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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1997
[ ] 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.
(Exact name of registrant as specified in its charter)
North Carolina 56-1837282
(State or other jurisdiction (I.R.S. Employer
Of incorporation or Identification Number)
organization)
68 Cabarrus Avenue, East,
Concord, North Carolina 28025
(Address of principal executive (Zip Code)
Offices)
Registrant's telephone number, including area code:
(704) 782-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Class B Nonvoting Common Stock
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant: The Registrant's Voting Common
Stock is infrequently traded, and there is no established market
for such shares. However, using the sale price of $131 per share
on March 24, 1998 for the Class B Nonvoting Common Stock (the
last sale known to the Registrant) and not granting a premium for
voting rights, the aggregate market value of the Registrant's
Voting Common Stock held by Non-Affiliates is $22,352,661
(170,631 x $131).
As of February 28, 1998, the Registrant had outstanding 337,843
shares of Voting Common Stock and 1,904,336 shares of Class B
Nonvoting Stock.
CT COMMUNICATIONS, INC.
AND CONSOLIDATED SUBSIDIARIES
Form 10-K for the Fiscal Year ended December 31, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders. 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters . . .. . . . . . . . . . . . . . 16
Item 6. Selected Financial Data. . . . . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data. . . . . 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . 26
Item 10A. Section 16(a) Beneficial Ownership Reporting
Compliance . . . . . . . . . . . . . . . . . . . . . 29
Item 11. Executive Compensation . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . 33
Item 13. Certain Relationships and Related Transactions . . . 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . 38
PART I
Item 1. Business
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "BELIEVES," "ESTIMATES," VARIATIONS OF SUCH WORDS
AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. INFORMATION CONCERNING CERTAIN
FACTORS THAT COULD IMPACT EXPECTED RESULTS IS INCLUDED IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--FORWARD-LOOKING STATEMENTS."
General. CT Communications, Inc. (the "Registrant") is a
holding company providing telecommunications services and
communications systems and products through seven wholly owned
subsidiaries: The Concord Telephone Company ("CTC"); CTC Long
Distance Services, Inc. ("CTC LDS"); Carolina Personal
Communications, Inc. (doing business as "CT Wireless, Inc.")
("CPC"); CT Wireless Cable, Inc. ("CT Wireless Cable"); CT
Cellular, Inc. ("CT Cellular"); CTC Exchange Services, Inc. ("CTC
Exchange"); and CT Global Telecommunications, Inc. ("CTGT").
CTC provides local and toll telephone service and network
access services in a territory covering approximately 705 square
miles in Cabarrus, Stanly, Rowan Counties, North Carolina (the
"CTC Service Area"). CTC LDS provides long distance telephone
service to residential and business subscribers throughout the
CTC Service Area, as well as in various other markets surrounding
the CTC Service Area. CPC manages the Registrant's ongoing
efforts to develop, construct and operate a personal
communication service ("PCS") system. CPC also markets and sells
PCS services in a specified Major Trading Area ("MTA") on behalf
of BellSouth Carolinas PCS Limited Partnership (the "BellSouth
Partnership"). CT Wireless Cable holds the Registrant's interest
in Wireless One of North Carolina, LLC ("WONC"), a limited
liability company formed to provide wireless cable television
service in North Carolina. CT Cellular currently holds the
Registrant's general partnership interests in certain
partnerships that provide cellular mobile telephone services in
two North Carolina Rural Service Areas ("RSAs"), although it has
entered into an agreement to exchange such interests. CTC
Exchange provides local telephone service in small- to
medium-sized markets beyond the CTC Service Area. Finally, CTGT
holds an approximate 35% equity interest in Amaritel, S.A. DE
C.V. ("Amaritel"), a Mexican entity that proposes to provide
telephone services in Mexico.
The Registrant is incorporated under the laws of North
Carolina and was organized in 1993 pursuant to the corporate
reorganization of CTC into a holding company structure. At
December 31, 1997, the Registrant and its subsidiaries had total
consolidated assets of $147,339,429 and had approximately 407
employees. The Registrant has its principal executive offices at
68 Cabarrus Avenue East, Concord, North Carolina 28205 (telephone
number: 704-782-7000).
Legislative and Regulatory Developments. The Registrant's
business continued to undergo significant changes during 1997.
These changes are primarily the result of the Registrant's
efforts to take advantage of fundamental statutory, regulatory
and technological developments currently taking place in the
telecommunications industry.
The Telecommunications Act of 1996. The Telecommunications
Act of 1996 (the "Telecom Act") was enacted on February 8, 1996.
The Telecom Act mandates significant changes in existing
regulation of the telecommunications industry to promote
competitive development of new service offerings, to expand
public availability of telecommunications services and to
streamline regulation of the industry.
The Telecom Act provides that implementing its legislative
objectives will be the task of the FCC, the state public
utilities commissions and a federal-state joint board.
Simultaneous proceedings are in process to address issues and
proposals already before the FCC in pending rule making
proceedings. Two significant proceedings currently in process
relate to access charge reform and universal service. The results
of such proceedings and the timing of implementation is uncertain
at this time, and the Registrant cannot currently estimate the
impact of such proceedings on its business or results of
operations.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition--including local
telephone service. The Telecom Act makes all state and local
barriers to competition unlawful, whether they are direct or
indirect. It directs the FCC to hold notice and comment
proceedings and to preempt all inconsistent state and local laws
and regulations.
Each state retains the power to impose "competitively
neutral" requirements that are both consistent with the Telecom
Act's universal service provision and necessary for universal
service, public safety and welfare, continued service quality and
consumer rights. Although a state may not impose requirements
that effectively function as barriers to entry or create a
competitive disadvantage, the scope of state authority to
maintain existing or adopt new requirements under this section is
not clearly spelled out. In addition, before it preempts a state
or local requirement as violating the entry barrier prohibition,
the FCC must hold a notice and comment proceeding.
The FCC is required to forbear from applying any statutory or
regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable or to protect
consumers. A state may not apply a statutory or regulatory
provision that the FCC decides to forbear from applying. In
addition, the FCC must review its telecommunications regulations
every two years and repeal or modify any that it deems no longer
necessary in the public interest.
The Telecom Act establishes a general duty of all
telecommunications carriers to interconnect with other carriers.
Congress has also developed a detailed list of requirements with
respect to the interconnection obligations of local exchange
carriers ("LECs"). These interconnection obligations include
resale, number portability, dialing parity, access to
rights-of-way and reciprocal compensation.
LECs that are designated "incumbents" have additional
obligations: to negotiate in good faith; to interconnect on terms
that are reasonable and non-discriminatory; to provide
non-discriminatory access to "facilities, equipment, features,
functions and capabilities" on an unbundled basis so that they
can be combined in a manner that a requesting telecommunications
carrier sees fit; to offer for resale at wholesale rates any
service that LECs provide on a retail basis and not subject to
unreasonable or discriminatory conditions; and to provide actual
collocation of equipment necessary for interconnection or access.
The Telecom Act establishes a framework for state commissions
to mediate and arbitrate negotiations between incumbent LECs and
carriers requesting interconnection, services or network
elements. The Telecom Act establishes deadlines, policy
guidelines for state commission decision making and recourse to
the FCC in the event a state commission fails to act.
In addition to opening up local exchange markets, the Telecom
Act contains provisions for (i) updating and expanding
telecommunications service guarantees, (ii) removing certain
restrictions relating to AT&T former operating companies
resulting from the antitrust consent decree issued by the federal
courts in 1984, (iii) the entry of telephone companies into video
services, (iv) the entry of cable television operators into other
telecommunications industries, (v) changes in the rules for
ownership of broadcasting and cable television operations, and
(vi) changes in the regulations governing cable television.
