1
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Schedules
December 31, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
2
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements Index
December 31, 1999, 1998 and 1997
(1) Consolidated Financial Statements
The following financial statements, together with independent auditors'
report thereon, are included:
o Independent Auditors' Report F - 2
o Consolidated balance sheets as of December 31, 1999 and 1998 F - 3 and F - 4
o Consolidated statements of income for the years ended
December 31, 1999, 1998, and 1997 F - 5
o Consolidated statements of comprehensive income for the years
ended December 31, 1999, 1998 and 1997 F-6
o Consolidated statements of stockholders' equity for the years ended
December 31, 1999, 1998, and 1997 F - 7 and F - 8
o Consolidated statements of cash flows for the years ended
December 31, 1999, 1998, and 1997 F - 9
o Notes to consolidated financial statements for the years ended
December 31, 1999, 1998, and 1997 F - 10 to F - 35
(2) Consolidated Financial Statement Schedules
The following financial statement schedule is included:
o Schedule II - Valuation and Qualifying Accounts F - 36
Other schedules are omitted because the required information is included
in the financial statements or is not applicable.
3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CT Communications, Inc.:
We have audited the consolidated financial statements of CT Communications, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of these consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CT Communications,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Charlotte, North Carolina
February 25, 2000
4
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
------------- -------------
Current assets:
Cash and cash equivalents $ 1,561,778 2,924,568
Accounts receivable, net of allowance for doubtful
accounts of $107,500 in 1999 and 1998 14,859,359 12,210,952
Notes receivable 1,513,500 1,513,500
Other accounts receivable 2,260,038 1,067,163
Materials and supplies 2,551,724 2,331,957
Deferred income taxes 154,669 1,051,855
Prepaid expenses and other assets 1,107,238 1,583,232
------------- -------------
Total current assets 24,008,306 22,683,227
------------- -------------
Investment securities 81,950,045 24,666,211
Investments in affiliates 31,683,635 29,789,794
Property and equipment:
Land, buildings, and general equipment 38,873,719 35,676,763
Central office equipment 83,054,096 70,787,607
Poles, wires, cables and conduit 95,335,716 87,587,101
Construction in progress 2,426,293 449,946
------------- -------------
219,689,824 194,501,417
Less accumulated depreciation (105,514,615) (94,329,834)
------------- -------------
Net property and equipment 114,175,209 100,171,583
------------- -------------
Intangibles, net 5,878,015 6,323,543
$ 257,695,210 183,634,358
============= =============
See accompanying notes to consolidated financial statements.
F-3
5
1999 1998
------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Redeemable preferred stock $ 12,500 12,500
Accounts payable 6,955,346 8,597,391
Customer deposits and advance billings 2,094,334 1,892,506
Accrued payroll 2,450,067 2,584,993
Income taxes payable 1,019,221 400,736
Accrued pension cost 1,020,639 1,411,430
Other accrued liabilities 2,321,594 1,795,533
------------- -------------
Total current liabilities 15,873,701 16,695,089
------------- -------------
Long-term debt 20,000,000 20,000,000
------------- -------------
Deferred credits and other liabilities:
Deferred income taxes 34,507,475 14,688,095
Investment tax credits 689,310 804,195
Postretirement benefits other than pension 10,551,111 10,549,204
Other 795,011 1,189,587
------------- -------------
46,542,907 27,231,081
------------- -------------
Redeemable preferred stock: 4.8% series; authorized 5,000
shares; issued and outstanding 1,125 and 1,250 shares in
1999 and 1998, respectively 112,500 125,000
------------- -------------
Total liabilities 82,529,108 64,051,170
------------- -------------
Minority interest -- --
Stockholders' equity:
Preferred stock not subject to mandatory redemption:
5% series, $100 par value; 3,356 and 3,440 shares
outstanding in 1999 and 1998, respectively 335,600 344,000
4.5% series, $100 par value; 614 and 628 shares
outstanding in 1999 and 1998, respectively 61,400 62,800
Common stock:
9,380,465 and 9,300,769 shares outstanding in
1999 and 1998, respectively 38,584,516 35,748,327
Other capital 298,083 298,083
Deferred compensation (1,074,726) (697,338)
Other accumulated comprehensive income 48,059,889 13,100,748
Retained earnings 88,901,340 70,726,568
------------- -------------
Total stockholders' equity 175,166,102 119,583,188
Contingency -- --
------------- -------------
$ 257,695,210 183,634,358
============= =============
F-4
6
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
------------- ------------- -------------
Operating revenues $ 105,591,594 91,725,394 78,483,514
Operating expenses 83,223,191 70,272,414 58,390,372
------------- ------------- -------------
Net operating revenues 22,368,403 21,452,980 20,093,142
------------- ------------- -------------
Other income (expenses):
Equity in income of affiliates, net 1,149,234 431,088 130,637
Interest, dividend income and gain on sale
of investments 17,823,337 1,916,446 261,459
Other expenses, principally interest (2,575,048) (1,491,635) (985,275)
------------- ------------- -------------
Total other income (expenses) 16,397,523 855,899 (593,179)
------------- ------------- -------------
Income before income taxes and
extraordinary item 38,765,926 22,308,879 19,499,963
Income taxes 15,697,657 8,926,469 7,898,159
------------- ------------- -------------
Net income before extraordinary item 23,068,269 13,382,410 11,601,804
Extraordinary item - discontinuance of SFAS 71,
net of income taxes of $1,493,312 -- -- 2,239,045
------------- ------------- -------------
Net income after extraordinary item 23,068,269 13,382,410 13,840,849
Dividends on preferred stock 26,210 28,457 73,073
------------- ------------- -------------
Earnings for common stock $ 23,042,059 13,353,953 13,767,776
============= ============= =============
Basic earnings per common share:
Earnings before extraordinary item $ 2.46 1.45 1.27
============= ============= =============
Extraordinary item $ -- -- 0.25
============= ============= =============
Earnings per common share $ 2.46 1.45 1.52
============= ============= =============
Diluted earnings per common share:
Earnings before extraordinary item $ 2.44 1.44 1.26
============= ============= =============
Extraordinary item $ -- -- 0.25
============= ============= =============
Earnings per common share $ 2.44 1.44 1.51
============= ============= =============
Basic weighted average shares outstanding 9,352,943 9,227,016 9,076,211
============= ============= =============
Diluted weighted average shares outstanding 9,425,925 9,276,504 9,111,439
============= ============= =============
See accompanying notes to consolidated financial statements
F-5
7
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
------------ ------------ ------------
Net income after extraordinary item $ 23,068,269 13,382,410 13,840,849
Other comprehensive income, net of tax
Unrealized holding gains on
available-for-sale securities 45,097,588 6,931,305 5,974,024
Less reclassification adjustment, net of
tax, for gains realized in net income (10,138,447) -- --
