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited)Three and Six Months Ended June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Stockholders Equity (Unaudited)Six Months Ended June 30, 2007 and 2006
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited)Six Months Ended June 30, 2007 and 2006
    
    
    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
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II. Other InformationItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibit Index
    
    
    38EX-31.1EX-31.2EX-32
  1




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
  (Unaudited)June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,459
    
    
    $
    14,063Short-term investments
    
    
    92,619
    
    
    
    86,741Accounts receivable and unbilled revenue, net
    
    
    16,168
    
    
    
    16,419Other
    
    
    11,540
    
    
    
    11,775Total current assets
    
    
    127,786
    
    
    
    128,998Investments
    
    
    7,464
    
    
    
    10,960Property and equipment, net
    
    
    214,852
    
    
    
    209,908Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    19,989
    
    
    
    19,989Other assets
    
    
    8,011
    
    
    
    7,597Total assets
    
    $
    388,008
    
    
    $
    387,358LIABILITIES AND STOCKHOLDERS EQUITYCurrrent liabilities:Current portion of long-term debt
    
    $
    5,000
    
    
    $
    5,000Accounts payable
    
    
    6,949
    
    
    
    12,553Accrued payroll
    
    
    5,483
    
    
    
    8,636Customer deposits and advance billings
    
    
    4,754
    
    
    
    4,618Accrued pension and postretirement benefit cost
    
    
    3,159
    
    
    
    2,391Other accrued liabilities
    
    
    6,593
    
    
    
    1,687Total current liabilities
    
    
    31,938
    
    
    
    34,885Long-term debt
    
    
    32,500
    
    
    
    35,000Deferred income taxes
    
    
    17,472
    
    
    
    23,060Postretirement and pension benefits
    
    
    8,789
    
    
    
    8,499Other
    
    
    12,744
    
    
    
    6,536Total liabilities
    
    
    103,443
    
    
    
    107,980Stockholders equity:Common stock, 20,287,993 and 20,035,823 shares outstanding
at June 30, 2007 and December 31, 2006, respectively
    
    
    61,925
    
    
    
    59,132Accumulated other comprehensive income
    
    
    4,001
    
    
    
    4,276Retained earnings
    
    
    218,639
    
    
    
    215,970Total stockholders equity
    
    
    284,565
    
    
    
    279,378Total liabilities and stockholders equity
    
    $
    388,008
    
    
    $
    387,358
  2




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006(1)
    
    
    2007
    
    
    2006(1)Operating revenue:Wireline
    
    $
    35,734
    
    
    $
    34,341
    
    
    $
    71,385
    
    
    $
    68,279Wireless
    
    
    10,572
    
    
    
    9,683
    
    
    
    20,333
    
    
    
    18,840Total operating revenue
    
    
    46,306
    
    
    
    44,024
    
    
    
    91,718
    
    
    
    87,119Operating expense:Wireline cost of service (excludes depreciation of $6,555,
$6,454, $13,076 and $12,987, respectively)
    
    
    9,945
    
    
    
    9,414
    
    
    
    19,690
    
    
    
    19,229Wireless cost of service (excludes depreciation of
$688, $636, $1,377 and $1,266,
respectively)
    
    
    5,509
    
    
    
    5,259
    
    
    
    11,046
    
    
    
    10,429Selling, general and administrative (excludes depreciation of
$650, $883, $1,348 and $1,840,
respectively)
    
    
    18,217
    
    
    
    16,547
    
    
    
    34,316
    
    
    
    31,462Depreciation
    
    
    7,893
    
    
    
    7,973
    
    
    
    15,801
    
    
    
    16,093Total operating expense
    
    
    41,564
    
    
    
    39,193
    
    
    
    80,853
    
    
    
    77,213Operating income
    
    
    4,742
    
    
    
    4,831
    
    
    
    10,865
    
    
    
    9,906Other income (expense):Equity in income of unconsolidated companies, net
    
    
    2
    
    
    
    263
    
    
    
    13
    
    
    
    90,103Interest, dividend income and gain on sale of investments
    
    
    2,178
    
    
    
    1,945
    
    
    
    3,529
    
    
    
    2,758Impairment of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (876
    )Interest expense
    
    
    (612
    )
    
    
    (869
    )
    
    
    (1,201
    )
    
    
    (1,893
    )Other (expense) income
    
    
    (52
    )
    
    
    31
    
    
    
    (116
    )
    
    
    21Total other income
    
    
    1,516
    
    
    
    1,370
    
    
    
    2,225
    
    
    
    90,113Income before income taxes
    
    
    6,258
    
    
    
    6,201
    
    
    
    13,090
    
    
    
    100,019Income taxes
    
    
    2,286
    
    
    
    2,258
    
    
    
    4,492
    
    
    
    38,710Net income
    
    
    3,972
    
    
    
    3,943
    
    
    
    8,598
    
    
    
    61,309Dividends on preferred stock
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Net income for common stock
    
    $
    3,972
    
    
    $
    3,942
    
    
    $
    8,598
    
    
    $
    61,308Earnings per common share:Basic
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    0.43
    
    
    $
    3.22Diluted
    
    
    0.20
    
    
    
    0.20
    
    
    
    0.42
    
    
    
    3.17Basic weighted-average shares outstanding
    
    
    20,033
    
    
    
    19,165
    
    
    
    19,997
    
    
    
    19,034Diluted weighted-average shares outstanding
    
    
    20,251
    
    
    
    19,452
    
    
    
    20,240
    
    
    
    19,359
 
 (1)
    
    Adjusted for the effect of SAB No. 108 items  See Note 3  3




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Comprehensive Income (Unaudited)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006(1)
    
    
    2007
    
    
    2006(1)Net income
    
    $
    3,972
    
    
    $
    3,943
    
    
    $
    8,598
    
    
    $
    61,309Other comprehensive income (loss), net of tax:Unrealized holding gains on available-for-
sale securities
    
    
    51
    
    
    
    409
    
    
    
    347
    
    
    
    404Reclassification adjustment for gains realized in
net income
    
    
    (593
    )
    
    
    (457
    )
    
    
    (593
    )
    
    
    (468
    )Amortization of prior service cost and net
actuarial
gains
    
    
    (16
    )
    
    
    
    
    
    
    (29
    )
    
    
    Comprehensive income
    
    $
    3,414
    
    
    $
    3,895
    
    
    $
    8,323
    
    
    $
    61,245
 
 (1)
    
    Adjusted for the effect of SAB No. 108 items  See Note 3  4




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Stockholders Equity (Unaudited)
  Accum. Other
    
    
    
    
    
    
    Total4.5% Series
    
    
    Common
    
    
    Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersPref Stock
    
    
    Stock
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2005
    
    $
    61
    
    
    $
    42,946
    
    
    $
    (307
    )
    
    $
    282
    
    
    $
    152,898
    
    
    $
    195,880SAB 108 transition cumulative
effect adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350
    )
    
    
    (350
    )Adjusted balance at January 1, 2006
    
    $
    61
    
    
    $
    42,946
    
    
    $
    (307
    )
    
    $
    282
    
    
    $
    152,548
    
    
    $
    195,530Net Income(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,309
    
    
    
    61,309Issuance of 44,182 shares of
common stock
    
    
    
    
    
    
    616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    616Issuance of 501,159 shares for
exercise of stock options
    
    
    
    
    
    
    5,873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,873Forfeiture and cancellation of
48,556 common shares
    
    
    
    
    
    
    (632
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (632
    )Reversal of unamortized unearned
compensation balance
    
    
    
    
    
    
    (307
    )
    
    
    307
    
    
    
    
    
    
    
    
    
    
    
    Tax benefits from exercised
stock options
    
    
    
    
    
    
    859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    859Preferred stock subject
to redemption
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Dividends declared:4.5% preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,836
    )
    
    
    (3,836
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    (64
    )Restricted stock compensation
net of $385 earned in 2006
    
    
    
    
    
    
    588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    588Balance at June 30, 2006
    
    $
    
    
    
    $
    49,943
    
    
    $
    
    
    
    $
    218
    
    
    $
    210,020
    
    
    $
    260,181
 Accum. Other
    
    
    
    
    
    
    Total4.5% Series
    
    
    Common
    
    
    Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersPref Stock
    
    
    Stock
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2006
    
    $
    
    
    
    $
    59,132
    
    
    $
    
    
    
    $
    4,276
    
    
    $
    215,970
    
    
    $
    279,378FIN 48 transition cumulative
effect adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075
    )
    
    
    (1,075
    )Adjusted balance at January 1, 2007
    
    $
    
    
    
    $
    59,132
    
    
    $
    
    
    
    $
    4,276
    
    
    $
    214,895
    
    
    $
    278,303Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,598
    
    
    
    8,598Issuance of 44,461 shares of
common stock
    
    
    
    
    
    
    1,060
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060Issuance of 31,650 shares for
exercise of stock options
    
    
    
    
    
    
    488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488Forfeiture and cancellation of
22,650 common shares
    
    
    
    
    
    
    (541
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (541
    )Tax benefits from exercised
stock options
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429Dividends declared:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,854
    )
    
    
    (4,854
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275
    )
    
    
    
    
    
    
    (275
    )Restricted stock compensation
including $739 earned in 2007
    
    
    
    
    
    
    1,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,357Balance at June 30, 2007
    
    $
    
    
    
    $
    61,925
    
    
    $
    
    
    
    $
    4,001
    
    
    $
    218,639
    
    
    $
    284,565
 
 (1)
    
    Adjusted for the effect of SAB No. 108 items  See Note 3  5




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
  Six Months Ended June 30,2007
    
    
    2006(1)Cash flows from operating activities:Net income
    
    $
    8,598
    
    
    $
    61,309Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation
    
    
    15,801
    
    
    
    16,093Stock compensation expense
    
    
    3,200
    
    
    
    1,957Loss on retirements of fixed assets
    
    
    190
    
    
    
    190Postretirement and pension benefits
    
    
    1,029
    
    
    
    511Impairment of investments
    
    
    
    
    
    
    876Gain on sale of investment securities
    
    
    (980
    )
    
    
    (947
    )Accrued interest income on short-term investments
    
    
    (76
    )
    
    
    (431
    )Equity in income of unconsolidated companies
    
    
    (13
    )
    
    
    (90,103
    )Undistributed patronage dividends
    
    
    (97
    )
    
    
    (110
    )Deferred income taxes and tax credits
    
    
    329
    
    
    
    (2,415
    )Change in income taxes payable
    
    
    3,226
    
    
    
    13,780Changes in operating assets and liabilities
    
    
    (8,959
    )
    
    
    (3,140
    )Net cash provided by (used in) operating activities
    
    
    22,248
    
    
    
    (2,430
    )Cash flows from investing activities:Capital expenditures
    
    
    (21,082
    )
    
    
    (13,051
    )Proceeds from sale of property, plant and equipment
    
    
    146
    
    
    
    50Proceeds from sale of wireless spectrum (net of costs to sell of $353)
    
    
    
    
    
    
    15,647Proceeds from sale of investments
    
    
    3,971
    
    
    
    1,375Proceeds from sale of short-term investments
    
    
    26,930
    
    
    
    6,000Purchases of short-term investments
    
    
    (32,733
    )
    
    
    (100,438
    )Purchases of investments
    
    
    (15
    )
    
    
    (151
    )Payment for wireless spectrum
    
    
    
    
    
    
    (300
    )Distribution from unconsolidated companies
    
    
    273
    
    
    
    97,899Net cash (used in) provided by investing activities
    
    
    (22,510
    )
    
    
    7,031Cash flows from financing activities:Repayment of long-term debt
    
    
    (2,500
    )
    
    
    (12,500
    )Dividends paid
    
    
    (4,854
    )
    
    
    (3,837
    )Tax benefits credited to additional paid-in-capital
    
    
    429
    
    
    
    859Redemption of preferred stock
    
    
    (11
    )
    
    
    Proceeds from common stock issuances
    
    
    594
    
    
    
    4,843Net cash used in financing activities
    
    
    (6,342
    )
    
    
    (10,635
    )Net cash used in discontinued operations  operating activities
    
    
    
    
    
    
    (95
    )Net decrease in cash and cash equivalents
    
    
    (6,604
    )
    
    
    (6,129
    )Cash and cash equivalents at beginning of period
    
    
    14,063
    
    
    
    23,011Cash and cash equivalents at end of period
    
    $
    7,459
    
    
    $
    16,882Supplemental disclosure of non-cash financing activities:Common and nonvested shares issued under long-term incentive plans
    
    $
    1,572
    
    
    $
    714
 
 (1)
    
    Adjusted for the effect of SAB No. 108 items  See Note 3  6




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1.
    