In 1996, the FCC adopted a number of interconnection
obligations that require LECs to provide physical or virtual
collocation of equipment necessary for interconnection, as well
as a technically feasible method of interconnection requested by
a competitive telephone service provider. LECs are also
obligated to enter into reciprocal cost-based compensation
arrangements with competitive service providers for the transport
and termination of "local" traffic. If the LEC refuses to enter
into such an agreement with a competitor, the competitor may
require the state government to serve as an arbitrator. The FCC
also adopted specific methodologies to determine resale discounts
and pricing for unbundled network elements in transactions
between incumbent LECs and competing service providers. The
FCC's new interconnection rules are currently being challenged in
court by several LECs and state regulatory authorities, and the
outcome of those challenges cannot be predicted.
Although certain interpretive issues under the Telecom Act
have not yet been resolved, it is apparent that the requirements
of the Telecom Act have led to increased competition among
providers of local telecommunications services and have
simplified the process of switching from incumbent local exchange
carrier services to those offered by competitive access providers
and competitive local exchange carriers. In light of the
foregoing, the Registrant continued its efforts in 1997 to
improve its competitive position in the local telephone service
business and to take advantage of opportunities that are
developing with other emerging telecommunications technologies.
THE CONCORD TELEPHONE COMPANY
General. CTC, the Registrant's principal subsidiary, was
originally organized in 1897 and provides local telephone and
intra-LATA (Local Access and Transport Area) toll service, access
service to other carriers, and telephone and equipment sales and
leasing to customers residing primarily in Cabarrus, Stanly and
Rowan Counties in North Carolina. As of December 31, 1997, CTC
served 102,221 access lines within the CTC Service Area. This
figure represents a 5.9% increase from December, 31, 1996.
To support the ongoing growth in the CTC Service Area, CTC
invested more than $8.2 million in circuit and switching
technology and expanded the total fiber network in 1997 to more
than 9,700 fiber miles. In addition, CTC began implementing
state-of-the-art Nortel DMS digital switching equipment as its
next generation switching platform. Implementation is expected
to continue for approximately five to seven years.
CTC is empowered by provisions of the North Carolina Public
Utilities Law and its Restated Articles of Incorporation to
construct and maintain its lines and is authorized by the North
Carolina Utilities Commission to operate the territory that CTC
now serves. In addition, CTC has municipal franchises for
constructing and maintaining its lines in the Cities of
Albemarle, Badin, China Grove, Concord, Harrisburg, Kannapolis,
Landis, Mt. Pleasant, New London, Oakboro and Richfield,
North Carolina.
New Rate Plan. On November 1, 1996, CTC filed a price
regulation rate plan (the "Rate Plan") with the North Carolina
Utilities Commission ("NCUC") seeking permission to become
regulated based on prices rather than traditional rate base rate
of return regulation. On May 30, 1997, the NCUC approved the
Rate Plan, which CTC implemented effective September 1, 1997. As
a result of the Rate Plan, the rates charged by CTC for local,
state access and toll plans will be controlled by the parameters
specified by the NCUC in the Rate Plan.
A driving force behind the Rate Plan is customer demand for
expanded calling options to areas beyond their home communities.
The Rate Plan expanded the area in which customers can call
without paying long distance charges by including all of CTC's
exchanges in its toll-free area. The Rate Plan also expanded
CTC's metro area, which already included Charlotte, to include
Matthews, Huntersville, Davidson and other surrounding
communities. A residential customer now may select one of four
metro calling packages, which provide a flat monthly fee (ranging
from no charge to $24.00) for specified monthly minutes of use
(ranging from 30 minutes to unlimited minutes). The customer may
pay $.10 per minute for usage in excess of the monthly purchased
amounts. In addition, the Rate Plan eliminated the separate
charge for touch-tone calling and reduced charges for
long-distance calls into a broader calling zone that extends into
Western North Carolina.
Under the new rate structure implemented under the Rate Plan,
CTC's residential customers, except those in the Harrisburg
exchange, now pay $10.50 per month for basic local service,
including touch-calling. Harrisburg customers now pay a slightly
higher charge of $12.00 per month because these customers are
able to call more customers under that community's basic plan.
Under the prior rate structure, CTC's residential customers paid
approximately $7.00 per month for basic local service, plus a
separate charge of $.50 per month for touch-calling.
Although the new rate structure reflects an increase for
basic service, other changes in the Rate Plan offset these
increases for many customers. The new rate structure did not
materially impact the Registrant's revenues in 1997 and is not
expected to materially impact revenues in 1998 or future years.
Recent state legislative developments made it possible for
the Registrant to file for price regulation. During 1995, the
North Carolina General Assembly passed H.B. 161, "An Act to
Provide the Public with Access to Low-Cost Telecommunication
Service in a Changing Competitive Environment" (the "NC Act").
Under this new legislation, which took effect in July 1996,
telephone companies are given the option to file for price
regulation. In exchange for greater flexibility in setting
prices, however, local telephone companies must agree to open
their markets to competition for local dial tone service -- the
last area of telecommunications services to be deregulated.
Although the Rate Plan requires that CTC open its markets to
competition for local dial-tone services, management believes CTC
can compete in emerging markets by rebalancing rates and still
sustain local rates that are affordable.
As a result of the effectiveness of the Rate Plan, CTC is no
longer regulated according to a traditional rate base rate of
return scheme of regulation as a Rural Telephone Company as
defined in the Telecom Act and the NC Act.
Competition. As CTC faces increased competition in the local
telephone service market, CTC's principal methods of competition
include its ability to provide a secure and reliable network,
high quality customer service, robust product and service lines,
simple pricing plans and wide calling areas, as well as its
long-term knowledge of and reputation within the CTC Service
Area. For example, CTC is currently negotiating interconnection
agreements with three competitors pursuant to which CTC would
provide such competitors access to its local telephone service
market, as mandated by the Telecom Act and the Rate Plan. The
terms of these agreements have not yet been finalized, and there
can be no assurance as to the terms of such agreements, the
timing of their execution or whether they will be executed. In
the event that CTC enters into one or more interconnection
agreements, CTC expects to experience the most significant
competitive pressure with regard to its largest business
customers, which CTC believes will be immediately targeted by its
competitors. CTC is unable to quantify the impact of such
competition.
CTC accounted for approximately 80% of the Registrant's
operating revenues and approximately 106% of the Registrant's
operating profit in 1997. Despite the anticipated growth of
other products offered by the Registrant, as described below, the
Registrant anticipates that CTC will continue to account for a
significant portion of the Registrant's earnings in 1998.
CTC LONG DISTANCE SERVICES, INC.
Organized in 1992, CTC LDS is engaged in the business of
purchasing long distance capacity in bulk from interexchange
carriers and reselling it to subscribers on a discounted retail
basis.
On April 3, 1993, CTC offered its customers equal access to
the interexchange (long distance) carriers who elected to market
their services in the CTC Service Area. This enables customers
to preselect their carrier and to use this carrier by dialing 1.