------------ ------------ ------------
Comprehensive income $ 58,027,410 20,313,715 19,814,873
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
8
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
5% Series 4.5% Series Discount
Preferred Preferred of 5% Common Other
Stock Stock Preferred Stock Capital
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 $ 1,508,700 200,000 (16,059) 27,398,214 298,083
----------- ----------- ----------- ----------- -----------
Net income -- -- -- -- --
Issuance of 52,028 shares of
Common Stock -- -- -- 1,412,339 --
Issuance of 1,048 shares for exercise
of stock options -- -- -- 74,279 --
Repurchases of shares:
11,456 shares of 5% Preferred Stock (1,145,600) -- 16,059 362,039 --
782 shares of 4.5% Preferred Stock -- (78,200) -- 46,920 --
9,090 shares of Common Stock -- -- -- (253,046) --
Dividends declared:
5% Preferred Stock -- -- -- -- --
4.8% Preferred Stock -- -- -- -- --
4.5% Preferred Stock -- -- -- -- --
Common Stock -- -- -- -- --
Other comprehensive income -- -- -- -- --
Unearned compensation related to the
granting of 27,476 shares of restricted
Common Stock, net of $140,931
earned during the year -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 363,100 121,800 -- 29,040,745 298,083
----------- ----------- ----------- ----------- -----------
Other Total
Unearned Comprehensive Retained Stockholders'
Compensation Income Earnings Equity
----------- ----------- ----------- -----------
Balances at December 31, 1996 (188,055) 195,419 52,260,013 81,656,315
----------- ----------- ----------- -----------
Net income -- -- 13,840,849 13,840,849
Issuance of 52,028 shares of
Common Stock -- -- -- 1,412,339
Issuance of 1,048 shares for exercise
of stock options -- -- -- 74,279
Repurchases of shares:
11,456 shares of 5% Preferred Stock -- -- -- (767,502)
782 shares of 4.5% Preferred Stock -- -- -- (31,280)
9,090 shares of Common Stock -- -- -- (253,046)
Dividends declared:
5% Preferred Stock -- -- (56,298) (56,298)
4.8% Preferred Stock -- -- (7,775) (7,775)
4.5% Preferred Stock -- -- (9,000) (9,000)
Common Stock -- -- (4,234,604) (4,234,604)
Other comprehensive income -- 5,974,024 -- 5,974,024
Unearned compensation related to the
granting of 27,476 shares of restricted
Common Stock, net of $140,931
earned during the year (629,848) -- -- (629,848)
----------- ----------- ----------- -----------
Balances at December 31, 1997 (817,903) 6,169,443 61,793,185 96,968,453
----------- ----------- ----------- -----------
F-7
9
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
5% Series 4.5% Series Discount
Preferred Preferred of 5% Common Other
Stock Stock Preferred Stock Capital
------------ ------------ ------------ ------------ ------------
Net income $ -- -- -- -- --
Issuance of 219,818 shares of Common Stock -- -- -- 6,559,335 --
Issuance of 11,114 shares for exercise
of stock options -- -- -- 425,619 --
Repurchases of shares:
191 shares of 5% Preferred Stock (19,100) -- -- 3,079 --
590 shares of 4.5% Preferred Stock -- (59,000) -- 27,824 --
9,570 shares of Common Stock -- -- -- (308,275) --
Dividends declared:
5% Preferred Stock -- -- -- -- --
4.8% Preferred Stock -- -- -- -- --
4.5% Preferred Stock -- -- -- -- --
Common Stock -- -- -- -- --
Other comprehensive income -- -- -- -- --
Unearned compensation related to the
granting of 8,084 shares of restricted
Common Stock, net of $385,316
earned during the year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 $ 344,000 62,800 -- 35,748,327 298,083
------------ ------------ ------------ ------------ ------------
Net income -- -- -- -- --
Issuance of 55,185 shares of Common Stock -- -- -- 2,157,170 --
Issuance of 25,228 shares for exercise
of stock options -- -- -- 411,888 --
Repurchases of shares:
84 shares of 5% Preferred Stock (8,400) -- -- 2,772 --
14 shares of 4.5% Preferred Stock -- (1,400) -- 560 --
717 shares of Common Stock -- -- -- (40,308) --
Dividends declared:
5% Preferred Stock -- -- -- -- --
4.8% Preferred Stock -- -- -- -- --
4.5% Preferred Stock -- -- -- -- --
Common Stock -- -- -- -- --
Tax benefit from exercise of stock options -- -- -- 304,107 --
Other comprehensive income -- -- -- -- --
Unearned compensation related to the
granting of 24,218 shares of restricted
Common Stock, net of $607,247
earned during the year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1999 $ 335,600 61,400 -- 38,584,516 298,083
============ ============ ============ ============ ============
Other Total
Unearned Comprehensive Retained Stockholders'
Compensation Income Earnings Equity
------------ ------------ ------------ ------------
Net income -- -- 13,382,410 13,382,410
Issuance of 219,818 shares of Common Stock -- -- -- 6,559,335
Issuance of 11,114 shares for exercise
of stock options -- -- -- 425,619
Repurchases of shares:
191 shares of 5% Preferred Stock -- -- -- (16,021)
590 shares of 4.5% Preferred Stock -- -- -- (31,176)
9,570 shares of Common Stock -- -- -- (308,275)
Dividends declared:
5% Preferred Stock -- -- (19,398) (19,398)
4.8% Preferred Stock -- -- (5,382) (5,382)
4.5% Preferred Stock -- -- (3,677) (3,677)
Common Stock -- -- (4,420,570) (4,420,570)
Other comprehensive income -- 6,931,305 -- 6,931,305
Unearned compensation related to the
granting of 8,084 shares of restricted
Common Stock, net of $385,316
earned during the year 120,565 -- -- 120,565
------------ ------------ ------------ ------------
Balances at December 31, 1998 (697,338) 13,100,748 70,726,568 119,583,188
------------ ------------ ------------ ------------
Net income -- -- 23,068,269 23,068,269
Issuance of 55,185 shares of Common Stock -- -- -- 2,157,170
Issuance of 25,228 shares for exercise
of stock options -- -- -- 411,888
Repurchases of shares:
84 shares of 5% Preferred Stock -- -- -- (5,628)
14 shares of 4.5% Preferred Stock -- -- -- (840)
717 shares of Common Stock -- -- -- (40,308)
Dividends declared:
5% Preferred Stock -- -- (16,843) (16,843)
4.8% Preferred Stock -- -- (6,575) (6,575)
4.5% Preferred Stock -- -- (2,792) (2,792)
Common Stock -- -- (4,867,287) (4,867,287)
Tax benefit from exercise of stock options -- -- -- 304,107
Other comprehensive income -- 34,959,141 -- 34,959,141
Unearned compensation related to the
granting of 24,218 shares of restricted
Common Stock, net of $607,247
earned during the year (377,388) -- -- (377,388)
------------ ------------ ------------ ------------
Balances at December 31, 1999 (1,074,726) 48,059,889 88,901,340 175,166,102
============ ============ ============ ============
F-8
10
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 23,068,269 13,382,410 13,840,849
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item -- -- (2,239,045)
Depreciation and amortization 15,124,263 12,840,561 9,612,085
Postretirement benefits 1,907 523,076 603,555
Loss (gain) on sale of investment securities (15,806,746) (1,113,546) 23,667
Undistributed income of affiliates (1,149,234) (431,088) (130,637)
Deferred income taxes and tax credits 1,446,326 4,138,338 (589,093)
Changes in operating assets and liabilities, net of effects
of acquisitions in 1998:
Accounts and notes receivable (3,715,640) (4,306,651) (1,228,185)
Materials and supplies (219,767) 364,475 163,682
Other current assets 313,167 (402,502) (473,480)
Accounts payable (1,642,045) (1,519,073) (1,565,023)
Customer deposits and advance billings 201,828 83,531 319,722
Accrued liabilities (148,487) 703,974 1,878,013
Refundable income taxes -- -- 14,736