    MERGER OF CT COMMUNICATIONS, INC. AND WINDSTREAM CORPORATIONCT Communications, Inc., a North Carolina corporation (the Company), announced on May
25, 2007 that it entered into an Agreement and Plan of Merger, (the Merger
Agreement), with Windstream Corporation, a Delaware corporation (Windstream),
pursuant to which Windstream Marlin, Inc., a wholly owned subsidiary of Windstream
(Merger Sub) will merge with and into the Company (the Merger), with the Company
continuing as the surviving corporation. Pursuant to the Merger Agreement, at the
effective time of the Merger, each outstanding share of common stock of the Company
(the Shares), other than any Shares owned by the Company or any subsidiary of the
Company, Merger Sub or any direct or indirect wholly owned subsidiary of Windstream,
will be canceled and converted automatically into the right to receive $31.50 in cash,
without interest. The Merger is conditioned, on certain customary conditions,
including the approval of the Merger Agreement by the shareholders of the Company, the
approval of the Federal Communications Commission and other regulatory approvals.On July 9, 2007, the Federal Trade Commission notified the Company that its request for
early termination of the waiting period had been granted. On or about July 6, 2007,
the Company distributed to all shareholders of record as of June 28, 2007, a definitive
proxy statement related to a special meeting of shareholders to be held on August 23,
2007. At the special meeting, the shareholders will consider and vote on the proposal
to approve the Merger Agreement with Windstream. The acquisition is expected to close
during the third quarter of 2007. However, factors outside of managements control
could delay or prevent completion of the proposed Merger. A change in control of the
Company could trigger modification of terms of certain plans or agreements, including
contracts and employee benefit arrangements. The Merger Agreement provides that the
Company may be required to pay Windstream a termination fee of $19 million in certain
circumstances. For the six months ended June 30, 2007, the Company recorded $1.8
million of transaction related costs in operating expense associated with the proposed
Merger.2.
    
    BASIS OF PRESENTATIONIn the opinion of management, 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 June 30, 2007 and December 31, 2006 and
the results of its operations and cash flows for the three and six months ended June
30, 2007 and June 30, 2006. 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, 2006. 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.One area of significant estimation relates to the Companys participation in revenue
pooling arrangements with other local exchange carriers administered by the National
Exchange Carrier Association (NECA), a quasi-governmental non-profit organization.
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. During
the second quarter of 2007, the Company recorded a $1.0 million increase in universal
service revenue based on the final 2006 cost study. In addition, the results
of operations for the three and six months ended June 30, 2007 are not necessarily
indicative of the results to be expected for the full year.3.
    
    RECLASSIFICATIONSIn certain instances, amounts previously reported in the 2006 consolidated financial
statements have been reclassified to conform to the presentation of the 2007
consolidated financial statements. Such reclassifications have no effect on net income
or retained earnings as previously reported, except for the adjustments discussed below
related to Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.
 7




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 As discussed in Note 4 below, effective in the first quarter of 2007, the Company
modified the financial reporting of its operating segments into four operating segments
to show amounts previously reported as the Companys Internet operating segment as a
product within the other operating segments. Accordingly, prior period segment
information has been recast to conform to the current period presentation. There was no
impact on the consolidated financial statements.In September 2006, the Securities and Exchange Commission (SEC) issued SAB No. 108 to
eliminate the diversity of practice surrounding how public companies quantify financial
statement misstatements. The Company adopted SAB No. 108 on December 31, 2006 and
recorded related adjustments using the cumulative effect transition method as of
January 1, 2006. The Company has recast its financial results for the three and six
months ended June 30, 2006, to reflect the 2006 impact of the SAB No. 108 items.4.
    
    SEGMENT INFORMATIONStatement of Financial Accounting Standards (SFAS) No. 131 Disclosures about
Segments of an Enterprise and Related Information, establishes standards for reporting
information about operating segments, which requires segmentation based on internal
organization and reporting of revenue and operating income based on internal accounting
methods. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.Historically, the Company has reported its results of operations in six separate
operating segments as defined by SFAS No. 131. These six segments were its incumbent
local exchange carrier (ILEC) segment, competitive local exchange carrier (CLEC)
segment, Wireless segment, Greenfield segment, Internet segment, and Palmetto
MobileNet, L.P. (Palmetto) segment.During 2006, the Company sold its investment in Palmetto and as a result no longer
reports results for that segment after December 31, 2006. During the first quarter of
2007, the Company launched its video product to trial customers located within the ILEC
service territory, and as a result, the Company evaluated whether video should be
accounted for as a separate operating segment or as a product within the Companys
existing operating segments. This in turn led the Company to reassess how it manages
the business and its assumptions, methodologies and reporting classifications
associated with all of its reporting segments. In response to the increased focus on
integrated telecommunications bundled offerings and the addition of new product
offerings, the Company has modified its financial reporting processes to present
revenues and expenses by defined customer groups. This method of presentation will
report revenues and expenses by customer relationship to aid in decision-making. As a
result of the restructuring of the Companys financial reporting process and the
assessment performed, the Company modified its segment reporting to report four
operating segments: ILEC, CLEC, Greenfield, and Wireless, effective January 1, 2007. As
a result, the former Internet segment results have been included in the ILEC, CLEC, and
Greenfield segment results for all periods presented. All other business units,
investments and operations of the Company that do not fall under these segments and do
not meet reporting guidelines and thresholds are reported under Other.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, 2006. The Companys management evaluates performance
based on certain operating metrics, including operating revenue and operating income.
Intersegment transactions are eliminated. All segments reported below provide services
primarily within North Carolina.
 8




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Amounts as of and for the three and six months ended June 30, 2006 have been recast to
conform to the current period presentation. Selected data by the Companys four
operating business segments as of and for the three and six months ended June 30, 2007
and 2006, was as follows (in thousands):
 Three months ended June 30, 2007
 ILEC
    
    
    CLEC
    
    
    Greenfield
    
    
    Wireless
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    27,182
    
    
    $
    5,377
    
    
    $
    3,175
    
    
    $
    10,572
    
    
    $
    
    
    
    $
    46,306External expense
    
    
    16,462
    
    
    
    5,083
    
    
    
    2,511
    
    
    
    8,583
    
    
    
    1,032
    
    
    
    33,671Depreciation
    
    
    5,145
    
    
    
    700
    
    
    
    1,129
    
    
    
    693
    
    
    
    226
    
    
    
    7,893Operating income (loss)
    
    $
    5,575
    
    
    $
    (406
    )
    
    $
    (465
    )
    
    $
    1,296
    
    
    $
    (1,258
    )
    
    $
    4,742
 Three months ended June 30, 2006 (1)
 ILEC
    
    
    CLEC
    
    
    Greenfield
    
    
    Wireless
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    26,105
    
    
    $
    5,354
    
    
    $
    2,882
    
    
    $
    9,683
    
    
    $
    
    
    
    $
    44,024External expense
    
    
    15,174
    
    
    
    4,988
    
    
    
    2,543
    
    
    
    8,229
    
    
    
    286
    
    
    
    31,220Depreciation
    
    
    5,347
    
    
    
    728
    
    
    
    1,032
    
    
    
    641
    
    
    
    225
    
    
    
    7,973Operating income (loss)
    
    $
    5,584
    
    
    $
    (362
    )
    
    $
    (693
    )
    
    $
    813
    
    
    $
    (511
    )
    
    $
    4,831
 Six months ended June 30, 2007
 ILEC
    
    
    CLEC
    
    
    Greenfield
    
    
    Wireless
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    54,304
    
    
    $
    10,742
    
    
    $
    6,339
    
    
    $
    20,333
    
    
    $
    
    
    
    $
    91,718External expense
    
    
    32,031
    
    
    
    10,012
    
    
    
    4,874
    
    
    
    16,985
    
    
    
    1,150
    
    
    
    65,052Depreciation
    
    
    10,300
    
    
    
    1,421
    
    
    
    2,243
    
    
    
    1,386
    
    
    
    451
    
    
    
    15,801Operating income (loss)
    
    $
    11,973
    
    
    $
    (691
    )
    
    $
    (778
    )
    
    $
    1,962
    
    
    $
    (1,601
    )
    
    $
    10,865Segment assets at June 30, 2007
    
    $
    272,908
    
    
    $
    15,792
    
    
    $
    33,133
    
    
    $
    35,449
    
    
    $
    30,726
    
    
    $
    388,008
 Six months ended June 30, 2006 (1)
 ILEC
    
    
    CLEC
    
    
    Greenfield
    
    
    Wireless
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    52,028
    
    
    $
    10,573
    
    
    $
    5,678
    
    
    $
    18,840
    
    
    $
    
    
    
    $
    87,119External expense
    
    
    29,059
    
    
    
    10,134
    
    
    
    5,035
    
    
    
    16,200
    
    
    
    692
    
    
    
    61,120Depreciation
    
    
    10,825
    
    
    
    1,443
    
    
    
    2,046
    
    
    
    1,276
    
    
    
    503
    
    
    
    16,093Operating income (loss)
    
    $
    12,144
    
    
    $
    (1,004
    )
    
    $
    (1,403
    )
    
    $
    1,364
    
    
    $
    (1,195
    )
    
    $
    9,906Segment assets at June 30, 2006
    
    $
    262,648
    
    
    $
    16,714
    
    
    $
    31,964
    
    
    $
    33,192
    
    
    $
    39,065
    
    
    $
    383,583
 
 (1)
    
    Adjusted for the effect of SAB No. 108 items  See Note 3 9




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Reconciliation to income before income taxes (in thousands):
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006(1)
    
    
    2007
    
    
    2006(1)Segment operating income
    
    $
    4,742
    
    
    $
    4,831
    
    
    $
    10,865
    
    
    $
    9,906Other income (expense):Equity in income of unconsolidated companies, net
    
    
    2
    
    
    
    263
    
    
    
    13
    
    
    
    90,103Interest, dividend income and gain on sale of investments
    
    
    2,178
    
    
    
    1,945
    
    
    
    3,529
    
    
    
    2,758Impairment of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (876
    )Interest expense
    
    
    (612
    )
    
    
    (869
    )
    
    
    (1,201
    )
    
    
    (1,893
    )Other (expense) income
    
    
    (52
    )
    
    
    31
    
    
    
    (116
    )
    
    
    21Total other income
    
    
    1,516
    
    
    
    1,370
    
    
    
    2,225
    
    
    
    90,113Income before income taxes
    
    $
    6,258
    
    
    $
    6,201
    
    
    $
    13,090
    
    
    $
    100,019
 
 (1)
    
    Adjusted for the effect of SAB No. 108 items  See Note 3 5.
    
    INCOME TAXESIncome tax expense was $2.3 million for both the three months ended June 30, 2007 and
2006, for effective tax rates of 36.5% and 36.4%, respectively. Income tax expense
decreased to $4.5 million for the six months ended June 30, 2007, compared to income
tax expense of $38.7 million for the six months ended June 30, 2006. In addition, the
effective rate decreased to 34.3% for the first six months of 2007 compared to 38.7%
for the same prior period in 2006 due to higher tax-exempt interest income from the
Companys increased investment in federal and state tax-exempt auction-rate securities.The Company will incur expenditures necessary to facilitate the proposed Merger of the
Company with Windstream in accordance with the Merger Agreement executed on May 25,
2007. The Company expects that these expenditures could be significant. Certain of
these costs may be non-deductible for income tax purposes if the Merger is completed.
During the three months ended June 30, 2007, $0.7 million of the transaction-related
expenses incurred may be non-deductible if the transaction closes and could
result in a potential future tax liability of $0.3 million.The Company adopted the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. As a result
of the implementation of FIN 48, the Company recognized a charge of $1.1 million to the
January 1, 2007 balance of retained earnings. As of the date of adoption, the Company
had unrecognized tax benefits of $8.0 million. Included in the balance at January 1,
2007, are $2.3 million of unrecognized tax benefits that, if recognized, would affect
the effective tax rate.The Company files a consolidated federal income tax return and separate income tax
returns in several state jurisdictions. The Company is no longer subject to federal
income tax examinations for years before 2000 and is no longer subject to state and
local income tax examinations by tax authorities for years before 2003.The Company recognizes potential accrued interest and penalties related to unrecognized
tax benefits in income tax expense. In conjunction with the adoption of FIN 48, the
Company recognized approximately $1.8 million for the potential payment of interest and
penalties at January 1, 2007, which is included as a component of the $8.0 million
unrecognized tax benefit noted above. During the three months ended June 30, 2007, the
Company recognized approximately $0.2 million in potential interest and penalties
associated with uncertain tax positions. To the extent interest and penalties are not
assessed with respect to uncertain tax positions, amounts accrued will be reduced and
reflected as a reduction of overall income tax expense.Currently, $3.8 million of unrecognized tax benefits relates to an ongoing IRS audit
that may be settled by June 30, 2008 and is included in income taxes payable.
 10




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 6.
    