CTC LDS received the largest number of selections in the
balloting process and has retained more than half of CTC's
customers. However, these customers are the smaller toll users,
and CTC LDS bills less than half of the total originating minutes
of long distance used by customers in the CTC Service Area. CTC
LDS is actively seeking new methods to increase its market share
and make new products available to its customers, including
expanding service outside its traditional service area. CTC LDS
was successful in these efforts in 1997, as it added more than
8,000 new customers for a total of 69,339. Management expects
the easy-to-understand, competitively-priced, long-distance plans
offered by CTC LDS will continue to attract new customers to CTC
LDS in 1998. During 1996, CTC LDS successfully introduced the
new CTC Calling Card, which the Registrant believes has enhanced
CTC LDS's ongoing efforts to market and sell long distance
services.
During 1996, CTC LDS purchased and installed a Nortel DMS 500
switch at a cost of $2.2 million. This switch is located in the
downtown area of Charlotte, and its purchase is indicative of the
Registrant's commitment to increase market presence by offering
services outside of its traditional market area. The addition of
the Nortel DMS 500 switch makes CTC LDS a facilities based
interexchange carrier in North Carolina.
In 1997, CTC LDS received regulatory approval to market long
distance telephone service in the surrounding states of Georgia,
South Carolina, Tennessee and Virginia. However, CTC LDS
concentrated its efforts in 1997 on expanding its operations in
the North Carolina counties contiguous to its current five-county
service area and proposes to expand concentrically from that area
in 1998. CTC LDS does not expect to have significant operations
outside of North Carolina in 1998.
The Telecom Act is not expected to have an immediate impact
on CTC LDS since it addresses competition in the local service
area of operations. In the future, however, a Regional Bell
Operating Company may be able to offer long distance service to
CTC LDS customers. This effectively exposes the long distance
service to additional competitive pressures. CTC LDS' principal
methods of responding to competitive pressures in the long
distance telephone service market include its ability to maintain
aggressive marketing initiatives and its ability to provide
simple pricing plans, high quality customer service, robust
product and service lines, easy to understand pricing and
accurate bills.
CTC EXCHANGE SERVICES, INC.
CTC Exchange Services was organized on January 23, 1997 and
began operations in the fourth quarter of 1997. This business
unit was created to enable CTC to offer local telephone service
to markets beyond the CTC Service Area. The new company targets
small- to medium-sized markets in the Carolinas for expansion of
local telephone service.
In September 1997, CTC Exchange Services entered into an
interconnection agreement with BellSouth Telecommunications, Inc.
("BellSouth") allowing CTC Exchange Services to access
BellSouth's facilities and equipment, for a fee, in order to
provide local telephone service in all of BellSouth's serving
areas in North Carolina. CTC Exchange Services began limited
operations in December 1997, primarily for the purpose of testing
its processes, facilities and equipment. Current operations
consist primarily of resale of BellSouth's existing products and
services.
The Registrant has developed a "90 Minute" market plan for
exchange services (i.e., the market accessible by a 90 minute
automobile trip, or approximately 75 miles, from Concord, North
Carolina). CTC Services expects to begin marketing its services
in the second quarter of 1998 in Salisbury, northern Charlotte,
and Statesville, North Carolina. Based on the results of those
efforts, CTC Exchange Services intends to decide in the fourth
quarter of 1998 the extent to which it will attempt to expand
beyond those areas. CTC Exchange Services expects its capital
needs in 1998 to be from $1 million to $1.5 million and expects
losses in 1998 to be approximately $500,000.
CT CELLULAR, INC.
CT Cellular's principal operations consist of owning two
general partnership interests in partnerships providing cellular
mobile telephone services. CT Cellular owns 24.5% of RSA 4/5,
with Ellerbe Telephone and Alltel Mobile owning the remainder.
RSA 4/5 is comprised of Anson, Lincoln, Montgomery and Richmond
Counties in North Carolina. CT Cellular also owns 50% of RSA 15,
with Alltel Mobile owning the remainder. RSA 15 is comprised of
Cabarrus, Stanly and parts of Iredell and Rowan Counties in North
Carolina. Growth in cellular mobile services has been good in
1997, but it is expected that competition from the PCS technology
(see below) may slow this growth. During 1997, RSA 15
experienced growth in customers and revenues. RSA 4/5, however,
experienced slower growth in its operations, which was expected
given the more rural nature of the area it serves. Both
partnerships were profitable in 1997.
CT Cellular and Ellerbe Telephone have entered into
agreements to exchange their respective interests in RSA 4/5
and RSA 15 to Palmetto MobileNet, L.P., a South Carolina limited
partnership ("Palmetto"), in a tax free transaction. In exchange
for its interests in RSA 4/5 and RSA 15. CT Cellular will receive
a 19% limited partnership interest in Palmetto, and a 19.5%
interest in the common stock of Palmetto's general partner.
The completion of the transaction is subject to receipt of
applicable regulatory approvals. The Registrant is not aware of
any issues that will prevent or delay regulatory approvals,
although there can be no assurance that such approvals will be
obtained. In the event that the transaction is consummated, it
will be deemed effective as of January 1, 1998. Thereupon, CT
Cellular will have no operations other than the ownership of its
Palmetto limited partnership interests.
Palmetto's other limited partners consist of 19
South Carolina independent telephone companies. Upon
consummation of the transaction, Palmetto will own 50% general
partnership interests in ten North Carolina and South Carolina
RSAs, with Alltel Mobile and 360 Communications owning the other
50% general partnership interests. Palmetto had actual net
income of $15.1 million in 1997 and had pro forma net income (to
reflect the transaction) of $20.5 million.
CAROLINA PERSONAL COMMUNICATIONS, INC.
In 1994, the Registrant purchased a limited partnership
interest in BellSouth Carolinas PCS Limited Partnership. The
BellSouth Partnership's business is to design, develop, construct
and operate a personal communication system in a specified Major
Trading Area ("MTA") and to market and provide personal
communication service ("PCS") services in the MTA. As a limited
partner, the Registrant's investment includes the Registrant's
pro rata share of the license fee and expenditures to construct
the system. The Registrant owns 1.95% of the BellSouth
Partnership.
PCS is a digital wireless telecommunications service. New
PCS devices incorporate various communications methods in a
single device, including voice, data interface and paging. With
PCS, a user is able to customize their telecommunications service
to best suit their particular requirements. The cost of this new
service to the customer is expected to be competitive with
cellular technology. However, like cellular telephone service,
capital requirements will be substantial and aggressive marketing
will be needed.
On March 31, 1995, the BellSouth Partnership received a 30
MHZ PCS license from the FCC covering North Carolina and South
Carolina (MTA 006). AT&T Wireless purchased a second 30 MHZ PCS
license for the same MTA in the March 1995 FCC auction and began
offering PCS services in major markets, including MTA 006, during
1997. In addition, the FCC has continued to auction licenses for
PCS services through 1997. This continued sale of spectrum to
additional PCS providers, combined with competition from cellular
providers, could result in competition from up to six wireless
competitors in a particular market. In the face of such
competitive pressures, CPC's principal methods of competition
will include its ability to provide high quality technology and
service, competitive pricing, as well as CPC's ability to
capitalize on the strength of customers' loyalty to other
well-known partners in the BellSouth Partnership, such as
BellSouth, Duke Power and Carolina Power and Light.
Funding of the BellSouth Partnership's operations began in
the second quarter of 1995, and during 1995 the Registrant
invested approximately $4.9 million in the BellSouth Partnership.
The Registrant invested an additional $2.8 million and $1.1
million in 1996 and 1997, respectively. Its 1998 commitments are
approximately $950,000, and its 1999 commitments are
approximately $550,000 million. Construction of towers and
transmitters began during 1996, and PCS service was first offered
to the public by the Bell Partnership in July 1996.