Income taxes payable 618,485 (592,014) 992,750
------------ ------------ ------------
Net cash provided by operating activities 18,092,326 23,671,491 21,223,596
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures, net (27,584,002) (24,789,296) (21,573,658)
Purchases of investments in affiliates (5,331,115) (4,375,949) (11,148,674)
Purchases of investment securities (11,883,346) (100,919) (356,268)
Proceeds from sale of investment securities 25,949,049 1,806,648 2,783,299
Partnership capital distribution 3,442,882 3,609,252 4,229,675
Notes receivable collections, net -- (503,000) (1,810,500)
Acquisition of business (255,000) -- --
------------ ------------ ------------
Net cash used in investing activities (15,661,532) (24,353,264) (27,876,126)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of long-term debt -- (21,281,889) (2,215,000)
Proceeds from new debt -- 29,422,889 10,000,000
Redemption of preferred stock (12,500) (12,500) (12,500)
Dividends paid (4,893,497) (4,449,027) (4,307,677)
Repurchases of common and preferred stock (46,776) (385,863) (1,067,468)
Proceeds from common stock issuances 1,159,189 312,731 643,600
Minority interest -- -- 1,360,998
Other -- -- 87,879
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,793,584) 3,606,341 4,489,832
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,362,790) 2,924,568 (2,162,698)
Cash and cash equivalents - beginning of year 2,924,568 -- 2,162,698
------------ ------------ ------------
Cash and cash equivalents - end of year $ 1,561,778 2,924,568 --
============ ============ ============
Supplemental cash flow information:
Cash paid for income taxes $ 13,545,442 $ 4,827,202 $ 7,912,449
Cash paid for interest $ 1,100,899 $ 1,093,473 $ 390,735
See accompanying notes to consolidated financial statements.
F-9
11
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
These consolidated financial statements include the accounts of CT
Communications, Inc. (the Company), a holding company, and its
wholly-owned subsidiaries, The Concord Telephone Company ("CTC"),
CTC Long Distance Services, Inc. ("CTC LDS"), CT Cellular, Inc.,
Carolina Personal Communications, Inc. (dba "CTC Wireless"), CT
Wireless Cable, Inc., CTC Exchange Services, Inc., CT Global
Telecommunications, Inc. ("CTGT"), CT Communications Northeast
Trust, CT Communications Northeast, Inc., CTC Internet Services,
Inc., and CT Communications Northeast Wireless Trust. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
CT Communications, Inc. and subsidiaries operate entirely in the
communications industry. CTC, the Company's principal subsidiary,
provides local telephone service as well as telephone and
equipment rental to customers who are primarily residents of
Cabarrus, Stanly and Rowan counties in North Carolina. The Company
also provides long distance service via CTC LDS. CT Cellular owns
and accounts for investments in a limited partnership which
provides cellular mobile telephone services to various counties in
North and South Carolina. CTC Wireless accounts for the retail
operations and services provided in relation to personal
communications services, a new wireless telecommunications system
which includes voice, data interface and paging. CT wireless Cable
accounts for an investment in Wireless One of North Carolina, LLC,
which participates in the wireless cable television market in
North Carolina. CTC Exchange Services was formed to provide
competitive local telephone service in North Carolina. CTGT was
formed to build telecommunications networks outside of the United
States. CT Communications Northeast Trust and CT Communications
Northeast, Inc. were formed in 1998 to hold the Company's
investment securities and investments in affiliates. CTC Internet
Services, Inc., which was established in 1998 as a result of the
Company's acquisition of G.A. Technologies, doing business as Vnet
(note 5), was formed to provide internet services to customers in
North Carolina. CT Communications Northeast Wireless Trust was
formed in 1999 to hold the Company's investment in CT Wireless
Cable, Inc.
Effective April 1, 1997, the Company discontinued application of
Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." See
note 14 for further discussion of the impacts of discontinuance of
SFAS No. 71.
(b) RECLASSIFICATIONS
In certain instances, amounts previously reported in the 1998 and
1997 consolidated financial statements have been reclassified to
conform with the 1999 consolidated financial statement
presentation. Such reclassifications have no effect on net income
or retained earnings as previously reported.
F-10
12
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(c) PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost and includes
certain indirect costs consisting of payroll taxes, pension and
other fringe benefits, administrative, and general cost.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets. Prior to the
Company's discontinued applications of SFAS No. 71 on April 1,
1997 (see note 14), depreciation on telephone plant in service was
provided on a straight-line basis using composite rates acceptable
to the regulatory authorities.
Maintenance, repairs, and minor renewals are primarily charged to
maintenance expense accounts. Additions, renewals, and betterments
are charged to telephone plant accounts. The original cost of
depreciable property retired is removed from telephone plant
accounts and charged to accumulated depreciation, which is
credited with the salvage less removal cost. Under this method, no
profit or loss is calculated on ordinary retirements of
depreciable property.
(d) INVESTMENT SECURITIES
Investment securities at December 31, 1999 and 1998 consist of
state, county and municipal debt securities, and corporate equity
securities. The Company classifies its debt and equity securities
in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. All
other securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or
discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale
securities 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 available-for-sale
securities are determined on a specific identification basis.
F-11
13
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
A decline in the market value of any available-for-sale or
held-to-maturity 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. Premiums and discounts are
amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned.
At December 31, 1999 and 1998, all securities are classified as
available-for-sale securities.
(e) INVESTMENTS IN AFFILIATED COMPANIES
The Company has interests in several partnerships and corporations
which operate in the communications industry. Investments in
affiliates over which the Company has the ability to exercise
significant influence are accounted for by the equity method.
(f) MATERIALS AND SUPPLIES
Materials and supplies are valued principally at the lower of
average cost (first-in, first-out method) or market.
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Investment tax credits related to telephone plant have been
deferred and amortized as a reduction of federal income tax
expense over the estimated useful lives of the assets giving rise
to the credits. Unamortized deferred investment tax credits are
recognized as temporary differences.
(h) REVENUE RECOGNITION
Local and toll service and access charges are recognized when
earned regardless of the period in which they are billed.