    RECENT ACCOUNTING PRONOUNCEMENTSSFAS No. 159In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities, which amends statement No. 115. SFAS No. 159
permits business entities to measure eligible items at fair value at specified election
dates, and report unrealized gains and losses on items for which fair value option has
been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective
as of the beginning of an entitys first fiscal year that begins after November 15,
2007. The Company will adopt SFAS No. 159 on January 1, 2008, and is currently
evaluating the impact of SFAS No. 159 on the results of operations, financial position
and cash flows.Emerging Issues Task Force Issue No. 06-4In September 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue No. 06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The scope of
EITF 06-4 is limited to the recognition of a liability and related compensation costs
for endorsement split-dollar life insurance policies that provide a benefit to an
employee that extends to postretirement periods. The EITF reached a consensus that for
a split-dollar life insurance arrangement within the scope of EITF 06-4, an employer
should recognize a liability for future benefits in accordance with existing accounting
guidance. EITF 06-4 is effective for fiscal years beginning after December 15, 2006.
The Company adopted EITF 06-4 on January 1, 2007, with no material effect on its
consolidated financial statements.EITF Issue No. 06-5In September 2006, the EITF reached a consensus on EITF Issue No. 06-5 (EITF 06-5),
Accounting for Purchases of Life Insurance  Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4. The EITF reached a
conclusion that a policyholder should consider any additional amounts included in the
contractual terms of the policy in determining the amount that could be realized under
the insurance contract and that a policyholder should determine the amount that could
be realized under the life insurance contract assuming the surrender of an
individual-life by individual-life policy (or certificate by certificate in a group
policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The
Company adopted EITF 06-5 on January 1, 2007, with no material effect on its
consolidated financial statements.SFAS No. 157In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 applies under other accounting pronouncements that require or permit fair
value measurements, and therefore does not require any new fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008 and is
currently evaluating the impact of SFAS No. 157 on the results of operations, financial
position and cash flows.FASB Interpretation No. 48In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109 and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The evaluation of a tax
position in accordance with this Interpretation is a two-step process. The first step
is recognition, in which the enterprise determines whether it is more likely than not
that a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position.
The second step is measurement. A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to recognize in
the financial statements. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company adopted FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a charge of approximately $1.1 million
to the January 1, 2007 balance of retained earnings. As of the date of adoption, the
Company had unrecognized tax benefits of $8.0 million. Included in the balance at
January 1, 2007, are $2.3 million of unrecognized tax benefits that, if recognized,
would affect the effective tax rate.
 11




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 EITF Issue No. 06-3In June 2006, the EITF reached a consensus on EITF Issue No. 06-3 (EITF 06-3), How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement. The EITF
reached a consensus that the scope of EITF 06-3 includes any tax assessed by a
governmental authority that is directly imposed on a revenue-producing transaction
between a seller and a customer and may include, but are not limited to, sales, use,
value added, and some excise taxes. The EITF also reached a consensus that the
presentation of taxes within the scope of this issue on either a gross (included in
revenues and costs) or a net (excluded from revenues) basis is an accounting policy
decision that should be disclosed. In addition, for any such taxes that are reported on
a gross basis, a company should disclose the amounts of those taxes in interim and
annual financial statements for each period for which an income statement is presented
if those amounts are significant. The Company presents sales and excise taxes received
from customers on a net basis. Universal Service Administration Company (USAC)
payments remitted as well as USAC revenue received from customers, are recorded on a
gross basis. For the three months ended June 30, 2007, the Company included $0.7
million of revenue and $0.8 million of expense in its consolidated financial
statements, compared to $0.6 million of revenue and $0.6 million of expense for the
three months ended June 30, 2006. For the six months ended June 30, 2007 the Company
recorded $1.2 million in USAC revenue and $1.6 million in USAC expense compared to $1.1
million in revenues and $1.2 million in expenses for the same six months in the prior
year. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. The
Company adopted EITF 06-3 on January 1, 2007, with no material effect on its
consolidated financial statements.7.
    
    STOCK COMPENSATION PLANSThe 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 stockholders
equity based on the fair value of the award at the grant date, which is recognized over
the vesting period of the stock. At June 30, 2007, the majority of the Companys stock
compensation expense was included in selling, general and administrative expense in the
Companys Consolidated Statements of Income.During the six months ended June 30, 2007 and 2006, respectively, the Company granted
238,992 and 88,496 unrestricted and nonvested shares, of which 198,709 and 56,902 were
nonvested shares, respectively, under the Amended and Restated 2001 Stock Incentive
Plan (Stock Incentive Plan) to participants with a weighted-average fair value of $24
and $13, respectively, measured at the grant-date fair value. At June 30, 2007, there
were 242,583 nonvested shares outstanding. The Company accounts for the unrestricted
and nonvested share awards as equity awards in accordance with SFAS No. 123R. At June
30, 2007, unrecognized compensation expense related to nonvested shares was $3.7
million, which will be recognized over a weighted-average period of 2.4 years. For the
three months ended June 30, 2007, the Company recognized stock compensation expense and
related tax benefits of $2.0 million and $0.8 million, respectively, compared to $1.3
million and $0.5 million, respectively, for the same period in 2006. For the six months
ended June 30, 2007, the Company recognized stock compensation expense and related tax
benefits of $3.2 million and $1.3 million, respectively, compared to $2.0 million and
$0.8 million, respectively, for the same period in 2006.Prior to August 10, 2005, the Company granted stock options under the Stock Incentive
Plan. These options were granted by the Board of Directors, at prices determined by the
closing price on the date of grant, and expire 10 years from the date of grant.
Beginning in August 2005, the Company changed its compensation philosophy to eliminate
future stock option grants. 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 and six months ended June 30, 2007 was $0.3 million and $0.4 million,
respectively, compared to $1.7 million and $2.2 million for the three and six months
ended June 30, 2006, respectively. There were no stock options granted during the six
months ended June 30, 2007 and 2006, respectively.The Company adopted the provisions of FASB Staff Position (FSP) No. FAS 123R-3
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards, on January 1, 2006. Accordingly, the Company reported the entire amount of
excess tax benefits of $0.4 million and $0.9 million for the six months ended June 30,
 12




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicNumber
    
    
    Exercise
    
    
    Contractual
    
    
    Valueof Options
    
    
    Price
    
    
    Term
    
    
    (in thousands)Options outstanding and exercisable at December 31, 2006
    
    
    578,183
    
    
    $
    16Options exercised
    
    
    (31,650
    )
    
    
    15Options forfeited
    
    
    (5,988
    )
    
    
    28Options outstanding and exercisable at June 30, 2007
    
    
    540,545
    
    
    $
    15
    
    
    
    5.93
    
    
    $
    8,155
 Nonvested share activity for the six months ended June 30, 2007 was as follows:
 Weighted-AverageNumber
    
    
    Grant-Dateof Shares
    
    
    ValueNonvested shares at December 31, 2006
    
    
    99,353
    
    
    $
    12Shares granted
    
    
    198,709
    
    
    
    24Shares vested
    
    
    (55,479
    )
    
    
    11Nonvested shares at June 30, 2007
    
    
    242,583
    
    
    $
    22
 The fair value of shares vested during the six months ended June 30, 2007 was approximately
$0.6 million.8.
    
    INVESTMENTS(a)
    
    Investments in Unconsolidated CompaniesThe Company recognized income of less than $0.1 million and $0.3 million for the three
months ended June 30, 2007 and 2006, respectively, and less than $0.1 million and $90.1
million for the six months ended June 30, 2007 and 2006, respectively, as its share of
earnings from unconsolidated companies accounted for under the equity method. 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. As a result of
this transaction, the Company recorded equity in income of unconsolidated companies of
$89.2 million, which included $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. In August 2006, the Company sold its remaining
investment in Palmetto for $4.2 million, which resulted in a gain of $0.8 million.
 13




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Investments in unconsolidated companies consisted of the following (in thousands):
 OwnershipPercentage at
    
    
    June 30,
    
    
    December 31,June 30, 2007
    
    
    2007
    
    
    2006Equity Method:Access/On Multimedia, Inc.
    
    
    20.1
    %
    
    $
    48
    
    
    $
    35Cost Method:Magnolia Holding Company,
L.L.C.
    
    
    4.6
    %
    
    
    1,111
    
    
    
    1,111InComm Holdings, Inc.
    
    
    0.2
    %
    
    
    1,239
    
    
    
    1,304Other
    
    Various
    
    
    1,846
    
    
    
    2,039Total
    
    
    
    
    
    $
    4,244
    
    
    $
    4,489
 The Company did not recognize any impairment charges in the six months ended June 30,
2007. During the six months ended June 30, 2006, the Company recognized impairment
charges of $0.4 million and $0.3 million on InComm Holdings, Inc., formerly PRE
Holdings, Inc., and Magnolia, a shareholder of PRE Holdings, Inc. respectively. The
impairment losses were determined based upon fair value resulting from a transaction
whereby InComm Holdings, Inc. purchased PRE Holdings, Inc. These impairment losses are
included in the caption Impairment of investments in the Condensed Consolidated
Statements of Income.
 (b)
    
    Investment Securities
 The book value, gross unrealized holding gains and losses and fair value for the
Companys investments at June 30, 2007 and December 31, 2006, were as follows (in
thousands):
 Investment Securities
    
    Book
    
    
    Gross Unrealized
    
    
    Gross UnrealizedAvailable-for-Sale
    
    Value
    
    
    Holding Gains
    
    
    Holding Losses
    
    
    Fair ValueJune 30, 2007
    
    $
    1,024
    
    
    $
    115
    
    
    $
    (8
    )
    
    $
    1,131December 31, 2006
    
    $
    4,015
    
    
    $
    417
    
    
    $
    (46
    )
    
    $
    4,386
 During the first six months of 2007, the Company sold investment securities for
proceeds of $4.0 million and realized a gain of approximately $1.0 million, compared to
proceeds of $1.3 million of investment securities for a realized gain of $0.9 million
during the same 2006 period.The Company did not recognize any impairment charges in the six months ended June 30,
2007. During the six months ended June 30, 2006, the Company recognized impairment
losses of $0.2 million 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 in the Condensed Consolidated Statements of Income.At June 30, 2007, the Company held $92.6 million of tax-exempt auction-rate securities
that 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. The Company receives tax-exempt 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 were no unrealized gains or losses on these securities at June 30,
2007.
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 (c)
    
    Other Investments
 Other investments represent the Companys investment in CoBank, ACB (CoBank), and
Rural Telephone Finance Cooperative (RTFC), which are organized as cooperatives for
federal income tax purposes. Distributions from CoBank include both cash distributions
of CoBanks earnings and equity participation certificates. These equity participation
certificates are included in the Companys carrying value of the investment and are
recognized as other income in the period earned. Other investments totaled $2.1
million and $1.9 million at June 30, 2007 and December 31, 2006, respectively.9.
    
    PROPERTY AND EQUIPMENTProperty and equipment was composed of the following (in thousands):
 June 30,
    
    
    December 31,2007
    
    
    2006Land, buildings and general equipment
    
    $
    93,435
    
    
    $
    92,971Central office equipment
    
    
    214,435
    
    
    
    203,118Poles, wires, cables and conduit
    
    
    185,064
    
    
    
    174,875Construction in progress
    
    
    16,127
    
    
    
    20,043509,061
    
    
    
    491,007Accumulated depreciation
    
    
    (294,209
    )
    
    
    (281,099
    )Property and equipment, net
    
    $
    214,852
    
    
    $
    209,908
 The Companys construction in progress decreased $3.9 million to $16.1 million at June
30, 2007, primarily related to the completion of projects associated with the Companys
strategic initiative to deploy fiber optic facilities and related equipment for the
deployment of video and data services. Included in central office equipment at June 30,
2007, was approximately $1.0 million of assets purchased with vendor credits and
free-of-charge services related to the replacement of certain wireless cell site
equipment.10.
    
