##### 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 September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-19179
 CT COMMUNICATIONS, INC.
  NORTH CAROLINA
    
    56-1837282(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 Statements.Condensed Consolidated Balance SheetsSeptember 30, 2006 (Unaudited) and December 31, 2005
    
    
    2Condensed Consolidated Statements of Income (Unaudited)Three and Nine months Ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited)Three and Nine months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Stockholders Equity (Unaudited)Three and Nine months Ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited)Nine months Ended September 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    36Item 4. Controls and Procedures.
    
    
    37PART II. Other InformationItem 1. Legal Proceedings.
    
    
    38Item 1A. Risk Factors.
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    38Item 3. Defaults Upon Senior Securities.
    
    
    38Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    38Item 5. Other Information.
    
    
    38Item 6. Exhibits.
    
    
    38Signatures
    
    
    39Exhibit Index
    
    
    40Ex-10.1EX-10.2Ex-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)September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,280
    
    
    $
    23,011Short-term investments
    
    
    94,567
    
    
    
    Accounts receivable and unbilled revenue, net of allowance for doubtful accounts
of $255 and $337 at September 30, 2006 and December 31, 2005, respectively
    
    
    15,722
    
    
    
    16,336Wireless spectrum held-for-sale
    
    
    
    
    
    
    15,646Other
    
    
    9,361
    
    
    
    7,220Total current assets
    
    
    141,930
    
    
    
    62,213Investment securities
    
    
    5,345
    
    
    
    5,845Other investments
    
    
    1,854
    
    
    
    1,690Investments in unconsolidated companies
    
    
    3,823
    
    
    
    15,618Property and equipment, net
    
    
    199,994
    
    
    
    200,179Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    19,989
    
    
    
    19,989Other assets
    
    
    6,748
    
    
    
    5,980Total assets
    
    $
    389,589
    
    
    $
    321,420LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    6,250
    
    
    $
    15,000Accounts payable
    
    
    8,164
    
    
    
    8,482Customer deposits and advance billings
    
    
    2,283
    
    
    
    2,538Income taxes payable
    
    
    7,754
    
    
    
    2,107Other accrued liabilities
    
    
    12,208
    
    
    
    11,814Total current liabilities
    
    
    36,659
    
    
    
    39,941Long-term debt
    
    
    36,250
    
    
    
    40,000Deferred income taxes
    
    
    20,790
    
    
    
    25,078Post-retirement and pension benefits
    
    
    16,930
    
    
    
    15,842Other
    
    
    6,217
    
    
    
    4,679Total liabilities
    
    
    116,846
    
    
    
    125,540Stockholders equity:Preferred stock 4.5% series,$100 par value; 614 shares outstanding
at December 31, 2005
    
    
    
    
    
    
    61Common stock, zero par value; 20,026,054 and 18,930,624 shares outstanding
at September 30, 2006 and December 31, 2005, respectively
    
    
    58,616
    
    
    
    42,648Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    
    
    
    
    (307
    )Accumulated other comprehensive income
    
    
    264
    
    
    
    282Retained earnings
    
    
    213,565
    
    
    
    152,898Total stockholders equity
    
    
    272,743
    
    
    
    195,880Total liabilities and stockholders equity
    
    $
    389,589
    
    
    $
    321,420
  2




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenue:Telephone
    
    $
    32,069
    
    
    $
    32,485
    
    
    $
    93,677
    
    
    $
    91,734Wireless and internet
    
    
    12,937
    
    
    
    12,458
    
    
    
    38,425
    
    
    
    35,639Total operating revenue
    
    
    45,006
    
    
    
    44,943
    
    
    
    132,102
    
    
    
    127,373Operating expense:Telephone cost of service (excludes depreciation of
$6,148, $5,820, $18,468 and $17,521, respectively)
    
    
    8,915
    
    
    
    9,585
    
    
    
    26,788
    
    
    
    27,660Wireless and internet cost of service (excludes depreciation
of $934, $1,003, $2,866 and $2,958, respectively)
    
    
    6,507
    
    
    
    6,012
    
    
    
    18,290
    
    
    
    17,242Selling, general and administrative (excludes depreciation
of $870, $1,086, $2,711 and $3,269, respectively)
    
    
    14,986
    
    
    
    14,359
    
    
    
    46,450
    
    
    
    42,997Depreciation
    
    
    7,952
    
    
    
    7,909
    
    
    
    24,045
    
    
    
    23,748Total operating expense
    
    
    38,360
    
    
    
    37,865
    
    
    
    115,573
    
    
    
    111,647Operating income
    
    
    6,646
    
    
    
    7,078
    
    
    
    16,529
    
    
    
    15,726Other income (expense):Equity in income of unconsolidated companies, net
    
    
    
    
    
    
    1,434
    
    
    
    90,103
    
    
    
    3,982Interest, dividend income and gain on sale of investments
    
    
    2,020
    
    
    
    396
    
    
    
    4,778
    
    
    
    2,073Impairment of investments
    
    
    
    
    
    
    
    
    
    
    (876
    )
    
    
    (529
    )Interest expense
    
    
    (750
    )
    
    
    (1,124
    )
    
    
    (2,643
    )
    
    
    (3,425
    )Other income (expense)
    
    
    29
    
    
    
    (38
    )
    
    
    50
    
    
    
    (268
    )Total other income
    
    
    1,299
    
    
    
    668
    
    
    
    91,412
    
    
    
    1,833Income before income taxes
    
    
    7,945
    
    
    
    7,746
    
    
    
    107,941
    
    
    
    17,559Income taxes
    
    
    2,825
    
    
    
    3,010
    
    
    
    41,439
    
    
    
    6,881Net income
    
    
    5,120
    
    
    
    4,736
    
    
    
    66,502
    
    
    
    10,678Dividends on preferred stock
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    11Net income for common stock
    
    $
    5,119
    
    
    $
    4,735
    
    
    $
    66,499
    
    
    $
    10,667Earnings per common share:Basic
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    3.45
    
    
    $
    0.57Diluted
    
    
    0.26
    
    
    
    0.25
    
    
    
    3.38
    
    
    
    0.56Basic weighted average shares outstanding
    
    
    19,721
    
    
    
    18,738
    
    
    
    19,265
    
    
    
    18,794Diluted weighted average shares outstanding
    
    
    20,046
    
    
    
    18,975
    
    
    
    19,652
    
    
    
    18,986
  3




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated
Statements of Comprehensive Income (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    5,120
    
    
    $
    4,736
    
    
    $
    66,502
    
    
    $
    10,678Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on available-for
sale securities
    
    
    46
    
    
    
    81
    
    
    
    450
    
    
    
    (252
    )Reclassification adjustment for (gains) losses
realized in net income
    
    
    
    
    
    
    
    
    
    
    (468
    )
    
    
    361Comprehensive income
    
    $
    5,166
    
    
    $
    4,817
    
    
    $
    66,484
    
    
    $
    10,787
  4




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Stockholders Equity (Unaudited)
 Accum. Other
    
    
    
    
    
    
    Total5% Series
    
    
    4.5% Series
    
    
    Common
    
    
    Other
    
    
    Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersPref Stock
    
    
    Pref Stock
    
    
    Stock
    
    
    Capital
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2004
    
    $
    336
    
    
    $
    61
    
    
    $
    42,222
    
    
    $
    298
    
    
    $
    (268
    )
    
    $
    215
    
    
    $
    145,364
    
    
    $
    188,228Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,678
    
    
    
    10,678Issuance of 161,650 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    1,854
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,854Issuance of 39,176 shares for
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379Forfeiture, cancellation and repurchase
of 190,299 common shares
    
    
    
    
    
    
    
    
    
    
    (2,372
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,372
    )Stock compensation expense -
acceleration of stock option vesting
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167Preferred stock subject
to redemption
    
    
    (336
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )Dividends declared:5% preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )4.5% preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,112
    )
    
    
    (5,112
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Restricted stock compensation
net of $611 earned in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    
    
    
    
    
    
    
    
    (252
    )Balance at September 30, 2005
    
    $
    
    
    
    $
    61
    
    
    $
    42,250
    
    
    $
    298
    
    
    $
    (520
    )
    
    $
    324
    
    
    $
    150,918
    
    
    $
    193,331
 Accum. Other
    
    
    
    
    
    
    Total5% Series
    
    
    4.5% Series
    
    
    Common
    
    
    Other
    
    
    Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersPref Stock
    
    
    Pref Stock
    
    
    Stock
    
    
    Capital
    
    
    Compensation
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2005
    
    $
    
    
    
    $
    61
    
    
    $
    42,648
    
    
    $
    298
    
    
    $
    (307
    )
    
    $
    282
    
    
    $
    152,898
    
    
    $
    195,880Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,502
    
    
    