F-12
14
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(i) INTANGIBLES
Intangibles consist primarily of goodwill representing the excess
of the purchase price of Catawba Valley Internet, Vnet and
tarheel.net (note 5) over the fair value of the net assets
acquired. Goodwill is amortized using the straight line method
over 10 to 15 years. Amortization expense for the years ended
December 31, 1999 and 1998 amounted to $679,340 and $432,359,
respectively Accumulated amortization at December 31, 1999 and
1998 was $1,113,029 and $433,689, respectively.
(j) CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers
all short-term investments with original maturities at the date of
purchase of three months or less to be cash equivalents.
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(m) STOCK OPTION PLANS
Statement of Financial Accounting Standards (SFAS) No. 123 allows
entities to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
F-13
15
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(n) RECENT ACCOUNTING PRONOUNCEMENTS
During 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures About Pension
and Other Postretirement Benefits" and has revised its disclosures
for its pension and postretirement plans accordingly.
(2) NOTES RECEIVABLE
At December 31, 1999 and 1998, the Company had notes receivables of
$1,513,500 due from US Telecom Holdings, Inc. ("USTH") with interest at
9.75%. The notes are secured by a first priority security interest in
4,950.50 shares of common stock of Telco Investors II, Inc. owned by USTH
and are due April 1, 2000. Interest due to the Company as of December 31,
1999 and 1998 was $325,223 and $170,131, respectively.
(3) INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for the Company's investments by major
security type and class of security at December 31, 1999 and 1998, were
as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
At December 31, 1999
Available-for-sale:
Certificate of deposit $ 124,208 -- -- 124,208
Equity securities 7,019,143 75,152,748 (221,846) 81,950,045
----------- ----------- ----------- -----------
$ 7,143,351 75,152,748 (221,846) 82,074,253
=========== =========== =========== ===========
At December 31, 1998
Available-for-sale:
Certificate of deposit $ 117,975 -- -- 117,975
Equity securities 4,140,229 23,667,578 (3,141,596) 24,666,211
----------- ----------- ----------- -----------
$ 4,258,204 23,667,578 (3,141,596) 24,784,186
=========== =========== =========== ===========
In 1999 and 1998, proceeds from the sale of investment securities
available for sale were $25,949,049 and $1,806,648 and included in income
were gross realized gains of $16,189,174 and $1,274,437 and gross
realized losses of $382,428 and $160,891, respectively.
F-14
16
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(4) INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies consist of the following:
1999
OWNERSHIP
PERCENTAGE 1999 1998
----------- ----------- ----------
Equity Method:
Palmetto Mobile Net, L.P. 19.84% 11,678,889 10,262,329
Wireless One of North
Carolina, LLC 49.50% 8,613,074 4,366,105
BellSouth Carolinas PCS, LP 1.96% -- 1,896,667
U.S. Telecom Holdings -- -- 695,385
Access On 19.58% 41,016 118,476
Cost Method:
Illuminet Holdings, Inc. -- -- 1,068,624
ITC Holding Company 3.80% 2,724,129 2,724,129
Maxcom Telecomunicaciones,
S.A. de C.V. 16.20% 8,610,277 8,566,777
Other Various 16,250 91,302
----------- ----------
$31,683,635 29,789,794
=========== ==========
CT Cellular, Inc. and Ellerbe Telephone entered into agreements to
exchange their respective interests in RSA 4/5 and RSA 15 for interests
in Palmetto MobileNet, L.P., a South Carolina limited partnership. In
April 1998, the Federal Communications Commission approved the
transaction which was deemed effective as of January 1, 1998.
The purpose of Wireless One of North Carolina, LLC is to develop and
deploy wireless cable in North Carolina.
BellSouth Carolinas PCS, L.P. is in the business of providing digital
personal communications services that competes with cellular phone
service.
U.S. Telecom Holdings is in the business of investing directly or
indirectly in regional operating telephone companies in Hungary, Mexico
and other developing countries. The Company has fully reserved the
investment at December 31, 1999.
Access On, in cooperation with the Company and thirteen other North
Carolina independent telephone companies, was formed to build and operate
a broadband backbone telecommunications network throughout much of North
Carolina. As a result of the Company's significant influence over this
company's operating and financial policies, this investment is accounted
for under the equity method.
F-15
17
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
ITC Holding Company structurally separated ITC Deltacom, Inc.
("Deltacom") (a publicly held company) and its subsidiaries from ITC
Holding Company. ITC Holding Company created the "New ITC Holding
Company", of which the Company received one share of stock for each share
of "Old ITC Holding Company" stock. The Company also received 2.3 shares
of Deltacom stock for each share of "Old ITC Holding Company" stock. The
investment in Deltacom is included in available-for-sale equity
securities in note 3.
Maxcom Telecomunicaciones, S.A. de C.V. ("Maxcom", formerly known as
Amaritel, S.A. de C.V.) is creating a competitive telecommunications
company offering local, long distance, and network telecommunications
services in Mexico. The Company's investment in Maxcom is through its
subsidiary, CTGT.
Illuminet Holdings, Inc., formerly USTN Holdings, Inc., provides network
services such as seamless routing for wireless services and database and
billing support. During 1999 the Company's interest in Illuminet was
converted into equity securities and is included within Investment
Securities in the financial statements.
Included in the Company's share of earnings from affiliates accounted for
under the equity method for 1999 were total losses of $3,710,209 and
total income of $4,859,443. 100% of the income was attributable to
Palmetto Mobile Net.
Summarized unaudited financial position information for Palmetto Mobile
Net as of December 31, 1999 is as follows: current assets - $20,217,143;
property and other non-current assets - $95,822,892; current liabilities
- $7,160,000; partners' capital - $108,880,035. Summarized unaudited
combined results of operations for this entity for the year ended
December 31, 1999, is as follows: revenues - $81,325,406; operating
income - $31,695,237 and net income $28,438,113.
(5) ACQUISITIONS
On September 30, 1999, the Company acquired Catawba Valley Internet
Services, an internet provider based in Cherryville, NC for $255,000. The
total purchase price has been allocated to assets acquired as follows:
Property and equipment $ 25,000
Goodwill 230,000
-------------
Total purchase price $ 255,000
=============
F-16
18
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
On May 8, 1998, the Company acquired G.A. Technologies, Inc., an internet
provider based in Charlotte, North Carolina doing business as Vnet, for
$6,449,134. This transaction was structured as a merger of Vnet into the
Company's subsidiary, CTC Internet Services, Inc. Pursuant to the merger,
the shareholders of Vnet exchanged their Vnet shares for shares of the
Company's common stock. This transaction was accounted for under the
purchase method of accounting and the total purchase has been allocated
to assets and liabilities assumed as follows:
Cash $ 27,216
Accounts receivable 123,829
Deferred taxes 35,037
Prepaid expenses 45,558
Property and equipment 407,929
Goodwill 6,354,910
Other intangibles 38,772
Accounts payable (366,426)
Customer deposits (217,691)
-----------
Total purchase price $ 6,449,134
===========
On December 23, 1998, the Company acquired tarheel.net, an internet
provider based in Hickory, North Carolina, for $110,000. The total
purchase price has been allocated to assets acquired as follows:
Accounts receivable $ 4,713
Property and equipment 11,500
Goodwill 93,787
--------
Total purchase price $110,000
========
Results of operations for the acquired entities have been included from
the date of acquisition. Pro forma results for these entities as if they
had been acquired at the beginning of the period are not material to the
consolidated financial statements.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of the company's financial instruments:
Cash and cash equivalents, accounts receivable, notes receivable,
other assets, accounts payable and accrued expenses - the carrying
amount approximates fair value because of the short maturity of
these instruments.