    COMMON STOCKDuring the six months ended June 30, 2007 and 2006, the Company issued common stock
under its Amended and Restated 2001 Stock Incentive Plan and as a result of the
exercise of stock options.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 and six months ended June 30, 2007 and 2006 (in thousands):
 Three Months ended June 30,
    
    Six Months ended June 30,2007
    
    2006
    
    2007
    
    2006Basic weighted-average shares outstanding
    
    
    20,033
    
    
    
    19,165
    
    
    
    19,997
    
    
    
    19,034Effect of dilutive stock options and
nonvested
stock
    
    
    218
    
    
    
    287
    
    
    
    243
    
    
    
    325Total diluted weighted-average shares
outstanding
    
    
    20,251
    
    
    
    19,452
    
    
    
    20,240
    
    
    
    19,359
 Anti-dilutive shares of common stock totaling approximately 117,881 and 252,000 for the
three months ended June 30, 2007 and 2006, respectively, and 117,881 and 367,000 for
the six months ended June 30, 2007 and 2006, respectively, were not included in the
computation of diluted earnings per share and diluted weighted-average shares
outstanding because the exercise prices of these options were greater than the average
market price of the common stock during the respective periods. At June 30, 2007 and
2006, the Company had total options outstanding of approximately 541,000 and 1,185,000,
respectively, and nonvested shares outstanding of approximately 243,000 and 100,000,
respectively.
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 The Company adopted the provisions of FSP No. FAS 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-average share calculation.Cash dividends per share of common stock were $0.12 and $0.10 for the three months ended June
30, 2007 and 2006, respectively, and $0.24 and $0.20 for the six months ended June 30, 2007
and 2006, respectively.11.
    
    DEBT INSTRUMENTSLong-term debt consists of the following (in thousands):
 June 30,
    
    
    December 31,2007
    
    
    2006Term loan with interest at 7.32%
    
    $
    37,500
    
    
    $
    40,000Less: Current portion of long-term debt
    
    
    5,000
    
    
    
    5,000Long-term debt
    
    $
    32,500
    
    
    $
    35,000
 On April 18, 2006, the Company entered into a Master Loan Agreement (MLA), which
provides a revolving loan commitment of $40.0 million and incorporated the Companys
existing 7.32% fixed rate $50.0 million term loan. The revolving loan commitment
expires on June 30, 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 matures on December 31, 2014. The term loan will accrue interest at
a fixed annual interest rate of 7.32% with principal repayments of $1.25 million due
quarterly. At June 30, 2007, $37.5 million was outstanding.12.
    
    PENSION AND POSTRETIREMENT PLANSComponents of net periodic benefit cost for the three months ended June 30 (in
thousands):
 Pension Benefits
    
    
    Postretirement Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    629
    
    
    $
    612
    
    
    $
    13
    
    
    $
    12Interest cost
    
    
    788
    
    
    
    724
    
    
    
    126
    
    
    
    115Expected return on plan assets
    
    
    (969
    )
    
    
    (899
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    
    
    
    
    (7
    )
    
    
    (2
    )Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    (31
    )Net periodic benefit cost
    
    $
    449
    
    
    $
    437
    
    
    $
    117
    
    
    $
    94
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Components of net periodic benefit cost for the six months ended June 30 (in
thousands):
 Pension Benefits
    
    
    Postretirement Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    1,222
    
    
    $
    1,224
    
    
    $
    26
    
    
    $
    24Interest cost
    
    
    1,575
    
    
    
    1,448
    
    
    
    252
    
    
    
    230Expected return on plan assets
    
    
    (1,937
    )
    
    
    (1,799
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    (14
    )
    
    
    (4
    )Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    (62
    )Net periodic benefit cost
    
    $
    861
    
    
    $
    874
    
    
    $
    234
    
    
    $
    188
 The Company does not expect to contribute to the pension plan in 2007.At June 30, 2007, the Companys pension and postretirement liabilities were $3.5
million and $8.4 million, respectively. The current portion of the Companys pension
and postretirement liabilities at June 30, 2007 was $2.4 million and $0.8 million,
respectively.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 No. 106-2
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, providing final guidance on accounting for
the Medicare Act. In accordance with FSP No. 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.Under new plan provisions, which were effective January 1, 2006, the Company pays a
fixed annual amount towards each eligible post-65 retirees health care coverage.
Retirees are required to pay all future premium increases in excess of the Companys
current contribution. As future increases are passed on to these retirees, the trend
(which is the rate at which premiums and claims are projected to increase in the
future) will not affect the cost of the plan.
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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 IntroductionCT Communications, Inc. (the Company), 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 announced on May 25, 2007 that it has entered into an Agreement and Plan of
Merger, (the Merger Agreement), with Windstream Corporation, a Delaware corporation
(Windstream), pursuant to which Windstream Marlin, Inc., a wholly owned subsidiary of
Windstream (Merger Sub) will merge with and into the Company (the Merger), with the
Company continuing as the surviving corporation. Pursuant to the Merger Agreement, at the
effective time of the Merger, each outstanding share of common stock of the Company (the
Shares), other than any Shares owned by the Company or any subsidiary of the Company,
Merger Sub or any direct or indirect wholly owned subsidiary of Windstream, will be canceled
and converted automatically into the right to receive $31.50 in cash, without interest. The
Merger is conditioned, on certain customary conditions, including the approval of the Merger
Agreement by the shareholders of the Company, the approval of the Federal Communications
Commission and other regulatory approvals.On July 9, 2007, the Federal Trade Commission notified the Company that its request for early
termination of the waiting period had been granted. On or about July 6, 2007, the Company
distributed to all shareholders of record as of June 28, 2007, a definitive proxy statement
related to a special meeting of shareholders to be held on August 23, 2007. At the special
meeting, the shareholders will consider and vote on the proposal to approve the Merger
Agreement with Windstream. The acquisition is expected to close during the third quarter of
2007. However, factors outside of managements control could delay or prevent completion of
the proposed Merger. A change in control of the Company could trigger modification of terms
of certain plans or agreements including contracts and certain employee benefit arrangements.
The Merger Agreement provides that the Company may be required to pay Windstream a
termination fee of $19 million in certain circumstances. For the six months ended June 30,
2007, the Company recorded $1.8 million of transaction related costs in operating expense
associated with the proposed Merger.During the second quarter of 2007, operating revenue increased 5.2% to $46.3 million, while
operating income decreased 1.8% to $4.7 million compared to the same period in 2006. For the
six months ended June 30, 2007, operating revenue increased 5.3% to $91.7 million, while
operating income increased 9.7% to $10.9 million compared to the same period in 2006. The
Companys incumbent local exchange carrier (ILEC) operating revenue increased 4.1% to $27.2
million for the first quarter of 2007 compared to the same 2006 period and 4.4% to $54.3
million for the six months ended June 30, 2007 compared to the same 2006 period. ILECs
operating revenue included a $1.0 million increase in universal
service revenue based on the final 2006 cost study. Wireless operating revenue increased 9.2% to $10.6 million
for the three months ended June 30, 2007 compared to the same 2006 period and 7.9% to $20.3
million for the six months ended June 30, 2007 compared to the same 2006 period, with a 4.9%
increase in subscribers.Net income for the Company was $4.0 million and $8.6 million for the three and six months
ended June 30, 2007, respectively, compared to $3.9 million and $61.3 million for the three
and six months ended June 30, 2006, respectively. Diluted earnings per share were $0.20 and
$0.42 for the three and six months ended June 30, 2007, respectively, compared to $0.20 and
$3.17 for the three and six months ended June 30, 2006, respectively. For the six months
ended June 30, 2007, the Company recorded $1.8 million of transaction related costs in
operating expense associated with the proposed Merger. Net income and diluted earnings per
share for the six months ended June 30, 2006 included $89.2 million of equity income of
unconsolidated companies as a result of the Palmetto MobileNet, L.P. (Palmetto)
transaction.On March 15, 2006, 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 $89.2
million and received a pre-tax cash distribution from Palmetto of $97.4 million as proceeds
from the sale. In August 2006, the Company sold its remaining investment in Palmetto for $4.2
million and recorded a gain of $0.8 million as a result of this transaction. Proceeds from
this transaction were invested in federal and state tax-exempt auction-rate securities, of
which the Company had $92.6 million invested at June 30, 2007.
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##### Table of Contents



Industry and Operating TrendsThe telecommunications industry is highly competitive and characterized by regulatory
uncertainty and high capital investment in technology. Industry participants are faced with
the challenge of adapting their organizations, services, processes and systems to this
environment.The Company has expanded its core businesses through the development of integrated product
and service offerings, investment in growth initiatives and targeted marketing efforts to
efficiently identify and obtain customers. The Company continues to focus on maximizing its
wireline businesses by investing to enhance its broadband network capabilities, cross-selling
bundled products and packages and growing its customer base.The Companys ILEC is facing more competitive pressure than at any other time in its history.
Wireless providers and competitive local exchange carriers (CLECs) have targeted the
Companys customers and will continue to promote low cost, flexible communications
alternatives. 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 likely benefited
from such substitution.Access line losses in recent years have also been impacted by the adoption of broadband
services by customers that had traditionally subscribed to dial-up Internet service. As
customers switch to broadband services, they no longer need a second landline for use with
their dial-up Internet service. If such a landline is replaced with a Company broadband
connection, then the Company can offset, at least partially, the lost landline revenue
through revenues from broadband services provided to the customer.Cable telephony 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.Time Warner Cable offers cable television, cable telephone and Internet service in most of
the Companys service territories and launched cable telephone service in the Companys ILEC
territory in July 2006. The Company has taken, and will continue to take, several steps to
position it to address competition from cable telephone services and to better position the
Company in the markets in which it operates. Prior to the introduction of cable telephone
service, and through the second quarter of 2007, the Company continued its aggressive
marketing campaigns and product development designed to further position the Company as a
leading broadband provider in the marketplace. The Company has adopted a strategy based on
delivering superior broadband service capabilities to capture and retain the broadband
relationship with customers. The Companys plan involves leveraging that relationship by
bundling multiple products and services with attractive value pricing to expand the revenue
opportunity with each customer.The Company began implementing this strategy in 2004, and in 2005 completed its initial 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 higher rate than offered
by the ILECs competitors. Broadband customer growth has continued to accelerate in the ILEC
with the availability of higher bandwidth services.Broadband customers increased by 5,886 or 24.9% from June 30, 2006, to end the second quarter
of 2007 at 29,547. Broadband penetration was 24.1% of ILEC lines and 23.5% of Greenfield
lines at June 30, 2007. Maintaining superior broadband service capabilities has and will
continue to be central to the Companys competitive strategy.The Company has also been working 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. A majority of the Companys ILEC customers can be served with aerial fiber
optic facilities that can be deployed at a lower capital cost than buried fiber facilities.
In addition, the Company has begun placing fiber to the home in select new developments. On
May 11, 2006, the Company executed a franchise agreement with the City of Concord, the
largest city in the Companys ILEC territory, permitting the Company to offer video services
within the city. In July 2006, the State of North Carolina passed legislation that will
significantly aid the Company in its efforts to provide video services by allowing the
Company to avoid lengthy video franchise procurement processes and uneconomic build-out
requirements.
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##### Table of Contents



The Company launched a video trial to select customers in the ILEC service territory at the
end of the first quarter of 2007. The trial participants receive video, broadband, and voice
services delivered through fiber optic facilities, which are part of the Companys fiber
initiative that passed over approximately 18,000 ILEC homes at the end of the second quarter
of 2007. The video service offered to customers participating in this trial includes a fully
competitive channel line-up and high definition programming and digital video recording
(DVR) capabilities. Initial broadband service download speeds for customers in this trial
are up to 15 Mbps.The initial investment in video head-end and signal processing equipment was substantially
complete by March 31, 2007. The Company has continued to deploy aerial fiber optic cable in
2007 to support the delivery of voice, video and data products to select ILEC customers.The Companys capital expenditures for the six months ended June 30, 2007, were $21.1 million
compared to $13.1 million for the same 2006 period. The Company was required to move forward
with the replacement of certain wireless cell site equipment as mandated by Cingular Wireless
(Cingular) and expects to spend a total of approximately $4 million to complete this
project.In 2001, the Company entered into a Joint Operating Agreement (JOA) with Cingular. Under
the JOA, the Company purchases pre-defined services from Cingular, such as switching, and
remains subject to certain conditions including technology, branding and service offering
requirements. Products and services are co-branded with Cingular. The Company has the ability
to bundle wireless services with wireline products and services and can customize pricing
plans for bundled services based on its customers needs. Additionally, the JOA with Cingular
allows the Company to benefit from their nationally recognized brand and nationwide network,
provides access to favorable purchasing discounts for cell site electronics, handsets and
equipment, and enables the Company to participate in shared market advertising.The JOA may at times require the Company to implement technical changes to make its network
consistent with Cingulars technical standards. As a result, the Company may be required to
implement certain technical changes that, while appropriate for Cingulars network, may not
provide attractive returns on capital investment for the Company. The Company is currently
exploring with Cingular the implementation of several new technical standards. The next
generation wireless data technology, Universal Mobile Telecommunications System (UMTS), a
technology that may ultimately support higher data transfer speeds, is under development and
may be deployed beginning in 2008. In addition, Cingular has required the Company to replace
certain wireless cell site equipment to comply with Cingulars plans to migrate North
Carolina wireless cell site equipment to another vendor. This project, which is now underway,
is expected to be completed in the third quarter of 2007 at a total net cash outlay of
approximately $4 million. During the second quarter of 2007, the Company recognized a loss of
$0.3 million related to this project. AT&T, through its acquisition of Bell South
Corporation in December 2006, acquired control of Cingular. The Company does not believe this
event will have a material impact on the Companys wireless business.Although the wireless telecommunications industry continues 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. Wireless industry competition and high customer
penetration rates have caused and will likely continue to cause the Companys subscriber
growth rate to moderate in comparison to historical growth rates.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 FCC at the federal level, and state utility commissions, principally the
North Carolina Utilities Commission (NCUC).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.The Companys ILEC derives a material portion of its revenue from USF mechanisms administered
by the National Exchange Carrier Association (NECA). NECA administers the funding through
revenue pooling arrangements in which
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##### Table of Contents