The Registrant experienced pre-tax losses in 1996 and 1997 of
$1.8 million and $2.9 million, respectively, due to expected
start-up costs. Losses associated with such start-up costs are
currently projected to continue through 1999. Such projections
are based on estimates of how long it will take to attract enough
customers to cover start-up and operating expenses associated
with the PCS network. Notwithstanding such losses, the
Registrant believes the long-term outlook for PCS is positive.
Each telephone company limited partner in the BellSouth Partnership
has the option to partition its pre-defined service area. The
Registrant's service area consists of Cabarrus, Stanly, Rowan and
parts of Iredell Counties in North Carolina (the "PCS Service
Area"). Partitioning will involve CTC (the current holder of the
partition option) purchasing the license for the PCS Service Area
and any assets in place within that area at a purchase price
expected to be between $12 million and $15 million, payable in
full on the date of partition. Following partition, CPC would
operate as a provider of PCS products and services within the PCS
Service Area. At the time of partitioning, CPC's PCS network
will be substantially built out throughout the PCS Service Area.
During 1996, CPC opened retail outlets to sell PCS telephones
in Concord and Statesville, and a third store began operations in
Salisbury, North Carolina during the first quarter of 1997.
These new telephones are also being marketed and sold through
CTC's offices.
CT WIRELESS CABLE, INC.
On October 9, 1995, the Registrant organized CT Wireless as a
wholly owned subsidiary to participate in the wireless cable
television market in North Carolina. CT Wireless owns 48% of
Wireless One of North Carolina L.L.C. ("WONC"). WONC was formed
to develop and launch wireless cable systems in North Carolina.
In October 1995, WONC entered into contracts with approximately
45 community colleges in North Carolina to provide wireless cable
services in connection with leases between the schools and the
FCC pertaining to certain educational channel rights within North
Carolina. WONC later participated as a bidder in the Multi
Channel Multipoint Distribution Service ("MMDS") auction in 1996,
and was awarded MMDS channels in several markets throughout North
Carolina.
During January 1997, WONC and the University of North
Carolina ("UNC") Center for Public Television entered into a
contract granting WONC the exclusive rights to lease UNC's 40
granted channel frequencies, as well as frequencies to be granted
pursuant to UNC's pending applications with the FCC (the "UNC
Lease Agreement"). In consideration for the UNC channel leasing
rights, WONC paid UNC $2.5 million upon execution of the UNC
Lease Agreement, as well as a $500,000 advance on future royalty
payments to be paid to UNC. Royalty payments are based on fees
developed for the various markets served and applied to
subscriber accounts. The UNC Lease Agreement is a key component
of WONC's efforts to implement a statewide system of wireless
cable television programming, and this contract improves WONC's
competitive position in the North Carolina wireless cable
television market. Wireless One, Inc. has estimated that the
channel frequencies represented by all of the channel rights
controlled by WONC, including the UNC channel rights, enable WONC
to reach a total of 2 million line of site households in 11
markets throughout North Carolina.
Wireless cable uses microwave technology to deliver line of
sight transmission from a central broadcast tower to a receiver
at the customer's premise. It is expected to be a lower cost
competitor to traditional hardwired cable systems. With respect
to direct broadcast satellite services that are currently being
marketed to consumers, wireless cable with digitalization will
offer a comparable number of channels and digital audio and
picture quality, and will also have the advantage of offering
local programming. There can be no assurance, however, that
consumers will choose to subscribe for wireless cable service
instead of hardwired cable or direct broadcast satellite
television services.
In 1977, BellSouth launched digital wireless cable systems in
New Orleans, Orlando and Atlanta. The digital system offers more
than 100 channels of high quality digital video and audio. In
addition, during 1997 several wireless cable operators announced
high-speed Internet services using wireless cable frequencies.
Wireless One launched its high-speed Internet service in Jackson,
Mississippi in the first quarter of 1998. In addition, in late
1997, the FCC initiated a proceeding to potentially expand the
use of wireless cable frequencies for telephony and two-way data
services. An Order is expected from the FCC in late 1998.
Contingent on FCC approval, WONC could begin construction of
wireless cable systems in 1999, with the first systems expected
to be in operation during the latter half of 1999. Complete
build out of the system is expected to take five years or longer.
The Registrant's capital requirements in connection with its WONC
investment were $1.4 million in 1996 and $3.2 million in 1997.
Additional capital requirements associated with the WONC network
are expected to be approximately $1 million in 1998.
CT GLOBAL TELECOMMUNICATIONS, INC.
In 1997, the Registrant acquired an 80% interest (increased
to 100% in March 1998) in CTGT, which holds the Registrant's
equity interest in Amaritel. Amaritel was formed early in 1997
for the purpose of constructing and operating domestic and
international long-distance services, as well as local telephone
services, in 111 communities representing approximately 25% of
Mexico's population, border to border along the coast of the Gulf
of Mexico and Mexico City. Amaritel expects to use a wide
spectrum of technology, ranging from microwave to wired fiber
distribution networks. Build-out of the system is expected to
be approximately 300,000 lines over a five-year period and is
expected to begin in the fourth quarter of 1998.
Amaritel has entered into a $100 million bank credit facility
with Nissho Iwai, which Amaritel intends to use to fund a portion of
its facilities build-out and operations. The credit facility is
secured in part by the Amaritel common stock held by CTGT, but
is not otherwise secured or guaranteed by CTGT or the Registrant.
Amaritel's ability to draw on the credit facility is contingent upon
its raising approximately $50 million of additional equity capital, and
there can be no assurance that Amaritel will be successful in doing
so. Access to the credit facility and additional equity investment
funds is necessary to implement Amaritel's business plan.
CTGT entered into an Operating Agreement with Amaritel
pursuant to which it will provide personnel and other services
for the purpose of conducting Amaritel's day-to-day operations
(e.g., network operation and maintenance, customer billing, sales
and marketing, customer service, general administration and
management). The fees to be paid to CTGT under the Operating
Agreement are expected to offset CTGT's expenses related to
providing those services. In addition, CTGT expects to provide
approximately $1.5 million of additional capital to Amaritel in
1998.
CTGT currently owns approximately 35% of the equity
securities of Amaritel. However, if Amaritel is successful in
raising additional equity in the future, CTGT expects its equity
interest to be reduced to approximately 15%.
CTGT was originally 80% owned by the Registrant and 20% owned
by US Telecom Holdings, Inc. ("US Telecom"). On March 31, 1998,
CTGT acquired and cancelled the CTGT shares held by US Telecom,
which resulted in CTGT becoming a wholly owned subsidiary of the
Registrant. The $1.4 million purchase price was paid through the
cancellation of a note in principal amount of $800,000 previously
owed by US Telecom to the Registrant and the delivery of cash.
The Registrant has an additional note receivable from US Telecom
in the principal amount of $1,551,851, which is secured by a first priority
interest in 4,950.50 shares of Telco Investors II, Inc. owned by
US Telecom and was due April 1, 1998. The Registrant expects to
amend the maturity of this note.