    66,502Issuance of 48,873 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    664Issuance of 1,059,171 shares for
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    13,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,499Forfeiture and cancellation of
105,263 common shares
    
    
    
    
    
    
    
    
    
    
    (2,001
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,001
    )Reversal of unamortized unearned
compensation balance
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    
    
    
    
    Tax benefits from exercised
stock options
    
    
    
    
    
    
    
    
    
    
    3,413
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,413Preferred stock subject
to redemption
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Dividends declared:4.5% preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,832
    )
    
    
    (5,832
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Restricted stock compensation
net of $497 earned in 2006
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    700Balance at September 30, 2006
    
    $
    
    
    
    $
    
    
    
    $
    58,616
    
    
    $
    298
    
    
    $
    
    
    
    $
    264
    
    
    $
    213,565
    
    
    $
    272,743
  5




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Nine Months Ended September 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    66,502
    
    
    $
    10,678Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    24,045
    
    
    
    23,748Stock compensation expense
    
    
    497
    
    
    
    778Impairment on fixed assets
    
    
    190
    
    
    
    (Gain)/loss on fixed assets
    
    
    (145
    )
    
    
    247Post-retirement and pension benefits
    
    
    1,089
    
    
    
    (310
    )Impairment of investments
    
    
    876
    
    
    
    529Gain on sale of investment
    
    
    (842
    )
    
    
    (1,189
    )(Gain) loss on sale of investment securities
    
    
    (947
    )
    
    
    77Interest income on short-term investments
    
    
    (129
    )
    
    
    Equity in income of unconsolidated companies
    
    
    (90,103
    )
    
    
    (3,982
    )Undistributed patronage dividends
    
    
    (164
    )
    
    
    (235
    )Deferred income taxes and tax credits
    
    
    (4,285
    )
    
    
    2,319Change in income taxes payable
    
    
    5,647
    
    
    
    (2,117
    )Changes in operating assets and liabilities
    
    
    (1,088
    )
    
    
    (5,338
    )Net cash provided by operating activities
    
    
    1,143
    
    
    
    25,205Cash flows from investing activities:Capital expenditures
    
    
    (24,149
    )
    
    
    (20,575
    )Proceeds from sale of property, plant and equipment
    
    
    245
    
    
    
    1,956Proceeds from sale of wireless spectrum (net of costs to sell of $353)
    
    
    15,647
    
    
    
    Proceeds from sale of investment
    
    
    4,152
    
    
    
    1,189Proceeds from sale of investment securities
    
    
    1,397
    
    
    
    218Proceeds from sale of short-term investments
    
    
    16,000
    
    
    
    Purchases of short-term investments
    
    
    (110,438
    )
    
    
    Purchases of investment securities and other investments
    
    
    (140
    )
    
    
    (283
    )Payment for wireless spectrum
    
    
    (300
    )
    
    
    Distribution from unconsolidated companies
    
    
    97,912
    
    
    
    2,870Net cash provided by (used in) investing activities
    
    
    326
    
    
    
    (14,625
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (12,500
    )
    
    
    (8,750
    )Dividends paid
    
    
    (5,835
    )
    
    
    (5,124
    )Tax benefits credited to additional paid-in-capital
    
    
    3,413
    
    
    
    Repurchase of common stock
    
    
    
    
    
    
    (1,945
    )Repurchase of preferred stock
    
    
    
    
    
    
    (309
    )Proceeds from common stock issuances
    
    
    12,817
    
    
    
    528Net cash used in financing activities
    
    
    (2,105
    )
    
    
    (15,600
    )Net cash used in discontinued operations  operating activities
(revised, see Note 2)
    
    
    (95
    )
    
    
    (334
    )Net decrease in cash and cash equivalents
    
    
    (731
    )
    
    
    (5,354
    )Cash and cash equivalents at beginning of period
    
    
    23,011
    
    
    
    28,358Cash and cash equivalents at end of period
    
    $
    22,280
    
    
    $
    23,004Supplemental disclosure of non-cash financing activities:Common and nonvested shares issued under annual incentive plan
    
    $
    714
    
    
    $
    831Receivable due from broker related to stock option exercises
    
    
    836
    
    
    
    
  6




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##### Table of Contents



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1.
    
    In the opinion of the management of CT Communications, Inc. (the Company), the
accompanying unaudited financial statements contain all adjustments consisting of only
normal recurring adjustments necessary to present fairly the Companys financial
position as of September 30, 2006 and December 31, 2005 and the results of its
operations for the three and nine months ended September 30, 2006 and September 30,
2005 and its cash flows for the nine months ended September 30, 2006 and September 30,
2005. These unaudited financial statements do not include all disclosures associated
with the Companys annual financial statements and should be read along with the
Companys Annual Report on Form 10-K for the year ended December 31, 2005. The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements, as
well as the amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. In addition, the results of operations for the three
and nine months ended September 30, 2006 are not necessarily indicative of the results
to be expected for the full year.2.
    
    In certain instances, amounts previously reported in the 2005 consolidated financial
statements have been reclassified to conform to the presentation of the 2006
consolidated financial statements. Such reclassifications have no effect on net income
or retained earnings as previously reported. The Company disclosed the net cash used in
discontinued operations in the first nine months of 2006 and 2005 related to operating
activities, which in prior periods was not specifically identified as related to
operating activities.3.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn September 2006, the staff of the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. SAB 108 was issued in order to eliminate the
diversity of practice surrounding how public companies quantify financial statement
misstatements.Traditionally, there have been two widely-recognized methods for quantifying the
effects of financial statement misstatements: the roll-over method and the iron
curtain method. The roll-over method focuses primarily on the impact of a misstatement
on the income statement, including the reversing effect of prior year misstatements,
but its use can lead to the accumulation of misstatements in the balance sheet. The
iron-curtain method, on the other hand, focuses primarily on the effect of correcting
the period-end balance sheet with less emphasis on the reversing effects of prior year
errors on the income statement. Prior to the Companys application of the guidance in
SAB 108, it used the roll-over method for quantifying financial statement
misstatements.In SAB 108, the SEC staff established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatements on each of
the Companys financial statements and the related financial statement disclosures.
This model is commonly referred to as a dual approach because it requires
quantification of errors under both the iron curtain and the roll-over methods.SAB 108 permits existing public companies to initially apply its provisions either by
(i) restating prior financial statements as if the dual approach had always been
applied or (ii) recording the cumulative effect of initially applying the dual
approach as adjustments to the carrying values of assets and liabilities as of January
1, 2006 with an offsetting adjustment recorded to the opening balance of retained
earnings. Use of the cumulative effect transition method requires detailed disclosure
of the nature and amount of each individual error being corrected through the
cumulative effect adjustment and how and when it arose.The Company will initially apply the provision of SAB 108 using the cumulative effect
transition method in connection with the preparation of its annual financial statements
for the year ending December 31, 2006. When SAB 108 is initially applied, the Company
expects to record an increase in its deferred revenue liability of $2.3 million, an
increase in accounts receivable of $0.1 million, an increase in deferred tax assets of
$0.9 million and a reduction in retained earnings of $1.3 million as of January 1,
2006. The accompanying financial statements do not reflect these adjustments.In 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
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 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. Therefore, EITF 06-4 would not apply to a split-dollar life
insurance arrangement that provides a specified benefit to an employee that is limited
to the employees active service period with an employer. 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 will adopt EITF 06-4 on January 1, 2007, with no expected
material effect on its consolidated financial statements.In 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 Financial Accounting Standards Board
(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. The EITF also reached a conclusion 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). The EITF also noted that any amount that is ultimately
realized by the policyholder upon the assumed surrender of the final policy (or final
certificate in a group policy) shall be included in the amount that could be realized
under the insurance contract. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company will adopt EITF 06-5 on January 1, 2007, with no
expected material effect on its consolidated financial statements.In 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. Accordingly, SFAS No. 157 does not require any new fair value
measurements. However, for some entities, the application of SFAS No. 157 will change
current practice. 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.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of Statements No. 87, 88,
106 and 132(R). SFAS No. 158 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. SFAS No. 158 also requires an employer to measure the
funded status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. An employer with publicly traded equity securities shall
initially apply the requirement to recognize the funded status of a benefit plan and
the disclosure requirements as of the end of the fiscal year ending after December 15,
2006. The Company will adopt this requirement of SFAS No. 158 in the fourth quarter of
2006. Upon adoption, the Company expects to record a reduction of $2.1 million to its
pension and postretirement liability, with a corresponding credit to other
comprehensive income. The requirement to measure plan assets and benefit obligations as
of the date of the employers fiscal year-end statement of financial position shall be
effective for fiscal years ending after December 15, 2008, and shall not be applied
retrospectively. The Company will adopt this requirement of SFAS No. 158 in the fourth
quarter of 2008. However, the Company currently measures its plan assets and benefit
obligations at December 31; therefore, the Company does not expect the adoption of this
requirement to have a material impact on its consolidated financial statements.In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of SFAS No. 109, (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
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 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 will adopt FIN 48 on
January 1, 2007 and is currently evaluating the impact of FIN 48 on the results of
operations, financial position and cash flows.In 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 taxes received from customers on a net
basis. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. The
Company will adopt EITF 06-3 on January 1, 2007, with no expected material effect on
its consolidated financial statements.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
which replaces Accounting Principles Board (APB) Opinion No. 20 Accounting Changes and SFAS No. 3 Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154, which is effective
for accounting changes made in fiscal years beginning after December 15, 2005, requires
retrospective application for voluntary changes in an accounting principle unless it is
impracticable to do so. The Company adopted SFAS No. 154 on January 1, 2006, with no
material effect on its consolidated financial statements.4.
    