local exchange carriers participate. The Companys ILEC participates in the NECA common line
and traffic sensitive interstate access pools and received Interstate Common Line Support
(ICLS) funds. The Company currently does not qualify for USF local switching support or
USF high cost loop support.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 tariff with rates based on its projected cost and demand. As a participant in the
NECA traffic sensitive pool, the Company charges NECA tariff rates that are determined by
averaging projected costs and demand among all pool members. The ILECs expected interstate
access revenues from the traffic sensitive pool are based on expenses plus a return on
investment. The Company shares the risk of reductions or increases in demand for its services
with hundreds of other telephone companies in a number of different markets.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 Companys ILEC, CLEC, and Greenfield businesses also receive intercarrier compensation
for the use of their 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.The FCC, and possibly Congress, is expected to continue to devote resources to the
consideration of USF and intercarrier compensation reform in 2007 and future years, and it is
possible that action taken by those governmental entities would result in a reduction in the
amount of revenue the ILEC receives from those sources. On February 10, 2005, the FCC
announced adoption of a Further Notice of Proposed Rule Making for Intercarrier Compensation
Reform. The text of the FCCs notice was released on March 3, 2005. On July 24, 2006, the
National Association of Regulatory Utility Commissioners Task Force on Intercarrier
Compensation filed a proposed reform plan with the FCC. This proposal, commonly called the
Missoula Plan, proposed to eliminate distinctions between traffic types for a majority of the
lines in the U.S., establish default interconnection architecture, increase subscriber line
charges, and replace lost revenue with direct payments from the USF or a similar fund. The
Company is generally supportive of the Missoula Plan in its current form and is currently
participating in industry associations that are working to further evaluate the proposal,
develop recommended modifications and file comments with the FCC.The federal universal service program is under increasing scrutiny from legislators,
regulators and service providers due to the growth in the demands on the fund and changes in
the telecommunications industry. As a result of the growth in the demands on the fund, the
FCC has increased the USF customer surcharge from the 9.7% charge applicable to the first
quarter of 2007 to 11.3% for the third quarter of 2007. Although it is generally
contemplated that companies subject to this charge will pass it on to their customers, the
Company in the case of certain service offerings or customer groups elects not to do so
because competitors offerings are not subject to the charge. Accordingly, increases in the
rate imposed by the FCC will generally result in a decrease in the Companys operating
margins on those services where charges are not passed on to customers. In addition, the
rate increase creates additional pressure on regulators and legislators to reform the
universal service system.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 the FCC has recently attempted to address some of the
regulatory disparities. In 2004, the FCC issued an order requiring VoIP providers to provide
911 service to their customers, but have not yet addressed other issues raised in that
proceeding, such as access for the disabled and intercarrier compensation.In June 2006, the FCC released a Report and Order and Notice of Proposed Rulemaking, which
addressed USF obligations for VoIP and wireless carriers. The FCC ordered VoIP carriers to
pay into USF and established a safe harbor of 64.9% that those carriers could apply to
determine the interstate portion of their revenues that were subject to the funding
obligations. The order eliminates one competitive advantage enjoyed by many VoIP providers
over traditional telephone service providers, as many such VoIP providers were not
contributing to USF at the levels mandated by the FCC.
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##### Table of Contents



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
Companys price regulation plan allows the Company to increase rates annually for basic local
exchange services up to 12% and for more competitive services by up to 20% annually. The
Companys 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. The plan imposes certain financial penalties if the Company fails to meet service
quality standards established by the NCUC.In May 2006, the Company executed a franchise agreement with the City of Concord permitting
the Company to offer video services within the city. In January 2007, new legislation in
North Carolina took effect that established a statewide franchise structure. Under the new
law, the North Carolina Secretary of State replaces North Carolina counties and cities as the
exclusive franchising authority for video services. To obtain a franchise from the Secretary
of State, the Company must file a notice designating the areas within which it desires to
provide video services. To maintain the authority granted by the notice filing, the Company
must pass one or more homes with its service no later than 120 days after the notice is
filed. No build-out requirements are mandated in the franchise law. The Company believes
that the new law will significantly aid its efforts to provide video services over its
network by allowing the Company to avoid lengthy franchise procurement processes with various
local governments and uneconomic build-out requirements that are frequently imposed by those
local governments. The Company has now filed for and received authorization to provide
services in Cornelius, North Carolina.In March 2007, the Company petitioned the FCC for a waiver from a requirement that all video
set-top boxes deployed after July 1, 2007 have security functions that are separate from
navigation functions. The Companys petition requests an 18 month extension of the current
deadline, during which time the Company would explore downloadable security systems and
provide boxes with separate integration, to the extent available, upon customer request. The
Company also provided the FCC with alternative relief options in the event the FCC found the
primary request unacceptable. On June 29, 2007, the FCC granted temporary relief to the
Company for basic set top boxes, but not for boxes providing high definition or digital video
recorder capabilities. The Company is currently evaluating the impact of the FCCs order on
the Companys video services offerings, but the Company does not believe the order will not
have a material impact on the overall financial results of the Company.The Companys CLEC and Greenfield businesses rely in part on unbundled network elements
obtained from the applicable incumbent local exchange carrier. FCC rules changes over the
past several years have resulted in increases in the cost of some of those unbundled network
elements, including high capacity transport elements and unbundled network element platform
(UNE-P). The Company continues to utilize alternative and more cost-effective transport
elements where available to minimize the Companys transport costs. The Company has executed
a new interconnection agreement with BellSouth that addresses those elements that remain
subject to the federal interconnection rules. The Company also executed commercial agreements
with certain incumbent local exchange carriers that permit the Company to maintain and lease
additional UNE-P lines from those carriers at negotiated rates. To lower expenses and improve
service levels, the Company primarily targets new customers that can be served by owned or
co-located facilities and continues to pursue opportunities to bring existing customers
served with leased elements on to the Companys network.In April 2007, the FCC released an order strengthening existing rules regarding the use and
disclosure of Customer Proprietary Network Information (CPNI). The rules require customers
to use passwords when requesting call detail records from their telecommunications carrier.
In addition, the new rules require telecommunications carriers to notify customers if their
confidential information was breached. The new rules are expected to be effective beginning
December 8, 2007.Results of OperationsStatements of Financial Accounting Standards (SFAS) No. 131 Disclosures about Segments of
an Enterprise and Related Information, establishes standards for reporting information about
operating segments, which requires segmentation based on internal organization and reporting
of revenue and operating income based on internal accounting methods. Operating segments are
defined as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in assessing performance.
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##### Table of Contents



Historically, the Company has reported its results of operations in six separate operating
segments as defined by SFAS No. 131. These six segments were ILEC, CLEC, Wireless,
Greenfield, Internet, and Palmetto. During 2006, the Company sold its investment in Palmetto
and as a result no longer reports results for that segment after December 31, 2006. During
the first quarter of 2007, the Company launched its video product to trial customers located
within the ILEC service territory, and as a result, the Company evaluated whether video
should be accounted for as a separate operating segment or as a product within the Companys
existing operating segments. This in turn led the Company to reassess how it manages the
business and its assumptions, methodologies and reporting classifications associated with all
of its reporting segments. In response to the increased focus on integrated
telecommunications bundled offerings and the addition of new product offerings, the Company
has modified its financial reporting processes to present revenues and expenses by defined
customer groups. This method of presentation will report revenues and expenses by customer
relationship to aid in decision-making. As a result of the restructuring of the Companys
financial reporting process and the assessment performed, the Company modified its segment
reporting to report four operating segments: ILEC, CLEC, Greenfield, and Wireless, effective
January 1, 2007. As a result, the former Internet segment results have been included in the
ILEC, CLEC, and Greenfield segment results for all periods presented. All other business
units, investments and operations of the Company that do not fall under these segments and do
not meet reporting guidelines and thresholds are reported under Other.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, 2006. The Companys management evaluates performance based on certain
operating metrics, including operating revenues and operating income. Intersegment
transactions are eliminated. All segments reported below provide services primarily within
North Carolina. Amounts as of and for the three and six months ended June 30, 2006 have been
recast to conform to the current period presentation.In September 2006, the Securities and Exchange Commission (SEC) issued SAB No. 108 to
eliminate the diversity of practice surrounding how public companies quantify financial
statement misstatements. The Company adopted SAB No. 108 on December 31, 2006 and recorded
related adjustments using the cumulative effect transition method as of January 1, 2006. The
Company has recast its first and second quarter 2006 financial results to reflect the impact
of the SAB No. 108 items.The following discussion reviews the results of the Companys consolidated operations and
specific results within each reportable segment.
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##### Table of Contents



Consolidated Operating Results(in thousands, except lines and customers)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeOperating revenue:Customer recurring:Wireline
    
    $
    18,355
    
    
    $
    18,832
    
    
    $
    (477
    )
    
    $
    36,936
    
    
    $
    37,594
    
    
    $
    (658
    )Wireless
    
    
    6,673
    
    
    
    5,930
    
    
    
    743
    
    
    
    13,032
    
    
    
    11,583
    
    
    
    1,449Broadband & dial-up
    
    
    3,891
    
    
    
    3,408
    
    
    
    483
    
    
    
    7,787
    
    
    
    6,589
    
    
    
    1,198Total customer recurring
    
    
    28,919
    
    
    
    28,170
    
    
    
    749
    
    
    
    57,755
    
    
    
    55,766
    
    
    
    1,989Universal service
    
    
    2,376
    
    
    
    1,169
    
    
    
    1,207
    
    
    
    3,790
    
    
    
    2,299
    
    
    
    1,491Access & interconnection
    
    
    6,989
    
    
    
    7,000
    
    
    
    (11
    )
    
    
    14,073
    
    
    
    13,793
    
    
    
    280Wireless roaming/settlement
    
    
    3,381
    
    
    
    3,259
    
    
    
    122
    
    
    
    6,390
    
    
    
    6,176
    
    
    
    214Other
    
    
    4,641
    
    
    
    4,426
    
    
    
    215
    
    
    
    9,710
    
    
    
    9,085
    
    
    
    625Total operating revenue
    
    
    46,306
    
    
    
    44,024
    
    
    
    2,282
    
    
    
    91,718
    
    
    
    87,119
    
    
    
    4,599Operating expense:Cost of service
    
    
    15,454
    
    
    
    14,673
    
    
    
    781
    
    
    
    30,736
    
    
    
    29,658
    
    
    
    1,078Selling, general & administrative
    
    
    18,217
    
    
    
    16,547
    
    
    
    1,670
    
    
    
    34,316
    
    
    
    31,462
    
    
    
    2,854Depreciation
    
    
    7,893
    
    
    
    7,973
    
    
    
    (80
    )
    
    
    15,801
    
    
    
    16,093
    
    
    
    (292
    )Total operating expense
    
    
    41,564
    
    
    
    39,193
    
    
    
    2,371
    
    
    
    80,853
    
    
    
    77,213
    
    
    
    3,640Operating income
    
    
    4,742
    
    
    
    4,831
    
    
    
    (89
    )
    
    
    10,865
    
    
    
    9,906
    
    
    
    959Other income
    
    
    1,516
    
    
    
    1,370
    
    
    
    146
    
    
    
    2,225
    
    
    
    90,113
    
    
    
    (87,888
    )Income before taxes
    
    
    6,258
    
    
    
    6,201
    
    
    
    57
    
    
    
    13,090
    
    
    
    100,019
    
    
    
    (86,929
    )Income taxes
    
    
    2,286
    
    
    
    2,258
    
    
    
    28
    
    
    
    4,492
    
    
    
    38,710
    
    
    
    (34,218
    )Net income
    
    $
    3,972
    
    
    $
    3,943
    
    
    $
    29
    
    
    $
    8,598
    
    
    $
    61,309
    
    
    $
    (52,711
    )Operating margin
    
    
    10.2
    %
    
    
    11.0
    %
    
    
    
    
    
    
    11.8
    %
    
    
    11.4
    %Capital expenditures
    
    $
    10,579
    
    
    $
    6,064
    
    
    $
    4,515
    
    
    $
    21,082
    
    
    $
    13,051
    
    
    $
    8,031Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388,008
    
    
    