RECENT INVESTMENTS
Between 1993 and 1997, the Registrant invested
approximately $6.18 million in the common stock of ITC Holding
company, Inc. ("ITC Holding"). In October 1997, ITC Holding
completed a corporate reorganization in which it transferred all
of its assets and liabilities other than the stock of its then
wholly owned subsidiary, ITC^DeltaCom, Inc. ("ITC^DeltaCom") to
another subsidiary. The former ITC Holding then merged with and
into ITC^DeltaCom, and the other subsidiary was renamed ITC
Holding company, Inc., which is the parent of a group of
companies involved in a wide range of telecommunications
activities. ITC^DeltaCom is a provider of local, long distance
and other telecommunications services to mid-sized and major
regional businesses in the southern United States, and also
provides wholesale long-haul services to other telecommunications
comapnies using its owned, operated and managed fiber optic
network. As part of ITC Holding's reorganization, stockholders
of the former ITC Holding received, in exchange for their shares
of ITC Holding stock, shares of stock of the new ITC Holding and
of ITC^DeltaCom completed its initial public offering of common
stock. The Registrant owns approximately 4% and 3% of the outstanding
equity securities of ITC Holding Company, Inc., and ITC^DeltaCom, Inc.,
respectively. At December 31, 1997, the Registrant's ownership interest
in ITC^DeltaCom was recorded on the Registrant's financial
statements at a market value of $14.04 million, with a tax basis
of $3.45 million. The Registrant has recorded its equity
interest in ITC Holding as of the same date at a cost basis of
$3.45 million.
Item 2. Properties
The properties of the Registrant consist of land, buildings,
central office equipment, exchange and toll switches, data
transmission equipment, underground conduits and cable, aerial
cable, poles, wires, telephone instruments, and other equipment.
The Registrant's principal operations are conducted in a building
owned by the Registrant at 68 Cabarrus Avenue East, Concord,
North Carolina 28025. This headquarters facility was built in
1956 and expanded in 1967. More recently, in 1991 the Registrant
made substantial interior renovations to the Cabarrus Avenue
facility. This headquarters building has approximately 53,000
square feet of floor space.
The Registrant's general warehouse is also owned by the
Registrant and is located in Concord. This facility was
completely renovated in 1991 and has approximately 12,300 square
feet of floor space. The Registrant has enlarged its warehouse
storage facilities by the addition of approximately 9,760 square
feet of warehouse space in 1995. Approximately 3,800 square feet
of warehouse space that was renovated in 1995 is currently
occupied by the Registrant's outside plant engineering group.
During 1994, the Registrant acquired 14.7 acres of property
north of Concord adjoining Interstate 85 for use as a future
campus-style business office center. The Registrant purchased an
additional acre of property at this site during 1996. The first
of several buildings to be constructed at this site was completed
in the fourth quarter of fiscal 1996. This new building is
currently occupied by the Registrant's customer service personnel
and has approximately 12,000 square feet of floor space (the
"Customer Care Center"). There is significant room on this
property for construction of additional facilities as needed in
the future.
In the middle of 1997 the Registrant began construction on
the second building on this tract of property. It is identical
to the building completed there during 1996. It will be occupied
by the sales and Enterprise Groups of employees and is slated for
completion near the end of the second quarter of 1998.
During 1996, the Registrant renovated approximately 3,000
square feet of owned office space in Kannapolis, North Carolina.
The CTC LDS telemarketing group moved into this space during the
fourth quarter of 1996. Both the addition of the Customer Care
Center and the relocation of the CTC LDS telemarketing group to
the Kannapolis office freed additional office space at the
Cabarrus Avenue headquarters facility.
In November 1997, the Registrant purchased a one-third
interest in 22.424 acres of undeveloped property located on
Weddington Road Extension and Speedway Boulevard in the King's
Grant Development. This property may be used for future
development if needed. The cost of this acquisition was
$597,096.
In the three years ended December 31, 1997, the Registrant
has acquired property and built remote switching units in its
exchange areas. During 1996, the Registrant installed a new
Nortel DMS 500 digital switch in downtown Charlotte, North
Carolina at a cost of $2.2 million. The new switch was placed in
service in October 1996, and is intended to expand the array of
service offerings available from CTC LDS and reduce CTC LDS's
monthly operating expenses. All of the Registrant's central
office switching equipment is digital. In mid-1997, the
Registrant began replacing CTC's digital switching platform by
changing from AG switches to state-of-the-art Nortel DMS
switches. This replacement process is expected to last
approximately five years. In 1997, the Registrant also replaced
the DOTS operator workstations used by CTC with TOPS workstations
from Nortel.
In connection with CPC's operations as a partner in the
BellSouth Partnership and the launch of the Partnership's PCS
network in the third quarter of 1996, the Registrant entered into
two real property leases in 1996 for space to house CPC's retail
outlets in Concord and Statesville, North Carolina. In 1997, the
Registrant leased space for a third retail outlet in Salisbury,
North Carolina. The Concord and Statesville leases are for terms
of five years and three years, respectively, with annual rent
obligations of $28,344 in Concord and $14,112 in Statesville.
The Salisbury lease is for a period of five years, at an annual
rent obligation of $31,958, with an option to renew for five more
years.
As of December 31, 1997, 14% of the Registrant's telephone
plant in service was represented by land, buildings and general
equipment; 37% by central office equipment; and 49% by wires,
cables, conduits, poles and related equipment. The connecting
lines, poles, wires, cables and conduits and related equipment
referred to above are located on streets and public highways
owned by persons other than the Registrant, pursuant to consents
of various governmental bodies or to leases, permits, easements,
agreements, or licenses, express or implied through use without
objection by the owners.
In addition to the foregoing, the Registrant uses 112 motor
vehicles in its operations.
During 1997, a portion of the Registrant's physical property
was subject to a certain Indenture of Mortgage and Deed of Trust
dated August 1, 1958, as supplemented and amended, securing the
Registrant's First Mortgage Bonds. This debt was retired on
March 1, 1997, and the related liens were released.
Item 3. Legal Proceedings
In December 1992, the Registrant was notified that it was a
potentially responsible party ("PRP") by the Environmental
Protection Agency ("EPA") under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") at the Bypass
601 Groundwater Contamination Superfund Site (the "Site") in
Concord, North Carolina. Previous investigations indicated that
the Martin Scrap Recycling ("MSR") facility, which operated as a
battery salvage and recycling facility from approximately 1966 to
1986, is one of the major sources of contamination. The MSR
facility dealt in the recovery of scrap metal (mostly lead) from
scrap vehicle batteries. The Registrant was named by the EPA as
a PRP because it disposed old batteries and cable at the MSR
facility.
The Registrant, along with approximately 70 other companies
(the "PRP Group"), has entered into a Consent Decree with the
United States to clean up the Site. The companies also have
agreed to reimburse the EPA for approximately $4 million in
costs that have been incurred thus far at the Site.
The EPA's original preferred remedy included stabilization of
lead-contaminated soils and extraction and treatment of
contaminated groundwater. The remedy was originally estimated to
cost approximately $40 million and should take at least 10 years
to complete. Based on data obtained by the PRP Group, however,
the EPA modified the preferred remedy to eliminate groundwater
extraction and to alter the soil remedy. The EPA has reduced the
total estimated cost of this remedy to $12 million.
The PRP Group has obtained funding from several other sources
to reduce its costs at the Site. The federal government has
contributed $4.75 million, reflecting the amount of batteries it
sent to the Site. The EPA has agreed to pay approximately 30% of
the cleanup costs out of the federal "Superfund", to reflect the
number of PRPs that are no longer in business and therefore
cannot pay their share. Also, the PRP Group has filed civil
actions for contribution against more than 100 other parties.
All those actions have been settled, with net payments to the PRP
Group of more than $2 million.