    STOCK COMPENSATION PLANSEffective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB Statement of Financial Accounting
Standards No. 123 (R), Share-Based Payment, (SFAS No. 123R) using the
modified-prospective transition method. Under the modified-prospective transition
method, SFAS No. 123R applies to all awards granted, modified, repurchased or cancelled
by the Company since January 1, 2006 and to unvested awards at the date of adoption.
The Company was also required to eliminate any unearned or deferred compensation
related to earlier awards against the appropriate equity account. At December 31, 2005,
the Company had $0.3 million of unearned compensation recorded in the shareholders
equity section of the Consolidated Balance Sheet. This amount was eliminated against
the Companys common stock account on January 1, 2006. The Company accounts for
cash-settled awards as liability awards and records compensation expense based on the
fair value of the award at the end of each reporting period. The liability is
re-measured at each reporting period based on the then current stock price and the
effects of the stock price changes are recognized as compensation expense. The Company
accounts for equity awards based on the grant date fair value. The Company records
compensation expense and credits common stock within shareholders equity based on the
fair value of the award at the grant date, which is recognized over the vesting period
of the stock. At September 30, 2006, 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.On August 10, 2005, the Companys Compensation Committee of the Board of Directors
approved the immediate and full acceleration of the vesting of each stock option that
was unvested as of such date. The closing price of the Companys common stock on August
10, 2005 was $10.67 per share. Based on the closing price of the Companys common stock
on August 10, 2005, approximately 77,000 of the accelerated options were in-the-money
(i.e., the option exercise price was less than $10.67 per share) and approximately
952,000 of the accelerated options were out-of-the-money (i.e., the option exercise
price was greater than or equal to $10.67 per share). The Company recognized
compensation cost of $0.2 million during the third quarter of 2005 related to the
acceleration of the vesting of stock options.
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Each officer, at a level of vice-president or higher, agreed pursuant to a lock-up
agreement to refrain from selling shares of common stock acquired upon the exercise of
accelerated options (other than shares needed to cover the exercise price and satisfy
withholding taxes) until the date on which the exercise would have been permitted under
the
options pre-acceleration vesting terms or, if earlier, the officers last day of
service or upon a corporate transaction as defined in the Companys Amended and
Restated 2001 Stock Incentive Plan.The decision to accelerate the vesting of these options was made primarily to reduce
compensation expense that would have been recorded in future periods as a result of the
Companys application of SFAS No. 123R. The Company adopted SFAS No. 123R effective
January 1, 2006. The Companys expense that will be eliminated as a result of the
acceleration of the vesting of these options could approximate up to $5.8 million. The
Company believes, based on its consideration of this potential expense savings and the
current intrinsic and perceived value of the accelerated stock options, that the
acceleration was in the best interests of the Company and its shareholders. In
addition, beginning in August 2005, the Company changed its compensation philosophy to
eliminate future stock option grants.Prior to January 1, 2006, the Company accounted for its stock option plans and its
employee stock purchase plan using the intrinsic value method of accounting provided
under APB Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related Interpretations, as permitted by FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under this method,
no compensation expense was recognized for issuances of stock pursuant to the employee
stock purchase plan, or for stock option grants, with the exception of the acceleration
of the vesting of stock options during the third quarter of 2005. Accordingly,
share-based compensation was included as a pro forma disclosure in the financial
statement footnotes and continues to be presented as a pro forma disclosure for periods
prior to January 1, 2006.At September 30, 2006, the Company had five stock-based compensation plans, which are
described below.Comprehensive Stock Option
PlanThe Company has a Comprehensive Stock Option Plan (the Comprehensive Option Plan) to
allow key employees to increase their holdings of the Companys common stock. Under the
Comprehensive Option Plan, 180,000 shares of common stock have been reserved for
issuance. At September 30, 2006, 480 shares of common stock were ungranted. The Company
does not intend to grant additional options under this plan. Options were granted at
prices determined by the Board of Directors, which was the most recent sales price at
the date of grant, and must be exercised within 10 years of the date of grant.Restricted Stock Award ProgramThe Company has a Restricted Stock Award Program (the Program) to provide deferred
compensation and additional equity participation to certain executive management and
key employees. The aggregate amount of common stock that may be awarded to participants
under the Program is 180,000 shares. The Company amortizes the amount of the fair
market value of the stock granted on a straight-line basis over the vesting period, the
majority of which is 1 to 2 years. At September 30, 2006, 455 shares of common stock
were authorized but ungranted under the Program. The Company does not intend to grant
additional awards under this plan.Director Compensation
PlanIn 1996, a Director Compensation Plan (the Director Plan) was approved to provide
each member of the Board of Directors the right to receive Directors compensation in
shares of common stock or cash, at the Directors discretion. An aggregate of 90,000
shares were reserved for issuance under the Director Plan. All compensation for a
Director who elects to receive shares of stock in lieu of cash will be converted to
shares of stock based upon the fair market value of the common stock on the issue date.
All subsequent compensation to the Director is converted to shares of common stock
based upon the fair market value of the common stock on the date such compensation is
paid or made available to the Director. During the nine months ended September 30, 2006
and 2005, the Company issued 7,954 shares and 13,554 shares under the Director Plan
with an average fair market value of approximately $13 and $11, respectively. These
shares related to Directors who elected to receive their compensation in shares for
meetings attended during the previous year. Directors compensation expense is accrued
during the year as meetings are attended; therefore, no compensation expense related to
these shares was recognized for the nine months ended September 30, 2006 and 2005. At
September 30, 2006, no shares were available for issuance under the Director Plan.
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Omnibus Stock Compensation PlanThe CT Communications, Inc. Omnibus Stock Compensation Plan (the Stock Plan) was
approved in 1997. Under the Stock Plan, 800,000 shares of common stock have been
reserved for issuance. The Stock Plan provides for awards of stock, stock options and
stock appreciation rights. There are no stock appreciation rights outstanding. The
Company
issued 49,932 shares under the Stock Plan. Shares of common stock authorized for
issuance under the Stock Plan but ungranted as of December 31, 2001 were transferred to
the 2001 Stock Incentive Plan as authorized by the approval of the 2001 Stock Incentive Plan. The total shares authorized but ungranted are discussed
below under the Amended and Restated 2001 Stock Incentive Plan. Options were granted at
prices determined by the Board of Directors, which was based on the most recent sales
price at the date of grant, and expire within 10 years of the date of grant.Amended and Restated 2001 Stock Incentive PlanDuring 2004, the Amended and Restated 2001 Stock Incentive Plan (the Stock Incentive
Plan) was approved. The Stock Incentive Plan allows for stock options, stock
appreciation rights, nonvested stock, unrestricted stock, stock units, dividend equivalent rights and
performance and annual incentive awards. Under the Stock Incentive Plan, 2.6 million
shares, plus any shares remaining available for grant under the Companys Stock Plan,
have been reserved for issuance. Of the 2.6 million shares reserved for issuance, 1.2
million shares were reserved for non-option grants. At September 30, 2006, the number
of shares of common stock authorized for issuance but ungranted was approximately
1,266,000 shares. The number of shares authorized but ungranted includes any shares
that have become available due to forfeitures or have been reacquired by the Company
for any reason without delivery of the stock, as allowed under the terms of the Stock
Incentive Plan and the Stock Plan. There have been no stock appreciation rights or
dividend equivalent rights granted by the Company. The Company issued 59,692 stock
units under the Stock Incentive Plan during the nine months ended September 30, 2006
with an average fair market value of approximately $13. The Company has issued a total
of 148,053 stock units under the Stock Incentive Plan, all of which were outstanding as
of September 30, 2006. These stock units are accounted for as liability awards and any
changes to the fair value are recognized in compensation expense. During the nine
months ended September 30, 2006, the Company recognized compensation expense of
approximately $0.8 million related to these stock units.During the nine months ended September 30, 2006 and 2005, respectively, the Company
granted 88,496 and 134,126 unrestricted and nonvested shares, of which 56,902 and
121,192 were nonvested shares, respectively, under the Stock Incentive Plan to
participants with a weighted-average fair value of $13 and $11, respectively, measured
at the grant date fair value. At September 30, 2006, there were 99,353 nonvested shares
outstanding. The Company accounts for the unrestricted and nonvested share awards as
equity awards in accordance with SFAS No. 123R. For the three months ended September
30, 2006, the Company recognized compensation expense and related tax benefits from
nonvested shares of $0.1 million and less than $0.1 million, respectively, compared to
$0.2 million and $0.1 million, respectively, for the same 2005 periods. For the nine
months ended September 30, 2006, the Company recognized compensation expense and
related tax benefits from nonvested shares of $0.5 million and $0.2 million,
respectively, compared to $0.6 million and $0.2 million, respectively, for the same
periods in 2005. At September 30, 2006, unrecognized compensation expense related to
nonvested shares was $0.4 million, which will be recognized over a weighted-average
period of 1.3 years.Prior to August 10, 2005, the Company granted stock options under the Stock Incentive
Plan. These options were granted at prices determined by the Board of Directors, which
was the closing price on the date of grant, and expire within 10 years of the date of
grant. The Company accounts for its stock options as equity awards in accordance with
SFAS No. 123R. The total intrinsic value of stock options exercised during the three
and nine months ended September 30, 2006 was $6.6 million and $8.8 million,
respectively. The total intrinsic value of stock options exercised during both the
three and nine months ended September 30, 2005 was $0.1 million. There were no stock
options granted during the nine months ended September 30, 2006.The Company adopted the provisions of FASB Staff Position FAS 123R-3 on January 1,
2006. Accordingly, the Company reported the entire amount of excess tax benefits of
$3.4 million credited to additional paid-in capital resulting from its stock
compensation plans in cash flows from financing activities in its Statement of Cash
Flows.
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Activity under the Companys stock option plans for the nine months ended September 30, 2006 was as follows:
 WeightedAverage
    