    383,583
    
    
    
    4,425Wired access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,270
    
    
    
    159,623
    
    
    
    (3,353
    )Wireless subscribers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,297
    
    
    
    47,932
    
    
    
    2,365Broadband and dial-up customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,459
    
    
    
    29,255
    
    
    
    4,204
 Three Months Ended June 30Operating revenue for the three months ended June 30, 2007 increased 5.2% to $46.3 million
compared to $44.0 million for the three months ended June 30, 2006. The increase in revenue
was largely attributable to a $1.2 million increase in universal service revenue primarily
related to a true-up of the 2006 cost study and higher 2007 recoveries based on current cost
study projections, and a $0.7 million increase in customer recurring revenue. The increase
in customer recurring revenue was driven by a $0.7 million increase in wireless revenue and a
$0.5 million increase in broadband revenue, which were partially offset by a decrease of $0.5
million in wireline revenue due to access line losses. Broadband customers increased 24.9%,
CLEC customers increased 7.1%, Greenfield customers increased 5.8% and wireless subscribers
increased 4.9%, compared to the end of the second quarter of 2006.Operating expense for the three months ended June 30, 2007 increased 6.0% to $41.6 million
compared to the three months ended June 30, 2006. The increase in operating expense was
attributable to a $1.7 million increase in selling,
 24




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general and administrative (SG&A) expense and a $0.8 million increase in cost of service.
The increase in SG&A expense was largely due to $1.7 million of transaction related costs
associated with the proposed Merger, of which $0.8 million was stock compensation expense
related to fair market value adjustments for the Companys stock units held in its
nonqualified deferred compensation plan and $0.9 million was related to professional fees.
The increase in cost of service was largely due to a loss of $0.3 million related to the
replacement of certain wireless cell site equipment, a $0.3 million increase in personnel
expense and an increase in USAC contribution rates.Other income was $1.5 million for the three months ended June 30, 2007 compared to $1.4
million for the same 2006 period. Included in other income were gains on sales of investments
of $1.0 million and $0.8 million for the three months ended June 30, 2007 and 2006,
respectively.Income tax expense was $2.3 million for both the three months ended June 30, 2007 and 2006,
for effective tax rates of 36.5% and 36.4%, respectively.The
Company will incur expenditures necessary to facilitate the proposed
Merger of the Company with Windstream in accordance with the Merger
Agreement executed on May 25, 2007. The Company expects that
these expenditures could be significant. Certain of these costs may
be non-deductible for income tax purposes if the Merger is completed.
During the three months ended June 30, 2007, $0.7 million
of the transaction-related expenses incurred may be
non-deductible if the transaction closes and could result in a
potential future tax liability of $0.3 million.Six Months Ended June 30Operating revenue for the six months ended June 30, 2007 increased to $91.7 million compared
to $87.1 million for the prior year. The increase in revenue was largely attributable to a
$2.0 million increase in customer recurring revenue, a $1.5 million increase in universal
service revenue, and a $0.6 million increase in other revenue. The increase in customer
recurring revenue resulted from an increase in wireless revenue of $1.4 million driven by a
4.9% increase in subscribers and an increase in the average revenue generated per subscriber,
and a $1.4 million increase in broadband revenue driven by a 24.9% increase in broadband
customers. The increase in universal service revenue was primarily due to a true-up of the
2006 cost study and higher 2007 recoveries based on current cost study projections received
in the second quarter of 2007. Other revenue increased due to higher telephone system sales
and directory revenue.Operating expense for the six months ended June 30, 2007 increased 4.7% to $80.9 million
compared to the six months ended June 30, 2006. The increase in operating expense was
attributable to a $2.9 million increase in SG&A expense and an $1.1 million increase in cost
of service. The increase in SG&A expense was largely due to $1.8 million of transaction
related costs associated with the proposed Merger, of which $0.8 million was stock
compensation expense related to fair market value adjustments for the Companys stock units
held in its nonqualified deferred compensation plan and $1.0 million was associated with
professional fees. The increase in cost of service was largely due to an increase of $0.5
million in network expense, a loss of $0.3 million related to the replacement of certain
wireless cell site equipment and year over year increases in USAC contribution rates.Other income was $2.2 million for the six months ended June 30, 2007 compared to $90.1
million for the same 2006 period. During the first six months of 2006, the Company recognized
$89.2 million, its portion of the gain on the sale of Palmettos assets, in equity income in
unconsolidated companies. Included in other income were gains on sales of investments of $1.0
million and $0.9 million for the six months ended June 30, 2007 and 2006, respectively.Income tax expense decreased to $4.5 million for the six months ended June 30, 2007, compared
to income tax expense of $38.7 million for the six months ended June 30, 2006. In addition,
the effective rate decreased to 34.3% for the first six months of 2007 compared to 38.7% for
the same prior period in 2006 due to higher tax-exempt interest income from the Companys
increased investment in federal and state tax-exempt auction-rate securities.
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##### Table of Contents



ILEC(in thousands, except lines)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeOperating revenue:Customer recurring:Wireline
    
    $
    12,825
    
    
    $
    13,270
    
    
    $
    (445
    )
    
    $
    25,859
    
    
    $
    26,502
    
    
    $
    (643
    )Broadband & dial-up
    
    
    2,839
    
    
    
    2,490
    
    
    
    349
    
    
    
    5,578
    
    
    
    4,792
    
    
    
    786Total customer recurring
    
    
    15,664
    
    
    
    15,760
    
    
    
    (96
    )
    
    
    31,437
    
    
    
    31,294
    
    
    
    143Universal service
    
    
    2,376
    
    
    
    1,169
    
    
    
    1,207
    
    
    
    3,790
    
    
    
    2,299
    
    
    
    1,491Access & interconnection
    
    
    5,141
    
    
    
    5,351
    
    
    
    (210
    )
    
    
    10,527
    
    
    
    10,679
    
    
    
    (152
    )Other
    
    
    4,001
    
    
    
    3,825
    
    
    
    176
    
    
    
    8,550
    
    
    
    7,756
    
    
    
    794Total operating revenue
    
    
    27,182
    
    
    
    26,105
    
    
    
    1,077
    
    
    
    54,304
    
    
    
    52,028
    
    
    
    2,276Operating expense:Cost of service
    
    
    5,769
    
    
    
    5,279
    
    
    
    490
    
    
    
    11,417
    
    
    
    10,601
    
    
    
    816Selling, general & administrative
    
    
    10,693
    
    
    
    9,895
    
    
    
    798
    
    
    
    20,614
    
    
    
    18,458
    
    
    
    2,156Depreciation
    
    
    5,145
    
    
    
    5,347
    
    
    
    (202
    )
    
    
    10,300
    
    
    
    10,825
    
    
    
    (525
    )Total operating expense
    
    
    21,607
    
    
    
    20,521
    
    
    
    1,086
    
    
    
    42,331
    
    
    
    39,884
    
    
    
    2,447Operating income
    
    $
    5,575
    
    
    $
    5,584
    
    
    $
    (9
    )
    
    $
    11,973
    
    
    $
    12,144
    
    
    $
    (171
    )Operating margin
    
    
    20.5
    %
    
    
    21.4
    %
    
    
    
    
    
    
    22.0
    %
    
    
    23.3
    %Capital expenditures
    
    $
    5,858
    
    
    $
    3,298
    
    
    $
    2,560
    
    
    $
    13,410
    
    
    $
    7,041
    
    
    $
    6,369Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    272,908
    
    
    
    262,648
    
    
    
    10,260Business access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,129
    
    
    
    28,404
    
    
    
    (275
    )Residential access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,512
    
    
    
    80,952
    
    
    
    (6,440
    )Total access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,641
    
    
    
    109,356
    
    
    
    (6,715
    )Broadband DSL customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,684
    
    
    
    19,978
    
    
    
    4,706Broadband high-speed customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    75
    
    
    
    16Total broadband customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,775
    
    
    
    20,053
    
    
    
    4,722Dial-up customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,912
    
    
    
    5,594
    
    
    
    (1,682
    )
 Three Months Ended June 30Operating revenue for the three months ended June 30, 2007 increased 4.1% to $27.2 million
compared to the three months ended June 30, 2006. The increase in operating revenue was
mainly due to a $1.2 million increase in universal service revenue from a true-up of the 2006
cost study and higher 2007 recoveries based on current cost study projections, and a $0.2
million increase in other revenue. These increases were partially offset by a $0.2 million
decrease in access and interconnection revenue and a $0.1 million decrease in customer
recurring revenue. The decrease in customer recurring revenue was due to a $0.5 million
decrease in wireline customer revenue related to access line losses, which was partially
offset by a $0.4 million increase in broadband revenue driven by a 23.5% increase in
broadband customers.Operating expense for the three months ended June 30, 2007 increased 5.3% to $21.6 million
compared to the three months ended June 30, 2006. The increase in operating expense was
attributable to a $0.8 million increase in SG&A expense and a $0.5 million increase in cost
of service. The increase in SG&A expense was driven by transaction related costs associated
with the proposed Merger and a $0.3 million increase in general administrative expense. These
increases in operating expense were partially offset by a $0.2 million decrease in
depreciation expense. Operating margin for the three months ended June 30, 2007 decreased to
20.5% from 21.4% during the three months ended June 30, 2006.
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##### Table of Contents



The Company launched a video trial to select customers in the ILEC service territory at the
end of the first quarter of 2007.
The trial participants receive video, data and voice services delivered through fiber optic
facilities, which are part of the Companys fiber initiative that passed over approximately
18,000 ILEC homes at the end of the second quarter of 2007. The video service offered to
customers participating in this trial includes a fully competitive channel line-up and high
definition programming and DVR capabilities. Initial broadband service download speeds for
customers in this trial are up to 15 Mbps.Capital expenditures for the three months ended June 30, 2007 were 21.6% of ILEC operating
revenue compared to 12.6% of revenue for the three months ended June 30, 2006. The increase
in capital expenditures primarily related to the Companys strategic initiative to deploy
fiber optic facilities and related equipment and software for the deployment of video and
data services.Six Months Ended June 30Operating revenue for the six months ended June 30, 2007 increased 4.4% to $54.3 million
compared to the six months ended June 30, 2006. The increase in operating revenue was mainly
due to a $1.5 million increase in universal service revenue resulting from a true-up of the
2006 cost study and higher 2007 recoveries based on current cost study projections, an $0.8
million increase in other revenue, and a $0.1 million increase in customer recurring.
Partially offsetting these increases in operating revenue was a $0.2 million reduction in
access and interconnection revenue. The increase in other revenue for the six months ended
June 30, 2007 related primarily to increased telephone systems sales and higher directory
revenue. The $0.1 million increase in customer recurring revenue was due to a $0.8 million
increase in broadband revenue driven by a 23.5% increase in broadband customers, partially
offset by a $0.6 million decrease in wireline revenue attributable to a 6.1% decline in
access lines and a $0.2 million decrease in dial-up revenue. 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.Operating expense for the six months ended June 30, 2007 increased 6.1% to $42.3 million
compared to the six months ended June 30, 2006. The increase in operating expense was due to
a $2.2 million increase in SG&A expense and an $0.8 million increase in cost of service. The
increase in SG&A expense was comprised of a $1.2 million increase in personnel expense
primarily attributable to transaction related costs associated with the proposed Merger, a
$0.8 million increase in general administrative expense and a $0.2 million increase in
selling expense. The increase in administrative expense was partially due to video
administrative expense, which was included in the Companys Other operating segment prior
to the launch of video services in the first quarter of 2007. The increase in selling expense
was largely attributable to an increase in commission expense in the first six months of 2007
compared to the same 2006 period. Operating margin for the six months ended June 30, 2007
decreased to 22.0% from 23.3% during the six months ended June 30, 2006.Capital expenditures for the six months ended June 30, 2007 were 24.7% of ILEC operating
revenue compared to 13.5% of revenue for the six months ended June 30, 2006. The increase in
capital expenditures primarily related to the Companys strategic initiative to deploy fiber
optic facilities and related equipment and software for the deployment of video and data
services.
 27




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##### Table of Contents



CLEC(in thousands, except lines)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeOperating revenue:Customer recurring:Wireline
    
    $
    3,458
    
    
    $
    3,589
    
    
    $
    (131
    )
    
    $
    6,917
    
    
    $
    7,179
    
    
    $
    (262
    )Broadband
    
    
    593
    
    
    
    595
    
    
    
    (2
    )
    
    
    1,330
    
    
    
    1,189
    
    
    
    141Total customer recurring
    
    
    4,051
    
    
    
    4,184
    
    
    
    (133
    )
    
    
    8,247
    
    
    