Investment Securities - debt and equity securities are carried at
market value.
F-17
19
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Long-term debt - the fair value of the Company's long-term debt is
estimated by discounting the scheduled payment streams to present
value based on current rates for similar instruments of comparable
maturities.
Based on the methods and assumptions noted above, the estimated fair
values of the Company's financial instruments approximate carrying
amounts at December 31, 1999 and 1998 due to the variability in interest
rates of the underlying instruments.
(7) LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
1999 1998
----------- ----------
Line of credit with interest at LIBOR plus .5%
(6.63% at December 31, 1999) due December
31, 2000, renewable for two separate two-year
extensions through December 31, 2004 $20,000,000 20,000,000
=========== ==========
The Company has an available line of credit totaling $60,000,000, of
which $20,000,000 was outstanding at December 31, 1999.
The Company currently maintains an interest rate swap to minimize the
risk of rising interest rates on floating rate debt. The agreement is
dated March 5, 1999 and is a floating to fixed swap which means that the
interest payable on $10 million of our floating rate debt is payable at a
fixed rate of the sum of 5.90% plus the applicable percentage as
determined under the terms of our credit agreement.
(8) REDEEMABLE PREFERRED STOCK
The 4.8% redeemable preferred stock is callable at a redemption price of
$100 a share plus accumulated dividends. Sinking fund requirements in the
next five years are $12,500 annually.
There have been no changes in the 4.8% series preferred stock in the
three years ended December 31, 1999, other than the annual sinking fund
requirement of $12,500.
F-18
20
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(9) COMMON STOCK AND PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION
There are 100,000,000 shares of voting common stock, no par value,
authorized.
In August 1997, the company effected a three-for-two stock split in the
form of a one-for-two stock distribution to stockholders of record at
August 1, 1997. On January 28, 1999, the Company's shareholders approved
a plan of recapitalization for its common stock. On that date, the
Company's Articles of Incorporation were amended to provide for one class
of common stock, rather than the two existing classes of Voting Common
Stock and Class B Nonvoting Common Stock. Each outstanding share of
Voting Common Stock has been automatically converted into 4.4 shares of
common stock, and each outstanding share of Class B Nonvoting Common
Stock has been automatically converted into 4.0 shares of common stock.
In lieu of issuing fractional shares, the Company paid cash for these
shares. The Company's common stock trades on The Nasdaq Stock Market
under the symbol "CTCI". The foregoing financial statements and footnotes
have been adjusted to reflect the recapitalization. Earnings per share,
dividends per share and weighted average shares outstanding have been
retroactively restated for all years presented.
Cash dividends per share of common stock are as follows: $.52 in 1999,
$.48 in 1998; and $.47 in 1997.
Preferred stock is comprised of cumulative $100 par value 5% and 4.5%
series stock. There are 17,000 shares of the 5% series stock authorized.
There are 2,000 shares of the 4.5% series stock authorized.
(10) STOCK COMPENSATION PLANS
At December 31, 1999, the Company has five stock-based compensation
plans, which are described below. The Company applies APB Opinion No. 25
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans
and its stock purchase plan. 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 would have been
reduced to the pro forma amounts indicated below:
1999 1998
----------- ----------
Net income for common
stock
As Reported $23,042,059 13,353,953
Pro forma $22,808,536 13,322,783
Basic earnings per
common share As Reported $ 2.46 1.45
Pro forma $ 2.44 1.44
Diluted earnings per
common share As Reported $ 2.44 1.44
Pro Forma $ 2.42 1.44
F-19
21
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The Company has an Executive Stock Option Plan (the Plan) to allow key
employees to increase their holdings of the Company's common stock.
45,000 shares of common stock were reserved for issuance under the Plan.
At December 31, 1999, all shares reserved for issuance have been granted.
Options are granted at prices determined by the board of directors,
generally the most recent sales price at the date of grant, and must be
exercised within five years of the date of grant. Options are exercisable
immediately when granted. Activity under the Plan for each of the years
in the three-year period ended December 31, 1999, is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
Options outstanding and exercisable at
December 31, 1996 21,364 $ 13
Options granted -- --
Options exercised (448) 12
Options forfeited (20) 12
------- -------
Options outstanding and exercisable at
December 31, 1997 20,896 13
Options granted -- --
Options exercised (8,468) 11
------- -------
Options outstanding and exercisable at
December 31, 1998 12,428 14
Options granted -- --
Options exercised (8,828) 13
------- -------
Options outstanding and exercisable at
December 31, 1999 3,600 $ 14
======= =======
As of December 31, 1999 and 1998, the 3,600 and 12,428 options
outstanding and exercisable have exercise prices between $11 and $14 and
a weighted-average remaining contractual life of 1 year and 6 months,
respectively.
The Company has a comprehensive Stock option plan (the Plan) to allow key
employees to increase their holdings of the Company's common stock.
90,000 shares of common stock have been reserved for issuance under the
Plan. At December 31, 1999, the number of common stock reserved for
issuance but ungranted was 240 shares. Options are granted at prices
determined by the board of directors, generally the most recent sales
price at the date of grant, and must be exercised within ten years of the
date of grant. Options become exercisable over periods from six months to
four years after the grant date.
F-20
22
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Activity under the Plan for each of the years in the three-year period
ended December 31, 1999 is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
Options outstanding at December 31, 1996 55,800 $ 18
Options granted 33,956 18
Options exercised (600) 18
Options forfeited (3,000) 18
------- -------
Options outstanding at December 31, 1997 86,156 18
Options granted -- --
Options exercised (2,656) 18
Options forfeited (5,308) 18
------- -------
Options outstanding at December 31, 1998 78,192 18
------- -------
Options granted -- --
Options exercised (15,064) 18
Options forfeited (3,992) 18
------- -------
Options outstanding at December 31, 1999 59,136 $ 18
======= =======
Options exercisable at December 31, 1999 40,284 $ 18
======= =======
As of December 31, 1999 and 1998, the 59,136 and 78,192 options
outstanding have exercise prices between $15 and $18 and a
weighted-average remaining contractual life of 6.0 and 7.5 years,
respectively.
The per share fair value of stock options granted in 1997 was $6 at the
date of grant. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: 1997 - Dividend yield of 2.7%,
expected volatility of 20%; risk-free interest rate of 6%; and expected
lives of 10 years.
F-21
23
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The 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 90,000
shares. The Company records deferred compensation in the amount of the
fair market value of the stock granted and amortizes this amount on a
straight line basis over the restricted period, generally 1 to 10 years.