    
    IntrinsicNumber
    
    
    Exercise
    
    
    Valueof Options
    
    
    Price
    
    
    (in thousands)Options outstanding and exercisable at December 31, 2005
    
    
    1,706,179
    
    
    $
    13Options exercised
    
    
    1,095,171
    
    
    
    12Options forfeited
    
    
    24,141
    
    
    
    16Options outstanding and exercisable at September 30, 2006
    
    
    586,867
    
    
    $
    16
    
    
    $
    3,618
 The weighted-average remaining contractual term of the options included in the
table above was approximately seven years.Nonvested share activity for the nine months ended September 30, 2006 was as follows:
 WeightedAverageNumber
    
    
    Grant-Dateof Shares
    
    
    ValueNonvested shares at December 31, 2005
    
    
    156,160
    
    
    $
    11Shares granted
    
    
    56,902
    
    
    
    13Shares vested
    
    
    113,457
    
    
    
    11Shares forfeited
    
    
    252
    
    
    
    11Nonvested shares at September 30, 2006
    
    
    99,353
    
    
    $
    12
 The fair value of shares vested during the nine months ended September 30, 2006
was approximately $1.5 million.
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Prior to January 1, 2006, the Company accounted for its stock option plans and its
employee stock purchase plan using the intrinsic value method of accounting provided
under APB 25 and related Interpretations, as permitted by SFAS No. 123. Pro forma
disclosures for the three months ended September 30, 2006 are not applicable. Had
compensation cost for the Companys stock-based compensation plans been determined
consistent with SFAS No. 123, the Companys net income and earnings per share for the
three and nine months ended September 30, 2005, would have been reduced to the pro
forma amounts indicated below (in thousands except per share data):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income
    
    $
    4,736
    
    
    $
    10,678Add: Stock-based compensation expense included
in reported net income, net of income tax
    
    
    102
    
    
    
    102Deduct: Additional stock-based compensation expense
that would have been included in net income if the
fair value method had been applied, net of income tax
    
    
    3,588
    
    
    
    4,098Pro forma net income
    
    $
    1,250
    
    
    $
    6,682Basic earnings per common shareAs reported
    
    $
    0.25
    
    
    $
    0.57Pro forma
    
    
    0.07
    
    
    
    0.36Diluted earnings per common shareAs reported
    
    $
    0.25
    
    
    $
    0.56Pro forma
    
    
    0.07
    
    
    
    0.35Assumptions used in Black Scholes pricing model:Expected dividend yield
    
    
    
    
    
    
    2.5
    %Risk-free interest rate
    
    
    
    
    
    
    4.2
    %Weighted average expected life
    
    
    
    
    
    
    5
    yearsExpected volatility
    
    
    
    
    
    
    57
    %Fair value per share of options granted
    
    
    
    
    
    $
    4.73
 5.
    
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consisted of the following (in thousands):
 September 30,
    
    
    December 31,2006
    
    
    2005Equity Method:Palmetto MobileNet, L.P.
    
    $
    
    
    
    $
    10,654Other
    
    
    37
    
    
    
    35Cost Method:Magnolia Holding Company
    
    
    1,239
    
    
    
    1,587InComm (formerly PRE Holdings, Inc)
    
    
    1,304
    
    
    
    2,100Other
    
    
    1,243
    
    
    
    1,242Total
    
    $
    3,823
    
    
    $
    15,618
 The Company recognized income of $1.4 million for the three months ended September
30, 2005, and $90.1 million and $4.0 million in the nine months ended September 30,
2006 and 2005, respectively, as its share of earnings from unconsolidated companies
accounted for under the equity method. Substantially all of the income was attributable
to the Companys 22.4% interest in Palmetto MobileNet, L.P. (Palmetto). Palmetto is a
partnership that held a 50%
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 interest in 10 cellular rural service areas (RSAs) in
North and South Carolina. On March 15, 2006, Palmetto sold its ownership interests in
the 10 RSAs to Alltel Corporation for approximately $455 million cash. As a result of
this transaction, the Company recorded equity in income of unconsolidated companies of
$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 cash of $4.2 million and its proportionate interest in RTFC
Patronage Certificates. The Company recorded a gain of $0.8 million as a result of this
transaction. Summarized unaudited interim results of operations for Palmetto for the
three and nine months ended September 30, 2006 and 2005 were as follows (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Equity in earnings of RSA partnership interests
    
    $
    
    
    
    $
    6,911
    
    
    $
    3,499
    
    
    $
    18,639Other income (expense)
    
    
    141
    
    
    
    (492
    )
    
    
    353,815
    
    
    
    (828
    )Net income
    
    $
    141
    
    
    $
    6,419
    
    
    $
    357,314
    
    
    $
    17,811
 Other income shown in the table above for the nine months ended September 30, 2006
included Palmettos $353.4 million gain on the sale of the
interests in the RSAs.During the first quarter of 2006, the Company recognized impairment losses of $0.4
million and $0.3 million on InComm and Magnolia Holding Company, respectively. The
impairment losses were determined based upon fair value resulting from a transaction
between the investee and another company. These impairment losses are included in the
caption Impairment of investments in the Condensed Consolidated Statements of Income.6.
    
    INVESTMENT SECURITIESInvestment securities at September 30, 2006 and December 31, 2005 consist of equity
securities. The Company classifies its equity securities as available-for-sale.
Unrealized holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of other comprehensive income until
realized. Realized gains and losses from the sale of securities are determined on a
specific identification basis.A decline in the market value of a security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established. Dividend and
interest income are recognized when earned.The book value, gross unrealized holding gains and losses and fair value for the
Companys equity investments at September 30, 2006 and December 31, 2005 were as
follows (in thousands):
 Equity Securities
    
    Book
    
    
    Gross Unrealized
    
    
    Gross UnrealizedAvailable-for-Sale
    
    Value
    
    
    Holding Gains
    
    
    Holding Losses
    
    
    Fair ValueSeptember 30, 2006
    
    $
    4,900
    
    
    $
    492
    
    
    $
    (47
    )
    
    $
    5,345December 31, 2005
    
    $
    5,379
    
    
    $
    537
    
    
    $
    (71
    )
    
    $
    5,845
 During the nine months ended September 30, 2006 and 2005, the Company recognized
impairment losses of $0.2 million and $0.5 million, respectively, on equity investment
securities due to declines in the fair value of those securities that, in the opinion
of management, were considered to be other than temporary. The impairment losses are
included in the caption Impairment of investments in the Condensed Consolidated
Statements of Income.
 14




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Certain investments of the Company are and have been in continuous unrealized loss
positions. The gross unrealized losses and fair value and length of time the
securities have been in the continuous unrealized loss position at September 30, 2006
were as follows (in thousands):
 Less than 12 months
    
    
    12 months or more
    
    
    TotalDescription of
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedSecurities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCommon Stock
    
    $
    
    
    
    $
    
    
    
    $
    91
    
    
    $
    47
    
    
    $
    91
    
    
    $
    47Total temporarily
impaired securities
    
    $
    
    
    
    $
    
    
    
    $
    91
    
    
    $
    47
    
    
    $
    91
    
    
    $
    47
 The fair value and unrealized losses noted above that were greater than 12 months
relate to two different investments. The Company will continue to evaluate these
investments on a quarterly basis to determine if the unrealized loss is
other-than-temporarily impaired, at which time the impairment loss would be realized.At September 30, 2006, the Company held $94.6 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 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 September 30, 2006.7.
    