The PRP Group has decided to allocate the remaining costs of
the cleanup among its members primarily in proportion to their
respective contributions of batteries to the Site. According to
the EPA's records, the Registrant sent a total of 446,412 pounds
of batteries, wire and other waste material to the Site. The
Registrant's total assessment thus far has been $45,713, which has
been paid. Based on the progress of the cleanup thus far and the
funds available from other sources to pay for the cleanup, the PRP
Group does not expect that its members will be required to pay any
additional amounts.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
Both the Voting Common Stock and the Class B Nonvoting Common
Stock (the "Class B Stock") of the Registrant trade principally
in local transactions without the benefit of an established
public trading market. The heirs of L.D. Coltrane, Sr., the
founder of the Company, collectively hold a controlling interest
in the Voting Common Stock.
On July 24, 1997, the Board of Directors of the Registrant
declared a stock split in the form of a one-for-two stock
dividend payable August 29, 1997 to holders of record on
August 1, 1997. All stock related figures set forth herein have
been retroactively restated to reflect this change.
Although there is no established trading market for the
shares, a Charlotte-based brokerage firm is currently making a
market as shares of the Class B Stock are offered for sale.
During 1997, a known range of selling prices was $113 to $131 per
share. The Registrant is aware of a sale by an individual on
March 24, 1998 of 100 shares of Class B Stock at $131 per share.
Dividends per share were declared quarterly and paid on both
Voting Common Stock and Class B Stock for the two previous years
as follows:
1997 1996
Quarter Dividend Dividend
------- -------- ---------
First $0.47 $0.46
Second 0.47 0.46
Third 0.48 0.47
Fourth 0.48 0.47
----- ------
$1.90 $1.86
===== =====
The approximate numbers of holders of each class of
common equity of the Registrant as of February 28, 1998, were as
follows:
Title of Class of Stock Number of Record Holders
----------------------- ------------------------
Voting Common Stock 296
Class B Nonvoting Common Stock 1,451
Item 6. Selected Financial Data
Years Ended December 31,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
Condensed Statements
of Income(1):
Operating
revenues $78,483,514 $ 67,054,006 $ 60,417,351
Operating
expenses 58,390,372 51,349,967 43,201,065
------------ ----------- -----------
Net Operating
Revenue 20,093,142 15,704,039 17,216,286
Other income(2) 1,645,866 1,341,053 2,561,081
Income taxes (7,898,159) (6,583,671) (6,760,624)
------------ ---------- ----------
Net income 13,840,849 10,461,421 13,016,743
Dividends on
preferred
stock 73,073 92,535 93,135
------------ ---------- ----------
Earnings for
common stock $13,767,776 10,368,886 12,923,608
============ ========== ==========
Common Stock
Data: (3)
Shares of
common stock
Year end 2,238,790 2,228,064 2,224,530
Basic weighted
average 2,236,188 2,227,184 2,248,383
Per share of
common stock
Basic earnings $ 6.16 $ 4.65 $ 5.83
Dividends $ 1.90 $ 1.85 $ 1.80
Book value
- year end $43.21 $35.89 $33.53
Total Assets $147,339,429 $115,063,963 $107,765,477
Long-Term Debt
(excluding current
maturities) $ 11,239,000 $ 2,014,000 $ 4,074,000
Redeemable Preferred Stock
with Sinking Fund
Requirements $ 150,000 $ 162,500 $ 175,000
Item 6. Selected Financial Data, Continued
Years Ended December 31,
-----------------------------
1994 1993
------------ ---------------
Condensed Statements
of Income(1):
Operating
revenues $ 55,129,895 $ 43,875,543
Operating
expenses 43,760,298 31,811,372
------------ -----------
Net Operating
Revenue 11,369,597 12,064,171
Other income(2) 1,663,687 176,919
Income taxes (4,688,936) (4,282,180)
------------ -----------
Net income 8,344,348 7,958,910
Dividends on
preferred stock 93,948 93,562
------------ -----------
Earnings for
common stock $ 8,250,400 $ 7,865,348
============ ===========
Common Stock
Data: (3)
Shares of
common stock
Year end 2,213,681 2,214,395
Basic weighted
average 2,213,285 2,214,180
Per share of
common stock
Basic earnings $ 3.73 $ 3.56
Dividends $ 1.76 $ 1.73
Book value
- year end $29.12 $26.92
Total Assets $ 99,886,639 $ 91,938,360
Long-Term Debt
(excluding current
maturities) $ 4,714,000 $ 6,331,000
Redeemable Preferred
Stock with Sinking
Fund Requirements $ 187,500 $ 200,000
______________________
(1) During 1996, the Registrant reclassified access and
settlement charges from an offsetting revenue account to an
expense category on its 1996 consolidated statement of income.
Amounts previously reported in the 1995, 1994 and 1993
consolidated statements of income have been reclassified to
conform with the 1996 consolidated statement of income in this
regard. Such reclassification has no effect on net income as
previously reported.
(2) Other income in 1997 includes an extraordinary item of
$2,239,045, net of income taxes of $1,493,312, relating to the
discontinuance of SFAS No. 71.
(3) Per share data is based on the weighted average number of
shares outstanding (including both Voting Common Stock and
Class B Stock) during the respective periods after giving
retroactive effect to the 25% stock distribution granted on
September 1, 1994, the 2 for 1 split effective May 3, 1996 and
the 1 for 2 split effective August 1, 1997. Dividends declared
per common share have been restated to give retroactive effect to
the above mentioned stock distributions.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
THE FOLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE
REGISTRANT AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant had net cash provided by its operating
activities of $21.2 million, $22.4 million and $20.3 million in
1997, 1996 and 1995, respectively. In 1997, the Registrant used
cash flows from operations and existing cash, cash equivalents,
short-term investments and borrowing on a line of credit to fund
(i) capital expenditures of $21.6 million pertaining to ongoing
plant construction projects, (ii) purchases of investments in
affiliates of $11.1 million, (iii) purchases of investment
securities of $400,000, (iv) dividends of $4.3 million and (v)
principal payments of $2,215,000 to retire long-term debt.
The Registrant has significant cash requirements due to growth
in its service area and the need to modernize its existing plant
and equipment. Capital expenditures in 1997 included a new Nortel
DMS 100/200 switch at the Concord Exchange, a new operator
position system, a new building and substantial investment in
outside plant, including poles, aerial cable and buried cable.
The Registrant's planned capital expenditures in 1998 are
approximately $20 million. Of this amount, approximately $8.0
million is for improvements in CTC's and CTC Exchange Services'
switching facilities, including the replacement of certain
elements of CTC's switching platform with a new Nortel DMS
switching platform. This replacement process began in mid-1997
and will continue over a period of approximately five years.
Approximately $7.7 million of the Registrant's planned capital
expenditures is for outside plant and circuit additions and
improvements to include the placement of six Nortel remote
switching nodes, and another $4.3 million is for other
telecommunications assets. Actual capital expenditures were
$21.6 million in 1997, $24.1 million in 1996 and $16.1 million in
1995.
Other anticipated uses of cash in 1998 include additional
investments in affiliates. In addition, the Registrant expects
to spend approximately $1 million in 1998 for wireless
cable investments and plant and equipment associated with CT
Wireless Cable and the WONC wireless cable television network.
Most of the Registrant's planned investment in CT Wireless Cable
in 1998 will be to enable WONC to acquire the rights to lease
certain channel frequencies from UNC pursuant to WONC's agreement
with UNC.
In the event CTC elects during 1998 to exercise its right to
partition out certain territories for which the Registrant has
invested in the Bell South Carolinas PCS Limited Partnership, the
resulting cost in the last quarter of 1998 is expected to be
between $12 million and $15 million.