In 1999, 1998 and 1997, respectively, the Company granted 24,218, 8,084
and 27,476 shares to participants with a weighted-average fair value of
$39, $33, and $19. Deferred compensation at December 31, 1999 and 1998,
respectively was $1,074,726 and $697,338, which is disclosed net of
accumulated amortization of $607,247 and $385,316, in the consolidated
statements of stockholders' equity.
In 1996, a Director Compensation Plan (the Plan) was approved to provide
each member of the Board of Directors the right to receive the Director's
compensation in shares of common stock or cash, at the Director's
discretion. An aggregate of 45,000 shares have been reserved for issuance
under the 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 grant date.
The initial grant date is the first day that is six months and one day
following the Directors election. All subsequent compensation shall be
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 1999, 1998 and 1997, the Company granted 4,528,
2,608 and 3,132 shares, respectively, with an average fair market value
of $37, $33 and $29, respectively.
During 1997, the CT Communications, Inc. Omnibus Stock Compensation Plan
(the Plan) was approved. 400,000 shares of common stock have been
reserved for issuance under the Plan. The Plan provides for awards of
stock, stock options and stock appreciation rights. At December 31, 1999,
the number of common stock reserved for issuance but ungranted was
317,561 shares. Options are granted at prices determined by the board of
directors, generally the most recent sales price at the date of grant,
and must be exercised within ten years of the date of grant.
F-22
24
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Activity under the Plan is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
Options outstanding at December 31, 1997 -- --
Options granted 32,232 $ 33
Options exercised -- --
Options forfeited -- --
------- -------
Options outstanding at December 31, 1998 32,232 33
Options granted 54,323 40
Options exercised (1,336) 27
Options forfeited (4,752) 40
------- -------
Options outstanding at December 31, 1999 80,467 $ 37
======= =======
Options exercisable at December 31, 1999 14,701 $ 21
======= =======
As of December 31, 1999 and 1998, the 80,467 and 32,232 options
outstanding have exercise prices between $21 and $43 and a
weighted-average remaining contractual life of 9.2 and 8.3 years,
respectively.
The per share fair value of stock options granted in 1998 was $33 at the
date of grant. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: 1999 and 1998 - dividend yield of
1.5%; expected volatility of 20%; risk-free interest rate of 6%, and
expected lives of 10 years.
(11) EMPLOYEE STOCK PURCHASE PLAN
The Company approved Employee Stock Purchase Plans in 1997 (the Plan)
which authorized 48,000 shares of common stock to be offered to all
employees eligible to buy shares. Purchase price of shares is 100% of
fair market value with the option to finance up to 100% of purchase by
payroll deduction over a period of up to 24 months at 6% interest. 19,501
and 2,344 shares were issued under the Plan at a purchase price of $43
and $33 per share in 1999 and 1998, respectively.
F-23
25
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(12) EMPLOYEE BENEFIT PLANS
(a) PENSION PLAN AND SAVINGS PLAN
The Company has a trusteed, defined benefit, noncontributory
pension plan covering substantially all of its employees. The
benefits are based on years of service and the employee's highest
five consecutive plan years of compensation. Contributions to the
plan are based upon the Entry Age Normal Method with Frozen
Initial Liability and comply with the funding requirements of the
Employee Retirement Income Security Act. Since the plan is
adequately funded, there have been no contributions made in 1999
or 1998. Plan assets are invested primarily in common stocks,
long-term bonds and U.S. treasury notes.
The following table sets forth the funded status of the Company's
pension plan and amounts recognized in the Company's financial
statements at December 31, 1999 and 1998.
DECEMBER 31, DECEMBER 31,
CHANGE IN BENEFIT OBLIGATION 1999 1998
------------ ------------
Benefit obligation at end of prior plan year $(30,046,553) (28,633,948)
Service cost (983,130) (776,031)
Interest cost (2,130,187) (1,961,462)
Actuarial loss 1,194,249 (258,303)
Actual distributions 1,520,375 1,583,191
------------ ------------
Benefit Obligation at end of year $(30,445,246) (30,046,553)
============ ============
Change in Plan Assets
Plan assets at fair value at beginning of year 42,428,520 40,472,587
Actual return on plan assets 875,932 3,539,124
Actual distributions (1,520,375) (1,583,191)
------------ ------------
Plan Assets at Fair Value at End of Year $ 41,784,077 42,428,520
============ ============
(Accrued)/Prepaid Pension Cost
Funded status 11,338,831 12,381,967
Unrecognized net actuarial (gain)/loss (11,739,787) (13,214,157)
Unrecognized prior service cost (31,492) (34,991)
Unrecognized transition obligation/(asset) (198,188) (264,249)
------------ ------------
Net Amount Recognized $ (630,636) (1,131,430)
============ ============
The Company also has an unqualified Supplemental Executive
Retirement Plan. Accrued costs related to this plan were $390,000
at December 31, 1999.
F-24
26
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Net pension cost for 1999, 1998, and 1997 included the following:
1999 1998 1997
----------- ----------- -----------
Service cost, benefits earned during
the period $ 983,130 776,031 666,447
Interest cost on projected benefit
obligation 2,130,187 1,961,462 1,893,377
Actual return on plan assets (3,116,292) (3,539,124) (9,452,700)
Net amortization and deferral (497,819) (37,895) 6,776,734
----------- ----------- -----------
Net periodic pension credit $ (500,794) (839,526) (116,142)
=========== =========== ===========
The weighted average discount rate of 7.5% in 1999 and 7.0% in
1998 and 1997 and the rate of increase in future compensation
levels of 5% in 1999, 1998 and 1997 were used in determining the
actuarial present value of the projected benefit obligations at
the end of the year. The assumed long-term rate of return on
pension plan assets was 7.5% in 1999, 1998 and 1997.
(b) EMPLOYEE SAVINGS PLAN
The Company has a 401(k) salary savings plan which provides that
employees may contribute a portion of their salary to the plan on
a tax deferred basis. The Company's match of a portion of the
employee's contribution totaled $336,208, $256,960 and $265,746 in
1999, 1998, and 1997, respectively.
(c) EMPLOYEE STOCK OWNERSHIP PLAN
The Employee Stock Ownership Plan of The Concord Telephone Company
(the Plan) was originally a defined contribution plan sponsored by
the Company. The Company was responsible for all contributions to
the Plan. Contributions were in the form of Company stock or cash
used to purchase Company stock. Prior to the Tax Reform Act of
1986 (the Act), the Company was eligible for certain tax credits
as a result of the Plan contributions. Subsequent to the Act,
these tax credits were no longer available. As a result, the plan
has been frozen. As of January 1, 1987, no more contributions can
be made into the plan and no employee may become eligible to
participate.
(d) POSTRETIREMENT BENEFITS
In addition to the Company's defined benefit pension plan, the
Company sponsors a health care plan that provides postretirement
medical benefits and life insurance coverage to full-time
employees who meet minimum age and service requirements. The plan
is contributory with respect to coverage for beneficiaries. The
Company's policy is to fund the cost of medical benefits on a cash
basis.