    OTHER INVESTMENTSOther investments represent the Companys investment in CoBank, ACB (CoBank), which
is organized as a cooperative for federal income tax purposes. Distributions include
both cash distributions of CoBanks earnings and equity participation certificates.
Equity participation certificates are included in the Companys carrying value of the
investment and are recognized as other income in the period earned.8.
    
    PROPERTY AND EQUIPMENTProperty and equipment was composed of the following (in thousands):
 September 30,
    
    
    December 31,2006
    
    
    2005Land, buildings and general equipment
    
    $
    92,524
    
    
    $
    91,496Central office equipment
    
    
    199,235
    
    
    
    190,220Poles, wires, cables and conduit
    
    
    171,238
    
    
    
    163,868Construction in progress
    
    
    10,346
    
    
    
    4,545473,343
    
    
    
    450,129Accumulated depreciation
    
    
    (273,349
    )
    
    
    (249,950
    )Property and equipment, net
    
    $
    199,994
    
    
    $
    200,179
 For the nine months ended September 30, 2006, the Company recognized an impairment
charge of $0.2 million related to certain fixed wireless broadband equipment, which was
recorded in selling, general and administrative expenses.9.
    
    COMMON STOCKDuring the three and nine months ended September 30, 2006 and 2005, the Company issued
common stock under its various compensation
plans and as a result of the exercise of stock options.
 15




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 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 nine months ended September 30, 2006 and 2005 (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic weighted average shares outstanding
    
    
    19,721
    
    
    
    18,738
    
    
    
    19,265
    
    
    
    18,794Effect of dilutive stock options and non-vested
stock
    
    
    325
    
    
    
    237
    
    
    
    387
    
    
    
    192Total diluted weighted average shares
outstanding
    
    
    20,046
    
    
    
    18,975
    
    
    
    19,652
    
    
    
    18,986
 Anti-dilutive shares of common stock totaling 129,000 and 526,000 for the three
months ended September 30, 2006 and 2005, respectively, and 139,000 and 1,046,000 for
the nine months ended September 30, 2006 and 2005, respectively, were not included in
the computation of diluted earnings per share and diluted weighted average shares
outstanding because the exercise price of these options was greater than the average
market price of the common stock during the respective periods. At September 30, 2006
and September 30, 2005, the Company had total options outstanding of approximately
587,000 and 1,774,000, respectively.The Company adopted the provisions of FASB Staff Position 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.On April 28, 2005, the Board of Directors approved the continuation of the Companys
existing stock repurchase program. Under this program, the Company was authorized,
subject to certain conditions, to repurchase up to 1,000,000 shares of its outstanding
common stock during the twelve-month period from April 28, 2005 to April 28, 2006.
There were no shares repurchased by the Company during the nine
months ended September 30, 2006.10.
    
    LONG-TERM DEBTLong-term debt consisted of the following (in thousands):
 September 30,
    
    
    December 31,2006
    
    
    2005Line of credit with interest at LIBOR plus a spread (5.56% at
December 31, 2005)
    
    $
    
    
    
    $
    10,000Term loan with interest at 7.32%
    
    
    42,500
    
    
    
    45,00042,500
    
    
    
    55,000Less: Current portion of long-term debt
    
    
    6,250
    
    
    
    15,000Long-term debt
    
    $
    36,250
    
    
    $
    40,000
 At December 31, 2005, the Company had a $70.0 million revolving five-year line of
credit with interest at three month LIBOR plus a spread based on various financial
ratios. On January 25, 2006, the Company reduced its available line of credit to $40.0
million based upon forecasted future cash requirements and to reduce the fees
associated with excess capacity. On March 30, 2006, the Company paid in full the $10.0
million outstanding under the revolving credit facility.The Company has a 7.32% fixed rate $50.0 million term loan that matures on December 31,
2014. At September 30, 2006, $42.5 million was outstanding. The term loan requires
quarterly payments of interest until maturity on
 16




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 December 31, 2014. Payments of
principal became due beginning March 31, 2005 and will be due quarterly through
December 31, 2014, in equal amounts of $1.25 million.On April 18, 2006, the Company entered into a Master Loan Agreement (MLA), which
provides a revolving loan commitment of $40.0 million and incorporates the Companys
existing $50.0 million term loan. The revolving loan commitment expires on March 31,
2011. The proceeds of borrowings under the revolving loan commitment will be used by
the Company for working capital, capital expenditures, and other general corporate
purposes. The unpaid principal balance of each advance under the revolving loan
commitment will accrue interest, in the Companys discretion, at a (i) variable base
rate option, (ii) quoted rate option or (iii) LIBOR-based option. Subject to exceptions
relating to loans accruing interest at the LIBOR-based option, interest will be payable
on the last day of each calendar quarter. Under the MLA, the Companys term loan
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.11.
    
    GOODWILL AND OTHER INTANGIBLE ASSETSOn January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. In accordance with SFAS No. 142, the Company discontinued goodwill
amortization and tested goodwill for impairment as of January 1, 2002, determining that
the recognition of an impairment loss was not necessary. The Company will
continue to test goodwill for impairment at least annually. Goodwill was $9.9 million
at December 31, 2005 and unchanged for the nine months ended
September 30, 2006.Other intangible assets consist primarily of wireless licenses. Wireless licenses have
terms of 10 years, but are renewable through a routine process involving a nominal fee.
The Company has determined that no legal, regulatory, contractual, competitive,
economic or other factors currently exist that limit the useful life of its wireless
licenses. Therefore, the Company does not amortize wireless licenses based on the
determination that these assets have indefinite lives. In accordance with SFAS No.
142, the Company periodically reviews its determination of indefinite useful lives for
wireless licenses and will test those licenses for impairment at
least annually.As described in the Companys Current Report on Form 8-K filed with the SEC on April 5, 2006, Wireless One of North Carolina, L.L.C.,
Wavetel NC License Corporation, Wavetel, L.L.C., and Wavetel TN, L.L.C. (the Affiliate
Companies), which are the Companys subsidiaries that were the holders of the
Companys Educational Broadband Service (EBS) and Broadband Radio Service (BRS)
spectrum, and related rights and obligations, completed a sale to Fixed Wireless
Holdings, LLC, an affiliate of Clearwire Corporation (Fixed Wireless) of all of the
Affiliate Companies BRS spectrum licenses, EBS spectrum lease rights and related
assets and obligations for total consideration of $16 million, less costs to sell of
$0.4 million.12.
    
    PENSION AND POST-RETIREMENT PLANSComponents of net periodic benefit cost for the three months ended September 30 (in
thousands):
 Pension Benefits
    
    
    Post-Retirement Benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    612
    
    
    $
    559
    
    
    $
    14
    
    
    $
    14Interest cost
    
    
    724
    
    
    
    756
    
    
    
    140
    
    
    
    117Expected return on plan assets
    
    
    (899
    )
    
    
    (871
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    (1
    )
    
    
    (18
    )
    
    
    (101
    )Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    (30
    )Net periodic benefit cost
    
    $
    437
    
    
    $
    443
    
    
    $
    164
    
    
    $
    
 17




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Components of net periodic benefit cost for the nine months ended September 30 (in thousands):
 Pension Benefits
    
    
    Post-Retirement Benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    1,835
    
    
    $
    1,681
    
    
    $
    38
    
    
    $
    43Interest cost
    
    
    2,173
    
    
    
    2,118
    
    
    
    370
    
    
    
    356Expected return on plan assets
    
    
    (2,698
    )
    
    
    (2,671
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    (22
    )
    
    
    (273
    )Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (88
    )Net periodic benefit cost
    
    $
    1,311
    
    
    $
    1,129
    
    
    $
    352
    
    
    $
    38
 The Company does not expect to contribute to the pension plan in 2006.At September 30, 2006, the Companys pension and post-retirement liabilities were $7.0
million and $10.4 million, respectively. The current portion of the Companys
post-retirement liability at September 30, 2006 was $0.5 million.In December 2003, the Medicare Act was signed into law. The Medicare Act introduced a
prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to
sponsors of retirement health care plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In May 2004, the FASB issued FSP 106-2,
providing final guidance on accounting for the Medicare Act. In accordance with FSP
106-2, the Company determined that the net periodic benefit costs do not reflect any
amount associated with the subsidy since insurance is not provided; rather the plan
provides a reimbursement of premiums paid by the retiree.13.
    