    8,368
    
    
    
    (121
    )Access & interconnection
    
    
    1,274
    
    
    
    1,127
    
    
    
    147
    
    
    
    2,381
    
    
    
    2,082
    
    
    
    299Other
    
    
    52
    
    
    
    43
    
    
    
    9
    
    
    
    114
    
    
    
    123
    
    
    
    (9
    )Total operating revenue
    
    
    5,377
    
    
    
    5,354
    
    
    
    23
    
    
    
    10,742
    
    
    
    10,573
    
    
    
    169Operating expense:Cost of service
    
    
    2,888
    
    
    
    2,808
    
    
    
    80
    
    
    
    5,748
    
    
    
    5,918
    
    
    
    (170
    )Selling, general & administrative
    
    
    2,195
    
    
    
    2,180
    
    
    
    15
    
    
    
    4,264
    
    
    
    4,216
    
    
    
    48Depreciation
    
    
    700
    
    
    
    728
    
    
    
    (28
    )
    
    
    1,421
    
    
    
    1,443
    
    
    
    (22
    )Total operating expense
    
    
    5,783
    
    
    
    5,716
    
    
    
    67
    
    
    
    11,433
    
    
    
    11,577
    
    
    
    (144
    )Operating income
    
    $
    (406
    )
    
    $
    (362
    )
    
    $
    (44
    )
    
    $
    (691
    )
    
    $
    (1,004
    )
    
    $
    313Operating margin
    
    
    (7.6
    %)
    
    
    (6.8
    %)
    
    
    
    
    
    
    (6.4
    %)
    
    
    (9.5
    %)Capital expenditures
    
    $
    423
    
    
    $
    493
    
    
    $
    (70
    )
    
    $
    768
    
    
    $
    1,773
    
    
    $
    (1,005
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,792
    
    
    
    16,714
    
    
    
    (922
    )Access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,811
    
    
    
    34,372
    
    
    
    2,439Broadband high-speed customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    817
    
    
    
    679
    
    
    
    138
 Three Months Ended June 30Operating revenue and operating expense remained relatively flat for the three months ended
June 30, 2007 compared to the same 2006 period.Capital expenditures were 7.9% of operating revenue for the three months ended June 30, 2007
compared to 9.2% for the same period in 2006.Six Months Ended June 30Operating revenue for the six months ended June 30, 2007 increased $0.2 million to $10.7
million compared to the six months ended June 30, 2006. The increase in operating revenue was
driven by a $0.3 million increase in access and interconnection revenue due to growth in
customer access lines and an increase in access rates. Customer recurring revenue decreased
$0.1 million from the prior year primarily attributable to lower average rates for wireline
customer contract renewals, partially offset by an increase in broadband revenue from new
broadband customers.Operating expense for the six months ended June 30, 2007 decreased 1.2% to $11.4 million
compared to the same period last year primarily due to a decrease in cost of service.
Operating margin for the six months ended June 30, 2007 improved to (6.4%), compared to
(9.5%) for the six months ended June 30, 2006.Capital expenditures for the six months ended June 30, 2007 were 7.1% of CLEC operating
revenue compared to 16.8% of operating revenue for the six months ended June 30, 2006.
Capital expenditures during the six months ended June 30, 2006 related to infrastructure
components required for the Companys migration of its switching networks to an IP-packet
based design.
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##### Table of Contents



Greenfield(in thousands, except lines and projects)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeOperating revenue:Customer recurring:Wireline
    
    $
    2,072
    
    
    $
    1,973
    
    
    $
    99
    
    
    $
    4,160
    
    
    $
    3,913
    
    
    $
    247Broadband
    
    
    459
    
    
    
    323
    
    
    
    136
    
    
    
    879
    
    
    
    608
    
    
    
    271Total customer recurring
    
    
    2,531
    
    
    
    2,296
    
    
    
    235
    
    
    
    5,039
    
    
    
    4,521
    
    
    
    518Access & interconnection
    
    
    574
    
    
    
    522
    
    
    
    52
    
    
    
    1,165
    
    
    
    1,032
    
    
    
    133Other
    
    
    70
    
    
    
    64
    
    
    
    6
    
    
    
    135
    
    
    
    125
    
    
    
    10Total operating revenue
    
    
    3,175
    
    
    
    2,882
    
    
    
    293
    
    
    
    6,339
    
    
    
    5,678
    
    
    
    661Operating expense:Cost of service
    
    
    1,288
    
    
    
    1,327
    
    
    
    (39
    )
    
    
    2,525
    
    
    
    2,710
    
    
    
    (185
    )Selling, general & administrative
    
    
    1,223
    
    
    
    1,216
    
    
    
    7
    
    
    
    2,349
    
    
    
    2,325
    
    
    
    24Depreciation
    
    
    1,129
    
    
    
    1,032
    
    
    
    97
    
    
    
    2,243
    
    
    
    2,046
    
    
    
    197Total operating expense
    
    
    3,640
    
    
    
    3,575
    
    
    
    65
    
    
    
    7,117
    
    
    
    7,081
    
    
    
    36Operating income
    
    $
    (465
    )
    
    $
    (693
    )
    
    $
    228
    
    
    $
    (778
    )
    
    $
    (1,403
    )
    
    $
    625Operating margin
    
    
    (14.6
    %)
    
    
    (24.0
    %)
    
    
    
    
    
    
    (12.3
    %)
    
    
    (24.7
    %)Capital expenditures
    
    $
    1,222
    
    
    $
    1,376
    
    
    $
    (154
    )
    
    $
    2,357
    
    
    $
    2,995
    
    
    $
    (638
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,133
    
    
    
    31,964
    
    
    
    1,169Access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,818
    
    
    
    15,895
    
    
    
    923Broadband DSL customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,955
    
    
    
    2,929
    
    
    
    1,026Total projects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    124
    
    
    
    6
 Three Months Ended June 30Operating revenue for the three months ended June 30, 2007 increased 10.2% to $3.2 million
compared to the three months ended June 30, 2006. The increase in operating revenue was due
to a $0.2 million increase in customer recurring revenue driven by a 35.0% increase in
broadband DSL customers and a 5.8% increase in access lines.Operating expense for the three months ended June 30, 2007 was relatively flat compared to
the same period in 2006. Operating margin for the three months ended June 30, 2007 improved
to (14.6%), compared to (24.0%) for the three months ended June 30, 2006.Capital expenditures for the three months ended June 30, 2007 were 38.5% of Greenfield
operating revenue compared to 47.7% of operating revenue for the three months ended June 30,
2006.Six Months Ended June 30Operating revenue for the six months ended June 30, 2007 increased 11.6% to $6.3 million
compared to the same period last year. The increase in operating revenue was due to a $0.5
million increase in customer recurring revenue, driven by a 35.0% increase in broadband DSL
customers and a 5.8% increase in access lines.Operating expense for the six months ended June 30, 2007 was relatively flat compared to the
same period in 2006. Operating margin for the six months ended June 30, 2007 improved to
(12.3%), compared to (24.7%) for the six months ended June 30, 2006.
 29




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##### Table of Contents



During the six months ended June 30, 2007, the Greenfield business added four preferred
provider projects, bringing the total number of projects to 130. These projects currently
represent a potential of 58,000 access lines once these developments have been completely
built-out. The residential/business line mix of these 130 projects is expected to be over 90%
residential.Capital expenditures for the first six months of 2007 were 37.2% of Greenfield operating
revenue compared to 52.7% of operating revenue for the same period last year.Wireless(in thousands, except subscribers)
 Three months ended June 30,
    
    

Six
months ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    6,673
    
    
    $
    5,930
    
    
    $
    743
    
    
    $
    13,032
    
    
    $
    11,583
    
    
    $
    1,449Wireless roaming/settlement
    
    
    3,381
    
    
    
    3,259
    
    
    
    122
    
    
    
    6,390
    
    
    
    6,176
    
    
    
    214Other
    
    
    518
    
    
    
    494
    
    
    
    24
    
    
    
    911
    
    
    
    1,081
    
    
    
    (170
    )Total operating revenue
    
    
    10,572
    
    
    
    9,683
    
    
    
    889
    
    
    
    20,333
    
    
    
    18,840
    
    
    
    1,493Operating expense:Cost of service
    
    
    5,509
    
    
    
    5,259
    
    
    
    250
    
    
    
    11,046
    
    
    
    10,429
    
    
    
    617Selling, general & administrative
    
    
    3,074
    
    
    
    2,970
    
    
    
    104
    
    
    
    5,939
    
    
    
    5,771
    
    
    
    168Depreciation
    
    
    693
    
    
    
    641
    
    
    
    52
    
    
    
    1,386
    
    
    
    1,276
    
    
    
    110Total operating expense
    
    
    9,276
    
    
    
    8,870
    
    
    
    406
    
    
    
    18,371
    
    
    
    17,476
    
    
    
    895Operating income
    
    $
    1,296
    
    
    $
    813
    
    
    $
    483
    
    
    $
    1,962
    
    
    $
    1,364
    
    
    $
    598Operating margin
    
    
    12.3
    %
    
    
    8.4
    %
    
    
    
    
    
    
    9.6
    %
    
    
    7.2
    %Capital expenditures
    
    $
    2,363
    
    
    $
    491
    
    
    $
    1,872
    
    
    $
    2,627
    
    
    $
    687
    
    
    $
    1,940Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,449
    
    
    
    33,192
    
    
    
    2,257Wireless subscribers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,297
    
    
    
    47,932
    
    
    
    2,365
 Three Months Ended June 30Operating revenue for the three months ended June 30, 2007 increased 9.2% to $10.6 million
compared to the same period last year. The increase in operating revenue was driven by a $0.7
million increase in customer recurring revenue and $0.1 million increase in wireless roaming
and settlement revenue. The increase in customer recurring revenue was driven by a 4.9%
increase in subscribers and an increase in the average revenue generated per subscriber.Operating expense for the three months ended June 30, 2007 increased 4.6% to $9.3 million
compared to the same period last year. The increase in operating expense was primarily
attributable to a $0.3 million increase in cost of service and a $0.1 million increase in
SG&A expense. The increase in cost of service was primarily due increased switching costs
associated with customer growth and a loss of $0.3 million related to the replacement of
certain wireless cell site equipment. In addition, cost of service for the three months
ended June 30, 2007 included a credit from a contractual true-up of switching rates of $0.5
million.Capital expenditures for the second quarter of 2007 were 22.4% of operating revenue compared
to 5.1% of operating revenue for the same period last year. The increase was primarily
related to the replacement of certain wireless cell site equipment during the second quarter
of 2007.
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##### Table of Contents



Six Months Ended June 30Operating revenue for the six months ended June 30, 2007 increased 7.9% to $20.3 million
compared to the six months ended June 30, 2006. The increase in operating revenue was driven
by a $1.4 million increase in customer recurring revenue and a $0.2 million increase in
roaming and settlement revenue. The increase customer recurring revenue was driven by a 4.9%
increase in wireless subscribers, and an increase in the average revenue generated per
customer.Operating expense for the six months ended June 30, 2007 increased 5.1% to $18.4 million
compared to the same period in 2006. The increase in operating expense primarily related to a
$0.6 million increase in cost of service, a $0.2 million increase in SG&A expense and a $0.1
million increase in depreciation. The $0.6 million increase in cost of service was largely
due to increased switching costs associated with customer growth and a loss of $0.3 million
related to the replacement of certain wireless cell site equipment. In addition, cost of
service for the six months ended June 30, 2007 included a credit from a contractual true-up
of switching rates of $0.3 million.Capital expenditures for the six months ended June 30, 2007 were 12.9% of operating revenue
compared to 3.6% of operating revenue for the same period last year. The increase was
primarily related to the replacement of certain wireless cell site equipment during the
second quarter of 2007.Other(in thousands)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeOperating expense:Selling, general & administrative
    
    $
    1,032
    
    
    $
    286
    
    
    $
    746
    
    
    $
    1,150
    
    
    $
    692
    
    
    $
    458Depreciation
    
    
    226
    
    
    
    225
    
    
    
    1
    
    
    
    451
    
    
    
    503
    
    
    
    (52
    )Total operating expense
    
    $
    1,258
    
    
    $
    511
    
    
    $
    747
    
    
    $
    1,601
    
    
    $
    1,195
    
    
    $
    406Capital expenditures
    
    $
    713
    
    
    $
    406
    
    
    $
    307
    
    
    $
    1,920
    
    
    $
    555
    
    
    $
    1,365Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,726
    
    
    
    39,065
    
    
    