F-25
27
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The Company has adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," and has elected to amortize the
transition liability over 15 years. The Statement requires the
accrual, during the years that an employee renders the necessary
service, of the expected cost of providing those benefits to the
employee and employee's beneficiaries and covered dependents.
The following table presents the plan's accumulated postretirement
benefit obligation reconciled with amounts recognized in the
Company's balance sheets at December 31, 1999 and 1998:
DECEMBER 31, DECEMBER 31,
CHANGE IN BENEFIT OBLIGATION 1999 1998
------------ ------------
Benefit obligation at end of prior plan year $ (9,288,899) (9,532,566)
Service cost (168,832) (180,087)
Interest cost (629,421) (608,299)
Benefits paid 491,581 419,246
Actuarial gain 270,763 437,227
Other (20,389) 175,580
------------ ------------
BENEFIT OBLIGATION AT END OF YEAR $ (9,345,197) (9,288,899)
============ ============
(ACCRUED)/PREPAID POSTRETIREMENT COST
Funded status (9,345,197) (9,288,899)
Unrecognized net actuarial gain (2,362,466) (2,525,808)
Unrecognized prior service cost (2,514,231) (3,017,078)
Unrecognized transition obligation 3,670,783 4,282,581
------------ ------------
NET AMOUNT RECOGNIZED $(10,551,111) (10,549,204)
============ ============
During 1997, Plan benefits were expanded to include Medicare
supplements and additional medical benefits resulting in increased
postretirement benefit costs.
F-26
28
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Net periodic postretirement benefit cost for 1999, 1998 and 1997
includes the following components:
1999 1998 1997
--------- --------- ---------
Service cost $ 168,832 180,087 216,693
Interest cost 629,421 608,299 631,910
Amortization of transition
obligation over 15 years 611,798 611,798 611,798
Amortization of gain (112,358) (101,181) (74,769)
Amortization of prior service
cost (502,847) (502,847) (502,847)
--------- --------- ---------
Net periodic postretirement
benefit cost $ 794,846 796,156 882,785
========= ========= =========
For measurement purposes, a 10.0% percent annual rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend rate)
was assumed for 1999 and the rate was assumed to decrease annually to
5.5% by the year 2003 and to remain level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1999, to
approximately $10,560,073 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year
ended December 31, 1999 to approximately $914,970. Decreasing the assumed
health care cost trend rates by one percentage point in each year would
decrease the accumulated postretirement benefit obligation as of December
31, 1999, to approximately $8,286,799 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost
for the year ended December 31, 1999 to approximately $695,663.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7% in 1999, 1998 and 1997.
F-27
29
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(13) INCOME TAXES
Total income taxes for the years ended December 31, 1999, 1998 and 1997
were allocated as follows:
1999 1998 1997
----------- ----------- -----------
Income before extraordinary item $15,697,657 8,926,469 7,898,159
Extraordinary item -- -- 1,493,312
----------- ----------- -----------
$15,697,657 8,926,469 9,391,471
=========== =========== ===========
Stockholders' equity, for
unrealized holding gain on
debt and equity securities
recognized for financial
reporting purposes $19,459,133 3,605,700 3,929,182
=========== =========== ===========
Income tax expense (benefit) attributable to income before extraordinary
item for the years ended December 31, 1999, 1998, and 1997, consists of:
1999 1998 1997
------------ ------------ ------------
Current:
Federal $ 11,360,031 3,896,673 6,694,381
State 2,860,578 1,104,868 1,965,013
Foreign 328,290 -- --
------------ ------------ ------------
14,548,899 5,001,541 8,659,394
------------ ------------ ------------
Deferred:
Federal, net of investment tax
credit amortization 1,653,076 3,284,653 (651,140)
State (504,318) 640,275 (110,095)
------------ ------------ ------------
1,148,758 3,924,928 (761,235)
------------ ------------ ------------
Total $ 15,697,657 8,926,469 7,898,159
============ ============ ============
F-28
30
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Income tax expense attributable to income before extraordinary item
differs from the amounts computed by applying the U.S. federal income tax
rate of 35 percent to pretax income from continuing operations as a
result of the following:
1999 1998 1997
------------ ------------ ------------
Amount computed at statutory rate $ 13,568,077 7,808,108 6,824,987
State income taxes, net of federal
income tax benefit 1,531,569 1,134,343 1,205,697
Nontaxable interest income (2,823) (2,166) (12,133)
Amortization of federal investment
tax credit (114,885) (114,885) (114,885)
Goodwill 454,636 -- --
Other, net 261,083 101,069 (5,507)
------------ ------------ ------------
Income tax expense $ 15,697,657 8,926,469 7,898,159
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 1998 were as follows:
1999 1998
------------ ------------
Deferred tax assets:
Accrued postretirement and pension benefits 4,633,699 4,638,380
Deferred investment tax credits -- 98,514
Environmental remediation costs -- 21,097
Accrued incentive 461,652 466,546
Intangibles 59,382 70,725
Net operating loss carryforwards 668,266 554,000
Other accrued expenses and allowances 123,562 484,610
Deferred revenue 415,130 --
Deferred state taxes 515,285 --
Other 1,959 --
------------ ------------
Total gross deferred tax assets 6,878,935 6,333,872
------------ ------------
Less valuation allowance (1,200,571) (554,000)
------------ ------------
Net deferred tax assets 5,678,364 5,779,872
------------ ------------
Deferred tax liabilities:
Property and equipment, primarily related to
depreciation differences 12,811,864 10,915,270
Unrealized gain on securities 26,870,221 7,698,734
Other 349,085 802,108
------------ ------------
Total gross deferred tax liabilities 40,031,170 19,416,112
------------ ------------
Net deferred tax liability $ 34,352,806 13,636,240
============ ============
F-29
31
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The valuation allowance for deferred tax assets as of January 1, 1999 was
$554,000. The net change in the total valuation allowance for the year
ended December 31, 1999 was an increase of $646,571. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more like than not
the Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at December 31, 1999. The amount
of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
period are reduced.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1999, will be allocated to
income tax expense.
At December 31, 1999, the Company has net operating loss carryforwards
for state income tax purposes of approximately $13,251,000 which will
expire in the years 2001-2014.
(14) ACCOUNTING FOR THE EFFECTS OF REGULATION
Prior to April 1, 1997 the Company's regulated operations were subject to
the provisions of SFAS No. 71. Actions of a regulator could provide
reasonable assurance of the existence of an asset, reduce or eliminate
the value of an asset and impose a liability on a regulated enterprise.
Therefore, regulatory assets and liabilities established by the actions
of a regulator were required to be recorded, and, accordingly, reflected
in the balance sheet of an entity subject to SFAS No. 71.