    INCOME TAXESIncome tax expense decreased to $2.8 million, for an effective tax rate of 35.6%, for
the three months ended September 30, 2006, compared to income tax expense of $3.0
million, for an effective tax rate of 38.9%, for the three months ended September 30,
2005. Income tax expense increased to $41.4 million primarily as a result of the Palmetto
transaction, for an effective tax rate of 38.4% for the nine months ended September 30,
2006, compared to $6.9 million, for an effective tax rate of 39.2%, for the nine months
ended September 30, 2005. During the third quarter of 2006, the Company settled certain
State of North Carolina tax credits that lowered tax expense $0.2 million for the
quarter. Generally, the effective rate will be lower than prior periods primarily due
to the Companys significant investments in federal and state tax-exempt auction-rate
securities.14.
    
    SEGMENT INFORMATIONThe Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory
environment, services offered and/or customers served. Of these six reportable
segments, five segments are operating business segments and the other segment is an
equity method investment in Palmetto. The segments and a description of their
businesses are as follows: the incumbent local exchange carrier (ILEC), which
provides local telephone services; the wireless group (Wireless), which provides
wireless phone services; the competitive local exchange carrier (CLEC), which
provides competitive local telephone services to customers outside the ILECs operating
area; the Greenfield business (Greenfield), which provides full telecommunications
services to developments outside the ILECs operating area; Internet and data services
(IDS), which provides dial-up and high-speed internet access and other data related
services; and Palmetto, which is a limited partnership in which the
Company had an
equity interest through the Companys subsidiary, CT Cellular, Inc. All other business
units, investments and operations of the Company that do not meet reporting guidelines
and thresholds are reported under Other.Accounting policies of the segments are the same as those described in the summary of
significant accounting policies included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2005. The Company
 18




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 evaluates performance based on
operating income. Intersegment transactions have been eliminated for purposes of
calculating operating income. All segments reported below, except Palmetto, provide
services primarily within North Carolina. On March 15, 2006, Palmetto sold the majority
of its assets to Alltel Corporation. In August 2006, the Company sold its remaining
investment in Palmetto. For summarized results of operations for
Palmetto see Note 5.
Selected data by the Companys five operating business segments as of and for the three
and nine months ended September 30, 2006 and 2005, was as follows (in thousands):
 Three months ended September 30, 2006
 ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    24,406
    
    
    $
    9,459
    
    
    $
    4,977
    
    
    $
    2,686
    
    
    $
    3,478
    
    
    $
    
    
    
    $
    45,006External expense
    
    
    12,796
    
    
    
    8,426
    
    
    
    4,393
    
    
    
    2,239
    
    
    
    2,132
    
    
    
    422
    
    
    
    30,408Depreciation
    
    
    5,058
    
    
    
    651
    
    
    
    681
    
    
    
    1,034
    
    
    
    302
    
    
    
    226
    
    
    
    7,952Operating income (loss)
    
    $
    6,552
    
    
    $
    382
    
    
    $
    (97
    )
    
    $
    (587
    )
    
    $
    1,044
    
    
    $
    (648
    )
    
    $
    6,646
 Three months ended September 30, 2005
 ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    25,237
    
    
    $
    9,521
    
    
    $
    4,785
    
    
    $
    2,463
    
    
    $
    2,937
    
    
    $
    
    
    
    $
    44,943External expense
    
    
    13,154
    
    
    
    7,790
    
    
    
    4,478
    
    
    
    2,207
    
    
    
    2,061
    
    
    
    266
    
    
    
    29,956Depreciation
    
    
    5,040
    
    
    
    601
    
    
    
    635
    
    
    
    868
    
    
    
    431
    
    
    
    334
    
    
    
    7,909Operating income (loss)
    
    $
    7,043
    
    
    $
    1,130
    
    
    $
    (328
    )
    
    $
    (612
    )
    
    $
    445
    
    
    $
    (600
    )
    
    $
    7,078
 Nine months ended September 30, 2006
 ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    71,551
    
    
    $
    28,231
    
    
    $
    14,370
    
    
    $
    7,756
    
    
    $
    10,194
    
    
    $
    
    
    
    $
    132,102External expense
    
    
    39,247
    
    
    
    24,626
    
    
    
    13,314
    
    
    
    6,898
    
    
    
    6,329
    
    
    
    1,114
    
    
    
    91,528Depreciation
    
    
    15,365
    
    
    
    1,927
    
    
    
    2,016
    
    
    
    3,003
    
    
    
    1,005
    
    
    
    729
    
    
    
    24,045Operating income (loss)
    
    $
    16,939
    
    
    $
    1,678
    
    
    $
    (960
    )
    
    $
    (2,145
    )
    
    $
    2,860
    
    
    $
    (1,843
    )
    
    $
    16,529Segment assets
    
    $
    260,964
    
    
    $
    33,228
    
    
    $
    14,535
    
    
    $
    30,851
    
    
    $
    13,220
    
    
    $
    36,791
    
    
    $
    389,589
 Nine months ended September 30, 2005
 ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    69,912
    
    
    $
    26,976
    
    
    $
    14,641
    
    
    $
    7,181
    
    
    $
    8,663
    
    
    $
    
    
    
    $
    127,373External expense
    
    
    38,071
    
    
    
    22,951
    
    
    
    13,458
    
    
    
    6,534
    
    
    
    6,241
    
    
    
    644
    
    
    
    87,899Depreciation
    
    
    15,278
    
    
    
    1,681
    
    
    
    1,898
    
    
    
    2,518
    
    
    
    1,365
    
    
    
    1,008
    
    
    
    23,748Operating income (loss)
    
    $
    16,563
    
    
    $
    2,344
    
    
    $
    (715
    )
    
    $
    (1,871
    )
    
    $
    1,057
    
    
    $
    (1,652
    )
    
    $
    15,726Segment assets
    
    $
    169,120
    
    
    $
    34,032
    
    
    $
    13,162
    
    
    $
    28,658
    
    
    $
    13,729
    
    
    $
    64,860
    
    
    $
    323,561
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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Segment operating income
    
    $
    6,646
    
    
    $
    7,078
    
    
    $
    16,529
    
    
    $
    15,726Other income (expense):Equity in income of unconsolidated companies, net
    
    
    
    
    
    
    1,434
    
    
    
    90,103
    
    
    
    3,982Interest, dividend income and gain on sale of investment
    
    
    2,020
    
    
    
    396
    
    
    
    4,778
    
    
    
    2,073Impairment of investments
    
    
    
    
    
    
    
    
    
    
    (876
    )
    
    
    (529
    )Interest expense
    
    
    (750
    )
    
    
    (1,124
    )
    
    
    (2,643
    )
    
    
    (3,425
    )Other income (expense)
    
    
    29
    
    
    
    (38
    )
    
    
    50
    
    
    
    (268
    )Total other income
    
    
    1,299
    
    
    
    668
    
    
    
    91,412
    
    
    
    1,833Income before income taxes
    
    $
    7,945
    
    
    $
    7,746
    
    
    $
    107,941
    
    
    $
    17,559
 20




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 Introduction
          21




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Industry and Operating Trends
       22




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24




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Results of Operations
    25




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Consolidated Operating Results
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    28,288
    
    
    $
    27,353
    
    
    $
    935
    
    
    $
    84,028
    
    
    $
    81,782
    
    
    $
    2,246Universal service
    
    
    1,691
    
    
    
    1,590
    
    
    
    101
    
    
    
    3,990
    
    
    
    3,434
    
    
    
    556Access & interconnection
    
    
    7,274
    
    
    
    7,238
    
    
    
    36
    
    
    
    21,067
    
    
    
    19,470
    
    
    
    1,597Wireless roaming/settlement
    
    
    3,099
    
    
    
    3,370
    
    
    
    (271
    )
    
    
    9,275
    
    
    
    8,700
    
    
    
    575Other
    
    
    4,654
    
    
    
    5,392
    
    
    
    (738
    )
    
    
    13,742
    
    
    
    13,987
    
    
    
    (245
    )Total operating revenue
    
    
    45,006
    
    
    
    44,943
    
    
    
    63
    
    
    
    132,102
    
    
    
    127,373
    
    
    
    4,729Operating expense:Cost of service
    
    
    15,422
    
    
    
    15,597
    
    
    
    (175
    )
    
    
    45,078
    
    
    
    44,902
    
    
    
    176Selling, general & administrative
    
    
    14,986
    
    
    
    14,359
    
    
    
    627
    
    
    
    46,450
    
    
    