    (8,339
    )
 Three Months Ended June 30Operating expense for the Companys Other business segment increased $0.7 million to $1.3
million for the three months ended June 30, 2007 compared to the same period in 2006. The
increase in operating expense was primarily due to transaction related costs of $0.8 million
associated with the proposed Merger.Capital expenditures for the three months ended June 30, 2007 increased $0.3 million to $0.7
million from the same period in 2006.Six Months Ended June 30Operating expense for the Companys Other business segment increased $0.4 million to $1.6
million for the six months ended June 30, 2007 compared to the same period in 2006. The
increase in operating expense was primarily due to transaction related costs of $0.9 million
associated with the proposed Merger that were partially offset by decreases in professional
services related to the development of the Companys video service offering which was
launched during the first quarter of 2007 within the ILEC service territory. Accordingly,
expenses related to the Companys video products and services for the six months ended June
30, 2007 are included in the Companys ILEC business segment.Capital expenditures for the six months ended June 30, 2007 increased $1.4 million to $1.9
million from the same period in 2006. The increase was primarily related to investments in IT
systems infrastructure necessary to support the Companys future product and service design
and associated customer experience.
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##### Table of Contents



Liquidity and Capital ResourcesNet cash provided by/used in operating activitiesCash provided by operating activities was $22.2 million for the six months ended June 30,
2007 compared to cash used in operating activities of $2.5 million for the six months ended
June 30, 2006. The change was primarily attributable to estimated tax payments of
approximately $26.1 million during the six months ended June 30, 2006, partially offset by an
increase in operating income for the six months ended June 30, 2007 compared to the same 2006
period.Net cash provided by/used in investing activitiesCash used in investing activities was $22.5 million for the six months ended June 30, 2007
compared to cash provided by investing activities of $7.0 million during the first six months
of 2006. During the first quarter of 2006, as a result of the Palmetto transaction, the
Company received a pre-tax cash distribution from Palmetto of $97.4 million as proceeds from
the sale of Palmetto assets to Alltel. During the first half of 2006, the Company invested
$94.9 million of these proceeds in short-term investments, which are accounted for as
available-for-sale securities. During 2007 the Company purchased an additional $32.7 million
of these securities, and sold $26.9 million. In addition, the Company received $15.6 million
in net proceeds from the sale of wireless spectrum during the six months ended June 30, 2006.
Capital expenditures increased $8.0 million to $21.1 million during the first half of 2007
related to the Companys strategic initiative to deploy fiber optic facilities and related
equipment and software for the deployment of video and broadband services. During the first
six months of 2007, the Company received net proceeds of $4.0 million from sales of
investment securities compared to $1.4 million for the same 2006 period.Net cash used in financing activitiesCash used in financing activities totaled $6.3 million in the first six months of 2007
compared to $10.6 million for the first six months of 2006. During the first six months of
2007, the Company repaid $2.5 million of debt compared to $12.5 million for the same 2006
period. On March 30, 2006, the Company paid in full the $10.0 million outstanding under the
revolving credit facility. In the fourth quarter of 2006, the Company increased its quarterly
cash dividend to $0.12 per share from $0.10 per share. As a result, during the first six
months of 2007, dividends paid were $1.0 million higher than the same 2006 period. During the
first quarter of 2007, proceeds from common stock issuances resulting from stock option
exercises was $0.6 million compared to $4.8 million for the same 2006 period.Anticipated sources and uses of fundsAt June 30, 2007, the fair market value of the Companys short-term investments and
investment securities was $93.8 million, all of which could be pledged to secure additional
borrowing, or sold, if needed for liquidity purposes.On April 18, 2006, the Company entered into a Master Loan Agreement, which provides a
revolving loan commitment of $40.0 million and incorporates the Companys existing term loan.
The commitment expires on June 30, 2011. The proceeds of borrowings under the revolving loan
commitment could 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.The Companys 7.32% fixed rate term loan matures on December 31, 2014. At June 30, 2007,
$37.5 million was outstanding on the term loan. The term loan requires quarterly payments of
interest until maturity on December 31, 2014. Payments of principal are due quarterly through
December 31, 2014 in equal amounts of $1.25 million.The Company has no off-balance sheet transactions, arrangements, obligations, guarantees or
other relationships with unconsolidated entities or other persons that have, or are
reasonably likely to have a material effect on the Companys financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources.The Company anticipates that it has access to adequate resources to meet its currently
foreseeable obligations and capital requirements associated with continued investment and
operations in the ILEC, CLEC, Greenfield, and Wireless units, payments associated with
long-term debt and contractual obligations.
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##### Table of Contents



Cautionary Note Regarding Forward-Looking StatementsThis report, including the foregoing discussion, contains forward-looking statements, as
defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act), that are based on the beliefs of management, as
well as assumptions made by, and information currently available to, management. Management
has based these forward-looking statements on its current expectations and projections about
future events and trends affecting the financial condition and operations of the Companys
business. These forward-looking statements are subject to certain risks, uncertainties and
assumptions about us that could cause actual results to differ materially from those
reflected in the forward-looking statements.Factors that may cause actual results to differ materially from these forward-looking
statements include:
 
    
    the risk that required closing conditions for the Companys proposed Merger with
Windstream, including necessary regulatory and shareholder approvals, will not be
obtained and the proposed Merger will not be consummated as
anticipated,
    
    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 achieve acceptable returns on investments in connection
with the expansion into new businesses, products and services,
    
    the Companys ability to attract and retain key personnel,
    
    the Companys ability to retain its existing customer base against wireless,
cable telephone and other competition in all areas of the business including local
and long distance and broadband 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.
 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 SEC, 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, 2006. All
forward-looking statements should be viewed with caution.
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
 On April 18, 2006, the Company entered into a Master Loan Agreement (MLA), which provides
a revolving loan commitment of $40.0 million and incorporated the Companys existing 7.32%
fixed rate $50.0 million term loan. The revolving loan commitment expires on June 30, 2011.
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 matures on December 31, 2014. The
term loan will accrue interest at a fixed annual interest rate of 7.32% with principal
repayments of $1.25 million due quarterly. At June 30, 2007, $37.5 million was outstanding.At June 30, 2007, the Company had $92.6 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. In addition, the Company
 33




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##### Table of Contents



had $1.1 million in investment securities, which are
classified as available-for-sale.Management believes that reasonably foreseeable movements in interest rates will not have a
material adverse effect on the Companys financial condition or operations.The Company has no off-balance sheet transactions, arrangements, obligations, guarantees or
other relationships with unconsolidated entities or other persons that have, or are
reasonably likely to have, a material effect on the Companys financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
 Item 4.
    
    Controls and Procedures.
 (a)
    
    Disclosure Controls and ProceduresThe Company has evaluated, under the supervision and with the participation of its
management, including the Companys Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of June 30, 2007, in providing reasonable assurance that information required to
be disclosed by the Company in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the SEC
and that such information is accumulated and communicated to our management (including our
Chief Executive Officer and Chief Financial Officer) to allow for timely decisions regarding
required disclosures.(b)
    
    Changes in Internal Control Over Financial ReportingThere have been no significant changes in the Companys internal control over financial
reporting during the second fiscal quarter of 2007 that have materially affected, or that are
reasonably likely to materially affect, the Companys internal control over financial
reporting.
 34




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 None
 
 Item 1A. Risk Factors.
 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, set forth below are cautionary statements identifying important factors in addition
to the risk factors previously disclosed in Item 1A to Part I of the Companys Form 10-K for
the year ended December 31, 2006, that could cause actual events or results to differ
materially from any forward-looking statements made by or on behalf of the Company, whether
oral or written. The Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to maximize to the fullest extent
possible the protections of the safe harbor provisions established in the Private Securities
Litigation Reform Act of 1995. Accordingly, any such statements are qualified in their
entirety by reference to, and are accompanied by, the following important factors that could
cause actual events or results to differ materially from the Companys forward-looking
statements. For additional information regarding forward-looking statements, please read the
Cautionary Note Regarding Forward-Looking Statements section included elsewhere in this
report.In addition to the other information contained or incorporated by reference into this Form
10-Q and the risk factors previously disclosed in Item 1A to Part I of the Companys Form
10-K for the year ended December 31, 2006, prospective investors should consider carefully
the following risk factors before investing in the Companys securities. The risks
described below and in Item 1A to Part I of the Companys Form 10-K for the year ended
December 31, 2006, may not be the only risks the Company faces. Additional risks that the
Company does not yet perceive or that the Company currently believes are immaterial may also
adversely affect the Companys business and the trading price of the Companys securities.Risks relating to the proposed Merger with WindstreamThe Companys proposed Merger with Windstream may be delayed or may not occur at all, which
could negatively affect the market price of our common stock and our business and financial
results.Completion of the Companys Merger with Windstream is conditioned upon the receipt of certain
governmental consents and approvals and shareholders approval. These consents and approvals
may impose conditions on or require divestitures relating to the divisions, operations or
assets of Windstream or the Company. Such conditions or divestitures may jeopardize or delay
completion of the proposed Merger or may reduce the anticipated benefits of the proposed
Merger. Further, no assurance can be given that the required consents and approvals will be
obtained or that the required conditions to closing will be satisfied. If the proposed Merger
is not consummated, it could adversely affect the market price of the Companys common stock
and its business and financial results. The Companys Merger Agreement with Windstream
provides that the Company may be required to pay Windstream a termination fee of $19 million
in certain circumstances.Whether or not the proposed Merger is completed, the uncertainty of the transaction could
cause disruptions in the business of the Company, which could have an adverse effect on the
Companys businesses and financial results.These disruptions could include the following:
 
    
    current and prospective employees may experience uncertainty about their future
roles with the combined company, which might adversely affect the Companys ability
to retain or attract key managers and other employees;
    
    current and prospective customers of the Company may experience variations in
levels of services as the companies prepare for integration and may, as a result,
choose to discontinue their service with us or choose another provider; and
    
    the attention of management of the Company may be diverted from the operation of
the businesses toward the completion of the proposed Merger.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 None
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Item 3. Defaults Upon Senior Securities.
 None
 
 Item 4. Submission of Matters to a Vote of Security Holders.
 An Annual Meeting of Shareholders was held on April 26, 2007.Proxies were solicited for the following matters:
 (1)
    
    To elect to the Board of Directors for the terms set forth below:Three Directors for a three-year term expiring in 2010:
 Votes
    
    VotesFor
    
    WithheldWilliam A. Coley
    
    
    16,855,698
    
    
    
    354,113Barry W. Eveland
    
    
    16,633,603
    
    
    
    576,208Tom E. Smith
    
    
    16,899,390
    
    
    
    310,421
 The names of each of the other directors whose terms of office continued after the Annual
Meeting of Shareholders are as follows: O. Charlie Chewning, Jr., Michael R. Coltrane, Linda
M. Farthing, Raymond C. Groth, James L. Moore Jr., and Cynthia L. Mynatt.
 (2)
    
    To ratify the appointment of Ernst & Young LLP as independent public accountants
of the Company for the 2007 fiscal year.
 Votes
    
    Votes
    
    
    
    BrokerFor
    
    Against
    
    Abstentions
    
    Non-Votes17,175,224
    
    4,437
    
    30,148
    
    
 
 Item 5. Other Information.
 None
 
 Item 6. Exhibits.
 (a)
    
    Exhibits
 Exhibit No.
    
    Description of Exhibit10.1
    
    Agreement and Plan of Merger, dated as of May 25, 2007, by and
among CT Communications, Inc., Windstream Marlin, Inc. and Windstream
Corporation. (Incorporated by Reference to Exhibit 2.1 to CT Communications
Current Report on Form 8-K, filed with the Securities and Exchange Commission
on May 31, 2007.)10.2
    
    Amendment No. 1 to Amended and Restated Rights Agreement, dated
May 25, 2007, between CT Communications, Inc. and American Stock Transfer &
Trust Company, as Rights Agent. (Incorporated by Reference to Exhibit 4.1 to CT
Communications Current Report on Form 8-K, filed with the Securities and
Exchange Commission on May 31, 2007.)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.
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CT COMMUNICATIONS, INC.(Registrant)/s/ Ronald A. MarinoRonald A. MarinoVice President Finance andChief Accounting OfficerAugust 3, 2007Date
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EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibit10.1
    
    Agreement and Plan of Merger, dated
as of May 25, 2007, by and among CT Communications, Inc.,
Windstream Marlin, Inc. and Windstream Corporation.
(Incorporated by Reference to Exhibit 2.1 to CT
Communications Current Report on Form 8-K, filed with the
Securities and Exchange Commission on May 31, 2007.)10.2
    
    Amendment No. 1 to Amended and
Restated Rights Agreement, dated May 25, 2007, between CT
Communications, Inc. and American Stock Transfer & Trust
Company, as Rights Agent. (Incorporated by Reference to
Exhibit 4.1 to CT Communications Current Report on Form 8-K,
filed with the Securities and Exchange Commission on May 31,
2007.)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.
 38