As the result of changes in the manner in which the Company is regulated
and the heightened competitive environment, the Company determined that
it no longer met the criteria for following SFAS No. 71. As of April 1,
1997, the Company discontinued applying SFAS No. 71. The accounting
impact was an extraordinary non-cash gain of $2,239,045, net of
applicable income taxes of $1,493,212. Although estimated economic useful
lives are shorter than previously used for regulatory approved asset
lives, the change has resulted in an increase in net telephone plant due
to the Company recording additional depreciation charges totaling
$15,414,156 over the prior five years. The effect on future charges for
depreciation is not expected to differ materially from what would have
been recorded under SFAS No. 71. The components of the gain, pretax, are
as follows:
Change in recorded value of long lived property and equipment $ 1,757,824
Elimination of regulatory liabilities 1,974,433
-----------
Total $ 3,732,257
===========
F-30
32
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The increase in net property and equipment, $1,757,824 pretax, was
recorded as a decrease to the related accumulated depreciation accounts.
Such change was the result of changing from regulator-approved asset
lives, and additional depreciation charges, to estimated economic asset
lives.
The average depreciable lives of affected categories of long-lived
telephone plant have been changed to more closely reflect the economic
and technological lives. Differences between regulator-approved asset
lives and the current economic asset lives are as follows:
COMPOSITE OF ESTIMATED ECONOMIC
REGULATOR-APPROVED ASSET
ASSET LIVES LIVES
------------------ ------------------
Digital switching 14 10
Circuit equipment 10 7
Aerial cable 19 17
Buried cable 16 17
The remaining components of the extraordinary charge, $1,974,433 pretax,
were the result of the removal of regulatory liabilities that were
recorded as a result of previous actions by regulators. Virtually all of
these regulatory liabilities arose in connection with the incorporation
of new accounting standards into the ratemaking process and were
transitory in nature.
(15) SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted FAS 131, "Disclosures
about segments of an Enterprise and Related Information." The Company has
four reportable segments, the incumbent local exchange carrier (ILEC),
the competitive local exchange carrier and long distance services
(CLEC/LD), internet and data services (ISP) and the digital wireless
group (DCS). Accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on operating profit before other income
(expenses) and income taxes. Intersegment revenues and expenses are
excluded for purposes of calculating operating profit. Selected data by
business segment for each of the three years in the three-year period
ended December 31, 1999, is as follows:
ILEC CLEC/LD ISP DCS OTHER TOTAL
------------ ---------- --------- ---------- ----------- -----------
December 31, 1999:
External revenues $ 76,653,009 16,904,373 5,716,709 5,192,503 1,125,000 105,591,594
Intersegment revenues 3,930,503 -- -- 46,139 -- 3,976,642
Depreciation and
amortization 12,850,014 1,076,441 926,913 63,022 207,873 15,124,263
Segment operating
profit 21,871,878 2,338,857 (530,236) (1,736,895) 424,799 22,368,403
Segment assets 119,584,134 9,852,582 7,651,954 1,524,461 119,082,079 257,695,210
(Continued)
F-31
33
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
ILEC CLEC/LD ISP DCS OTHER TOTAL
------------ ---------- --------- ---------- ----------- -----------
December 31, 1998:
External revenues $ 70,646,748 13,883,555 3,369,305 3,150,786 675,000 91,725,394
Intersegment revenues 5,017,641 -- -- -- -- 5,017,641
Depreciation and
amortization 11,530,611 643,970 553,765 55,196 57,019 12,840,561
Segment operating
profit 20,657,610 2,075,234 (92,089) (1,100,312) (87,463) 21,452,980
Segment assets 112,606,447 5,107,432 7,329,775 645,805 57,944,899 183,634,358
ILEC CLEC/LD ISP DCS OTHER TOTAL
------------ ---------- --------- ---------- ----------- -----------
December 31, 1997:
External revenues $ 64,417,269 11,881,063 580,217 1,604,965 -- 78,483,514
Intersegment revenues 3,629,556 -- -- -- -- 3,629,556
Depreciation and
amortization 9,130,090 411,732 32,088 38,175 -- 9,612,085
Segment operating
profit 19,184,180 4,313,272 (93,090) (2,176,795) (1,134,425) 20,093,142
Segment assets 107,059,374 4,331,091 206,629 163,262 35,579,073 147,339,429
F-32
34
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(16) RECONCILIATION OF BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
1999:
Basic weighted average shares outstanding 9,352,943
Effect of dilutive securities:
Stock options 72,982
---------
Diluted weighted average shares outstanding 9,425,925
=========
1998:
Basic weighted average shares outstanding 9,227,016
Effect of dilutive securities:
Stock options 49,488
---------
Diluted weighted average shares outstanding 9,276,504
=========
1997:
Basic weighted average shares outstanding 9,076,211
Effect of dilutive securities:
Stock options 35,228
---------
Diluted weighted average shares outstanding 9,111,439
=========
(17) SUMMARY OF INCOME STATEMENT INFORMATION (UNAUDITED)
A summary of quarterly income statement information for the years ended
December 31, 1999 and 1998, follows:
1999 QUARTERS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
Operating revenues $25,332,224 26,101,594 26,594,439 27,563,337
Income before other income
(expenses) and income
taxes 5,239,392 5,643,778 5,851,158 5,634,075
Net income 3,870,048 9,142,801 5,014,811 5,040,609
Basic earnings per common
share $ .41 .98 .53 .54
=========== =========== =========== ===========
Diluted earnings per common
share $ .41 .97 .53 .53
=========== =========== =========== ===========
F-33
35
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1998 QUARTERS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
Operating revenues $21,015,585 22,408,193 23,760,610 24,541,006
Income before other income
(expenses) and income
taxes 5,558,343 5,690,767 5,512,696 4,691,174
Net income 3,137,453 3,195,198 3,202,872 3,846,887
Basic earnings per common
share $ .34 .35 .34 .42
=========== =========== =========== ===========
Diluted earnings per common
share $ .34 .34 .34 .42
=========== =========== =========== ===========
(18) Subsequent Event
Effective February 28, 2000 the Company purchased essentially all assets
of Internet of Concord for approximately $883,000. Internet of Concord is
an internet service provider based in Concord, North Carolina which
operates in 6 surrounding counties within North Carolina.
F-34
36
Schedule II
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------- ------------- -------------- ---------------- --------------
DEDUCTIONS
BALANCE, ADDITIONS FROM BALANCE,
BEGINNING CHARGED RESERVES AT END
DESCRIPTION OF YEAR TO INCOME (SEE NOTE) OF YEAR
------------------------------------------- ------------- -------------- ---------------- --------------
Valuation and qualifying accounts
deducted from assets to which
they apply:
Allowance for uncollectible accounts:
Year ended December 31, 1999 $ 107,500 603,458 603,458 107,500
============== ============== ================ ==============
Year ended December 31, 1998 $ 100,000 433,747 426,247 107,500
============== ============== ================ ==============
Year ended December 31, 1997 $ 100,000 381,757 381,757 100,000
============== ============== ================ ==============
Note: Represents balances written-off as uncollectible less collections on
balances previously written off of $170,132, $202,512 and $436,511 for
1999, 1998, and 1997, respectively.
F-35