During 1997, the Registrant generated $21.2 million in cash
from operations. During the same period, approximately $27.9
million was utilized for plant additions and other investment
activities and $4.5 million was generated from financing
activities, resulting in negative working capital of $2.2 million
at fiscal year-end. As of December 31, 1997, the Registrant had
short-term investments of $168,979, and two unsecured available
lines of credit totaling $18.5 million. One of the Registrant's
lines of credit is in the amount of $15 million from Rural
Telephone Finance Corporation ("RTFC") and the remaining $3.5
million line of credit is from First Charter National Bank. At
December 31, 1997, the Registrant had used $10 million of the
line of credit from RTFC. The current interest rate is 7.25%.
Depending primarily upon the Registrant's level of purchases of
investments in affiliates, its growth in local business and
expansion of its long distance and competitive local exchange
carrier businesses in 1998, management may seek additional bank
financing in 1998 to fund such activities.
At December 31, 1997, the Registrant had outstanding long-term
debt of $11,239,000. RTFC holds $10,000,000 of this amount. The
balance of long-term debt is held by a North Carolina bank at
7.25% interest with equal quarterly installments of principal and
interest until 2001. Annual maturities of the long-term debt
outstanding for the five-year periods subsequent to December 31,
1997, are as follows: $620,000 in 1998; $10,620,000 in 1999;
$620,000 in 2000; and $154,000 in 2001.
As a limited partner of the BellSouth Partnership, the
Registrant has committed to make certain payments to the
Partnership for its pro rata share of PCS license fee and network
expenditures for the purpose of constructing and operating PCS
Services. The Registrant estimates that its total obligations in
this regard will be approximately $9.1 million over the four-year
period ending in 1998. During 1997, the Registrant expended
approximately $1.3 million in connection with its limited partner
status in the BellSouth Partnership. The Registrant's 1998
commitments are approximately $427,900.
On March 14, 1994, the Registrant entered into a consent decree
known as the MSR Site Remediation Agreement with the United
States EPA and other PRP's, all as described in Item 3, above. A
Trust has been established and amounts will be paid periodically
to this fund for disbursement as the need for moneys arises. The
Registrant expects this amount will not be material.
The Registrant anticipates that all of the capital requirements
in 1998 associated with its construction program, payments
associated with long-term debt and investments as summarized
above will be provided by cash flows from operations, existing
cash, cash equivalents and short-term investments and currently
available lines of credit. If additional funds are required
during 1998, management expects that such funds will be raised by
through additional bank borrowings.
RESULTS OF OPERATIONS
1997 Compared to 1996
Operating revenues increased $11,429,508 or 17.05% for the year
ending December 31, 1997 compared to 1996. This increase was
primarily attributable to local service, long distance service,
PCS service and business system sales. However, all categories
showed increases.
Local service revenues, from the provision of telephone
exchange services, increased $4,482,363 or 18.1% during 1997
compared to 1996. This growth arises primarily from increased
demand for local services due to growth in the CTC Service Area.
Nearly 5,700 new access lines were connected to the network in
1997, bringing the total number of local access lines in CTC's
three-county service area to 102,221. Due to access line growth
and increased customer demand, this area of operations is
expected to continue to grow.
Long distance service revenues are derived principally from
providing long distance communication between designated areas.
Network access service revenues are derived from other carriers
for their use of the Registrant's local network to complete long
distance calls. Access and toll revenues increased $3,224,489 or
10.2% during 1997 compared to 1996. This increase is the result
of increased sales and marketing efforts by CTC LDS and increased
calling volume by the interexchange carriers.
Toll revenues in the intra-LATA markets decreased due to the
new Rate Plan implemented in September. This was expected due to
the rate structure which moved toll revenues to the local
revenues area. This reduction, however, is unquantifiable and is
relatively small when compared to total revenues.
Other and unregulated revenues increased $3,781,338 or 34.4%
during 1997 compared to 1996. This increase is made up of
increased directory advertising of approximately $603,545,
increased Internet revenues of approximately $411,437, a
$1,424,580 increase in business system sales, a $282,808 increase
in PCS telephone system sales and a $473,518 increase in inside
wire maintenance revenue. The Registrant is placing more
emphasis on non-regulated areas of operations and expects
non-regulated income to increase in 1998.
Operating expenses, exclusive of depreciation, increased
$7,533,122 or 18.3% during 1997 compared to 1996. Plant specific
expenditures increased $5,061,789 or 25.3%. This increase
results from an increase of $1,478,813 in DCS service expense and
cost of goods sold associated with the CT Wireless, Inc.
subsidiary; an increase in access expense of $1,648,041 due to
additional sales of toll services; and an increase of $697,164
relating to business systems cost of goods sold. The remaining
increase is primarily expenses associated with an increase in
outside contractor cost relating to the replacement of SPN poles
and increased expenditures in telephone plant due to growth.
Corporate and customer operations expense increased $1,451,333
or 6.8% during 1997 compared to 1996. Approximately $793,824 or
54.7% relates to costs associated with additional sales and
marketing efforts in long distance services and $587,313 or 40.5%
related to PCS sales and marketing efforts. Another $201,626 of
this amount related to additional expenditures in customer
service operations.
Other income decreased $1,934,232 or 144% in 1997, compared to
1996. This decrease was primarily attributable to the
Registrant's pro rata share of the BellSouth Partnership's losses
experienced in connection with start-up costs associated with the
PCS network, which became operational during the third quarter of
1996. These losses were partially offset by higher income in
1997 over 1996 as a result of the equity in earnings of the
Registrant's investment in the Alltel Mobile Partnership
providing cellular communications services in North Carolina RSAs
4/5 and 15. Losses associated with start-up costs in connection
with the BellSouth Partnership PCS network are currently
projected to continue through 2001. Such losses in 1998 are
expected to approximate losses experienced in 1997; however, if
actual PCS sales exceed the Partnership's forecasted sales,
losses could be greater. Management expects losses associated with
the BellSouth Partnership to begin to decline in 1999.
Other expenses, principally interest, increased $280,163 in
1997 compared to 1996. This increase was primarily from
additional interest paid on loans outstanding.
In January 1997, the Registrant offered an early retirement program
to 29 CTC employees. Twenty-eight of those eligible accepted the
early retirement package and the Registrant recorded an
additional expense of $1,020,000 in connection with its
obligations under this program.
Depreciation expense decreased $492,717 during 1997 compared to
1996. This decrease resulted from a reclassification of circuit
equipment amounts into the Central Office switching category and
recalculating previously recorded depreciation expense at the
lower rates used for switching equipment. The reduction of
depreciation expense due to reclassification is $736,971. The
Registrant also recorded additional depreciation of $600,000
during the same period of the prior year, as authorized by the
NCUC. Without these factors, this expense would have increased
by $844,254, which would be expected due to the increased
depreciable plant balances.
For the reasons set forth above, the Registrant's net income
before extraordinary item in 1997 increased $1,140,383 or 10.9%
compared to 1996. Considering the extraordinary item arising
from the discontinuance of SFAS 71, 1997 net income increased
$3,379,428 compared to 1996. With the rapid pace of change in
the telecommunications industry caused by deregulation and
advancing technology, management expects operating expenses to
increase. It also expects operating losses in newly established
business ventures to continue but at a reduced rate. Management
believes that expenditures in telephone plant construction,
switching, marketing and advertising will continue to cause
increases in operating costs, but it believes these expenditures
are necessary to its long term profitability and growth.
1996 Compared to 1995
During 1996, the Registrant reclassified access and settlement
charges from an offsetting revenue account to an expense category
on its 1996 consolidated statement of income. Amounts previously
reported in the 1995 consolidated statement of income have been
reclassified to conform with the 1996 consolidated statement of
income in this regard. Such reclassification has no effect on
net income as previously reported.