    42,997
    
    
    
    3,453Depreciation
    
    
    7,952
    
    
    
    7,909
    
    
    
    43
    
    
    
    24,045
    
    
    
    23,748
    
    
    
    297Total operating expense
    
    
    38,360
    
    
    
    37,865
    
    
    
    495
    
    
    
    115,573
    
    
    
    111,647
    
    
    
    3,926Operating income
    
    
    6,646
    
    
    
    7,078
    
    
    
    (432
    )
    
    
    16,529
    
    
    
    15,726
    
    
    
    803Other income
    
    
    1,299
    
    
    
    668
    
    
    
    631
    
    
    
    91,412
    
    
    
    1,833
    
    
    
    89,579Income before taxes
    
    
    7,945
    
    
    
    7,746
    
    
    
    199
    
    
    
    107,941
    
    
    
    17,559
    
    
    
    90,382Income taxes
    
    
    2,825
    
    
    
    3,010
    
    
    
    (185
    )
    
    
    41,439
    
    
    
    6,881
    
    
    
    34,558Net income
    
    $
    5,120
    
    
    $
    4,736
    
    
    $
    384
    
    
    $
    66,502
    
    
    $
    10,678
    
    
    $
    55,824Operating margin
    
    
    14.8
    %
    
    
    15.7
    %
    
    
    
    
    
    
    12.5
    %
    
    
    12.3
    %Capital expenditures
    
    $
    11,098
    
    
    $
    6,227
    
    
    $
    4,871
    
    
    $
    24,149
    
    
    $
    20,575
    
    
    $
    3,574Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,589
    
    
    
    323,561
    
    
    
    66,028Wired access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,149
    
    
    
    157,283
    
    
    
    1,866Wireless subs cribers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,706
    
    
    
    45,285
    
    
    
    3,421Internet and data cus tomers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,488
    
    
    
    25,767
    
    
    
    4,721
 Three Months Ended September 30
    26




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       27




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ILEC
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    13,252
    
    
    $
    13,238
    
    
    $
    14
    
    
    $
    39,739
    
    
    $
    39,901
    
    
    $
    (162
    )Universal service
    
    
    1,691
    
    
    
    1,590
    
    
    
    101
    
    
    
    3,990
    
    
    
    3,434
    
    
    
    556Access & interconnection
    
    
    5,442
    
    
    
    5,647
    
    
    
    (205
    )
    
    
    16,121
    
    
    
    14,638
    
    
    
    1,483Other
    
    
    4,021
    
    
    
    4,762
    
    
    
    (741
    )
    
    
    11,701
    
    
    
    11,939
    
    
    
    (238
    )Total operating revenue
    
    
    24,406
    
    
    
    25,237
    
    
    
    (831
    )
    
    
    71,551
    
    
    
    69,912
    
    
    
    1,639Operating expense:Cost of service
    
    
    4,964
    
    
    
    5,623
    
    
    
    (659
    )
    
    
    15,053
    
    
    
    15,733
    
    
    
    (680
    )Selling, general & administrative
    
    
    7,832
    
    
    
    7,531
    
    
    
    301
    
    
    
    24,194
    
    
    
    22,338
    
    
    
    1,856Depreciation
    
    
    5,058
    
    
    
    5,040
    
    
    
    18
    
    
    
    15,365
    
    
    
    15,278
    
    
    
    87Total operating expense
    
    
    17,854
    
    
    
    18,194
    
    
    
    (340
    )
    
    
    54,612
    
    
    
    53,349
    
    
    
    1,263Operating income
    
    $
    6,552
    
    
    $
    7,043
    
    
    $
    (491
    )
    
    $
    16,939
    
    
    $
    16,563
    
    
    $
    376Operating margin
    
    
    26.8
    %
    
    
    27.9
    %
    
    
    
    
    
    
    23.7
    %
    
    
    23.7
    %Capital expenditures
    
    $
    5,732
    
    
    $
    3,921
    
    
    $
    1,811
    
    
    $
    12,367
    
    
    $
    12,128
    
    
    $
    239Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,964
    
    
    
    169,120
    
    
    
    91,844Business access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,164
    
    
    
    28,532
    
    
    
    (368
    )Residential access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,756
    
    
    
    82,511
    
    
    
    (2,755
    )Total access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,920
    
    
    
    111,043
    
    
    
    (3,123
    )
 Three Months Ended September 30
   28




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Nine months Ended September 30
    Wireless
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    5,924
    
    
    $
    5,693
    
    
    $
    231
    
    
    $
    17,439
    
    
    $
    16,790
    
    
    $
    649Wireless roaming/settlement
    
    
    3,099
    
    
    
    3,370
    
    
    
    (271
    )
    
    
    9,275
    
    
    
    8,700
    
    
    
    575Other
    
    
    436
    
    
    
    458
    
    
    
    (22
    )
    
    
    1,517
    
    
    
    1,486
    
    
    
    31Total operating revenue
    
    
    9,459
    
    
    
    9,521
    
    
    
    (62
    )
    
    
    28,231
    
    
    
    26,976
    
    
    
    1,255Operating expense:Cost of service
    
    
    5,823
    
    
    
    5,331
    
    
    
    492
    
    
    
    16,252
    
    
    
    15,061
    
    
    
    1,191Selling, general & administrative
    
    
    2,603
    
    
    
    2,459
    
    
    
    144
    
    
    
    8,374
    
    
    
    7,890
    
    
    
    484Depreciation
    
    
    651
    
    
    
    601
    
    
    
    50
    
    
    
    1,927
    
    
    
    1,681
    
    
    
    246Total operating expense
    
    
    9,077
    
    
    
    8,391
    
    
    
    686
    
    
    
    26,553
    
    
    
    24,632
    
    
    
    1,921Operating income
    
    $
    382
    
    
    $
    1,130
    
    
    $
    (748
    )
    
    $
    1,678
    
    
    $
    2,344
    
    
    $
    (666
    )Operating margin
    
    
    4.0
    %
    
    
    11.9
    %
    
    
    
    
    
    
    5.9
    %
    
    
    8.7
    %Capital expenditures
    
    $
    444
    
    
    $
    225
    
    
    $
    219
    
    
    $
    1,131
    
    
    $
    1,692
    
    
    $
    (561
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,228
    
    
    
    34,032
    
    
    
    (804
    )Wireless subscribers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,706
    
    
    
    45,285
    
    
    
    3,421
 29




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Three Months Ended September 30
    Nine months Ended September 30
    30




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CLEC
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    3,630
    
    
    $
    3,679
    
    
    $
    (49
    )
    
    $
    10,816
    
    
    $
    11,190
    
    
    $
    (374
    )Access & interconnection
    
    
    1,258
    
    
    
    1,038
    
    
    
    220
    
    
    
    3,341
    
    
    
    3,241
    
    
    
    100Other
    
    
    89
    
    
    
    68
    
    
    
    21
    
    
    
    213
    
    
    
    210
    
    
    
    3Total operating revenue
    
    
    4,977
    
    
    
    4,785
    
    
    
    192
    
    
    
    14,370
    
    
    
    14,641
    
    
    
    (271
    )Operating expense:Cost of service
    
    
    2,638
    
    
    
    2,675
    
    
    
    (37
    )
    
    
    7,778
    
    
    
    8,119
    
    
    
    (341
    )Selling, general & administrative
    
    
    1,755
    
    
    
    1,803
    
    
    
    (48
    )
    
    
    5,536
    
    
    
    5,339
    
    
    
    197Depreciation
    
    
    681
    
    
    
    635
    
    
    
    46
    
    
    
    2,016
    
    
    
    1,898
    
    
    
    118Total operating expense
    
    
    5,074
    
    
    
    5,113
    
    
    
    (39
    )
    
    
    15,330
    
    
    
    15,356
    
    
    
    (26
    )Operating income
    
    $
    (97
    )
    
    $
    (328
    )
    
    $
    231
    
    
    $
    (960
    )
    
    $
    (715
    )
    
    $
    (245
    )Operating margin
    
    
    (1.9
    %)
    
    
    (6.9
    %)
    
    
    
    
    
    
    (6.7
    %)
    
    
    (4.9
    %)Capital expenditures
    
    $
    658
    
    
    $
    348
    
    
    $
    310
    
    
    $
    2,341
    
    
    $
    1,008
    
    
    $
    1,333Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,535
    
    
    
    13,162
    
    
    
    1,373Access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,868
    
    
    
    31,853
    
    
    
    3,015Long distance lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,503
    
    
    
    24,723
    
    
    
    (1,220
    )
 Three Months Ended September 30
    Nine months Ended September 30
    31




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Greenfield
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    2,041
    
    
    $
    1,854
    
    
    $
    187
    
    
    $
    5,954
    
    
    $
    5,378
    
    
    $
    576Access & interconnection
    
    
    574
    
    
    
    553
    
    
    
    21
    
    
    
    1,605
    
    
    
    1,591
    
    
    
    14Other
    
    
    71
    
    
    
    56
    
    
    
    15
    
    
    
    197
    
    
    
    212
    
    
    
    (15
    )Total operating revenue
    
    
    2,686
    
    
    
    2,463
    
    
    
    223
    
    
    
    7,756
    
    
    
    7,181
    
    
    
    575Operating expense:Cost of service
    
    
    1,313
    
    
    
    1,288
    
    
    
    25
    
    
    
    3,957
    
    
    
    3,808
    
    
    
    149Selling, general & administrative
    
    
    926
    
    
    
    919
    
    
    
    7
    
    
    
    2,941
    
    
    
    2,726
    
    
    
    215Depreciation
    
    
    1,034
    
    
    
    868
    
    
    
    166
    
    
    
    3,003
    
    
    
    2,518
    
    
    
    485Total operating expense
    
    
    3,273
    
    
    
    3,075
    
    
    
    198
    
    
    
    9,901
    
    
    
    9,052
    
    
    
    849Operating income
    
    $
    (587
    )
    
    $
    (612
    )
    
    $
    25
    
    
    $
    (2,145
    )
    
    $
    (1,871
    )
    
    $
    (274
    )Operating margin
    
    
    (21.9
    %)
    
    
    (24.8
    %)
    
    
    
    
    
    
    (27.7
    %)
    
    
    (26.1
    %)Capital expenditures
    
    $
    1,371
    
    
    $
    1,055
    
    
    $
    316
    
    
    $
    4,305
    
    
    $
    4,058
    
    
    $
    247Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,851
    
    
    
    28,658
    
    
    
    2,193Access lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,361
    
    
    
    14,387
    
    
    
    1,974Long distance lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,158
    
    
    
    8,080
    
    
    
    2,078Total projects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    112
    
    
    
    12
  ProjectedLines in
    
    Marketable
    
    TotalGreenfield Projects By Year
    
    Service
    
    Lines
    
    ProjectsPrevious years
    
    
    14,155
    
    
    
    40,000
    
    
    
    752003
    
    
    1,097
    
    
    
    5,000
    
    
    
    182004
    
    
    853
    
    
    
    4,000
    
    
    
    122005
    
    
    129
    
    
    
    4,500
    
    
    
    132006
    
    
    127
    
    
    
    1,000
    
    
    
    6Total
    
    
    16,361
    
    
    
    54,500
    
    
    
    124
 Three Months Ended September 30
    32




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Nine months Ended September 30, 2006
      Internet
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating revenue:Customer recurring
    
    $
    3,441
    
    
    $
    2,889
    
    
    $
    552
    
    
    $
    10,080
    
    
    $
    8,523
    
    
    $
    1,557Other
    
    
    37
    
    
    
    48
    
    
    
    (11
    )
    
    
    114
    
    
    
    140
    
    
    
    (26
    )Total operating revenue
    
    
    3,478
    
    
    
    2,937
    
    
    
    541
    
    
    
    10,194
    
    
    
    8,663
    
    
    
    1,531Operating expense:Cost of service
    
    
    684
    
    
    
    680
    
    
    
    4
    
    
    
    2,038
    
    
    
    2,181
    
    
    
    (143
    )Selling, general & administrative
    
    
    1,448
    
    
    
    1,381
    
    
    
    67
    
    
    
    4,291
    
    
    
    4,060
    
    
    
    231Depreciation
    
    
    302
    
    
    
    431
    
    
    
    (129
    )
    
    
    1,005
    
    
    
    1,365
    
    
    
    (360
    )Total operating expense
    
    
    2,434
    
    
    
    2,492
    
    
    
    (58
    )
    
    
    7,334
    
    
    
    7,606
    
    
    
    (272
    )Operating income
    
    $
    1,044
    
    
    $
    445
    
    
    $
    599
    
    
    $
    2,860
    
    
    $
    1,057
    
    
    $
    1,803Operating margin
    
    
    30.0
    %
    
    
    15.2
    %
    
    
    
    
    
    
    28.1
    %
    
    
    12.2
    %Capital expenditures
    
    $
    348
    
    
    $
    352
    
    
    $
    (4
    )
    
    $
    905
    
    
    $
    950
    
    
    $
    (45
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,220
    
    
    
    13,729
    
    
    
    (509
    )DSL lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,544
    
    
    
    17,921
    
    
    
    6,623Dial-up accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,132
    
    
    
    7,197
    
    
    
    (2,065
    )High-speed accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    812
    
    
    
    649
    
    
    
    163
 33




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Three months Ended September 30
    Nine months Ended September 30
    Other
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeOperating expense:Selling, general & administrative
    
    $
    422
    
    
    $
    266
    
    
    $
    156
    
    
    $
    1,114
    
    
    $
    644
    
    
    $
    470Depreciation
    
    
    226
    
    
    
    334
    
    
    
    (108
    )
    
    
    729
    
    
    
    1,008
    
    
    
    (279
    )Total operating expense
    
    $
    648
    
    
    $
    600
    
    
    $
    48
    
    
    $
    1,843
    
    
    $
    1,652
    
    
    $
    191Capital expenditures
    
    $
    2,545
    
    
    $
    326
    
    
    $
    2,219
    
    
    $
    3,100
    
    
    $
    739
    
    
    $
    2,361Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,791
    
    
    
    64,860
    
    
    
    (28,069
    )
 Three months Ended September 30
   Nine months Ended September 30
  34




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##### Table of Contents



Liquidity and Capital Resources
        Payments Due by YearLess than
    
    
    
    
    
    
    
    
    
    
    After 5Total
    
    
    one Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsContractual obligationsTerm loan
    
    $
    42,500
    
    
    $
    6,250
    
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    16,250Fixed interest payments
    
    
    12,834
    
    
    
    2,882
    
    
    
    4,667
    
    
    
    3,203
    
    
    
    2,082Operating leases
    
    
    10,033
    
    
    
    2,401
    
    
    
    3,609
    
    
    
    2,279
    
    
    
    1,744Capital leases
    
    
    205
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    Other service contracts
    
    
    2,201
    
    
    
    1,025
    
    
    
    1,133
    
    
    
    43
    
    
    
    $
    67,773
    
    
    $
    12,763
    
    
    $
    19,409
    
    
    $
    15,525
    
    
    $
    20,076
 35




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
   
    
    the Companys ability to respond effectively to the issues surrounding the
telecommunications industry caused by state and federal legislation and regulations,
    
    the impact of economic conditions related to the financial performance of
customers, business partners, competitors and peers within the telecommunications
industry,
    
    the Companys ability to achieve acceptable returns on investments in connection
with the expansion into new businesses,
    
    the Companys ability to attract and retain key personnel,
    
    the Companys ability to retain its existing customer base against wireless,
cable telephone and other competition in all areas of the business including local
and long distance and Internet and data services,
    
    the Companys ability to maintain its margins in a highly competitive industry,
    
    the performance of the Companys investments,
    
    the Companys ability to effectively manage rapid changes in technology and
control capital expenditures related to those technologies, and
    
    the impact of economic and political events on the Companys business, operating
regions and customers, including terrorist attacks.
  In making forward-looking statements, the Company claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995. The Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors discussed in documents
filed by us with the Securities and Exchange Commission, including those matters summarized
under the caption Risk Factors in the Companys Annual Report on Form 10-K for the year
ended December 31, 2005. All forward-looking statements should be viewed with caution.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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##### Table of Contents



Item 4. Controls and Procedures.
 (a)  Disclosure Controls and Procedures
  (b)  Changes in Internal Control Over Financial Reporting
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  Exhibit No.
    
    Description of Exhibit10.1
    
    Amendment No. 1 to the CT Communications, Inc. Amended and
Restated 2001 Stock Incentive Plan.10.2
    
    CT Communications, Inc. Amended and
Restated 2001 Stock Incentive Plan: Form of Amendment No. 1 to the CT
Communications, Inc. Amended and Restated 2001 Stock Incentive Plan
Non-Qualified Stock Option Agreement.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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##### Table of Contents



CT COMMUNICATIONS, INC.(Registrant)/s/ Ronald A. MarinoRonald A. MarinoVice President Finance andChief Accounting OfficerNovember 3, 2006Date
  39




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Exhibit10.1
    
    Amendment No. 1 to the CT
Communications, Inc. Amended and Restated 2001 Stock Incentive
Plan.10.2
    
    CT Communications, Inc. Amended and
Restated 2001 Stock Incentive Plan: Form of Amendment No.1 to the CT
Communications, Inc. Amended and Restated 2001 Stock Incentive Plan
Non-Qualified Stock Option Agreement.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.
 40