Operating revenues increased $6,636,655 or nearly 11% for the
year ending December 31, 1996, compared to 1995. This increase
is primarily attributable to local service revenues from CTC
operations and toll revenues from CTC LDS operations.
Local service revenues are derived from providing telephone
exchange services. Local service revenues increased $3,484,431
or 16.4% during 1996, compared to 1995. This growth is
attributable to increased demand for local service due to growth
in the CTC Service Area and a metro calling plan which allocates
more revenues to local service. Nearly 5,000 new access lines
were connected to the network in 1996, bringing the total number
of local access lines in CTC's three-county service area to more
than 96,000.
Long distance service revenues are derived principally from
providing long distance services within designated areas.
Network access service revenues are derived from other carriers
for their use of the Registrant's local network to complete long
distance calls. Access and toll revenues increased $1,681,633 or
5.6% during 1996, compared to 1995. This increase is a result of
increased marketing and sales efforts by CTC LDS and increased
calling volumes by the inter-exchange carriers.
CTC LDS's marketing and sales efforts in 1996 led to the
addition of more than 7,000 new customers. The installation of
CTC LDS's new Nortel DMS 500 switch in the fourth quarter of 1996
enabled CTC LDS to begin marketing and selling long distance
service to new markets beyond CTC's core three-county service
area. These efforts commenced in Mecklenburg County in 1996 and
continued throughout North Carolina in 1997. In addition, CTC
LDS received approval in the first quarter of fiscal 1997 to
market long distance services in South Carolina and Virginia.
The 1996 toll and access service revenue increases discussed
above were offset in part by a $1,124,033 decrease in revenues
from the National Exchange Carrier Association ("NECA") related
to a settlement adjustment recorded in 1995. The Registrant's
decision to file its own interstate tariffs and thereby forego
certain NECA toll pool revenues is intended to make Concord a
more attractive place for interconnection by long distance
companies.
Toll and access service revenues were further offset in 1996 by
a $1,029,594 decrease in Bell settlement access revenues from
1995. This decrease was due to Bell's implementation of its own
defined radius calling plans, primarily during the first quarter
of 1996.
Access charge reforms were approved by the FCC in 1997. This
approval resulted in a reduction in the access charge rates which
local telephone companies can charge long distance carriers.
Such a reduction in permitted access charge rates would have a
negative impact upon future CTC access revenues, but this impact
would be at least partially offset by corresponding CTC LDS cost
savings attributable to lower access charges.
Other and unregulated operating revenues increased $1,457,708
or 15.3% during 1996, compared to 1995. This increase is
primarily due to larger amounts of non-regulated revenues,
including a $984,000 increase in equipment sales, and increased
billing and collection revenues which were up $130,000, a 7%
increase from a year ago.
Operating expenses, exclusive of depreciation, increased
$10,012,190 or 32% during 1996, compared to 1995. Plant specific
expenditures increased $4,398,163. This increase results from
the reclassification of access and toll settlement charges from
an offsetting revenue account to an expense account in the amount
of $2,382,954; increased maintenance expenditures in the outside
plant operations of $906,762 due to extensive construction work
on cable and pole line facilities; and increased access expense
of $1,468,518 due to increased toll volumes generated by long
distance sales by CTC LDS. Also the non-regulated expense
component of plant specific expenditures increased by $335,661
primarily relating to the cost of equipment sold. The remainder
of such operating expenses primarily relates to the development
of an internal management information system.
Corporate and customer operations expense increased $5,614,027
or 36% for 1996 when compared to 1995. Approximately $1,006,284
or 18% of this amount relates to product management and
advertising. Another $973,415 of this amount relates to
additional efforts being placed in customer service operations.
Approximately $700,000 of the increase in corporate and customer
operations expense relates to consulting fees for work process
re-engineering and software implementation for a new accounting
system. The remainder of such amount primarily relates to the
implementation of a new long-term executive incentive
compensation plan and a management incentive compensation plan,
as well as an adjustment to reconcile customer accounts
receivable.
Depreciation expense decreased $1,863,288 or 15.6% during 1996,
compared to 1995. This amount includes a special amortization of
$574,363 recorded under authority of the NCUC as additional
amortization relating to certain telephone plant accounts.
During 1995, a special amortization was recorded in the amount of
$3,708,000. Without the special amortizations recorded to
depreciation expense in 1996 and 1995, depreciation and
amortization would have increased $1,270,349 in 1996, which is a
result of an increased depreciable asset base.
Other income decreased $1,220,028 or 47.6% in 1996, compared to
1995. This decrease is primarily attributable to the
Registrant's pro rata share of the BellSouth Partnership's losses
experienced in connection with start-up costs associated with the
PCS network which became operational during the third quarter of
1996. These losses were partially offset by higher income in
1996 over 1995 as a result of the equity in the earnings of the
Registrant's investment in the Alltel Mobile Partnership
providing cellular communications services in North Carolina RSAs
4/5 and 15.
The decrease in other income in 1996 is also attributable to
decreased interest income, dividend income and gain on sale of
investments of $694,926, and an increase in other expenses of
$123,348. Interest income decreased due to smaller amounts
invested in interest earning assets and lower earning rates.
For the reasons set forth above, the Registrant's net income in
1996 decreased $2,555,322 million or 19.6% compared to 1995.
OTHER EVENTS
VNET Acquisition
On March 13, 1998, the Registrant announced that it had signed
a nonbinding letter of intent to acquire G-A Technologies, Inc.,
doing business as VNET Access ("VNET"). VNET is a regional
provider of Internet services headquarters in Charlotte, North
Carolina. The acquisition would be effected through the tax-free
merger of VNET into a wholly owned subsidiary of the Registrant
and would be accounted for as a purchase. The resulting
subsidiary of the Registrant would continue to offer services
under the VNET brand name. All consideration payable to the
VNET shareholders would be in the form of Class B Stock.
Completion of the acquisition is contingent upon execution of a
definitive merger agreement, approval of the VNET shareholders,
certain regulatory approvals and satisfaction of other conditions
typical of such transactions. There can be no assurance that the
acquisition will be consummated. If completed, the acquisition
of VNET will not materially affect the Registrant's operations or
financial condition.
New Rate Plan
Effective September 1, 1997, CTC began operation under the new
Rate Plan. Although the Registrant's new rate structure under the
Rate Plan reflects an increase for the cost of basic service,
other changes in the Rate Plan offset these increases for many
customers. Overall, the new rate structure did not materially
impact the Registrant's revenues in 1997 and is not expected to
materially impact revenues in 1998 or future years. By submitting
its price regulation filing, the Registrant has agreed to open
its markets to competition for local dial tone service, on the
condition that the Registrant is allowed to "rebalance" or adjust
its rates at the same time. Although the competitive pressures
of opening its markets to competition from other local telephone
service providers may lead to reductions in the Registrant's
future local service revenues, management believes that by
rebalancing its local service rates, it can compete in emerging
markets and continue to sustain local rates at levels that are
affordable for customers. See "Item 1. Business" for additional
information regarding the Rate Plan.
1996 Telecommunications Act
On February 8, 1996, the Telecom Act was enacted into law.
Among its numerous other effects, the Telecom Act opens local
telephone markets to competition. Although the precise impact of
the Telecom Act will not be known until additional progress is
made by the FCC in its ongoing rule making efforts, it is clear
that the Registrant will encounter increasing competition in
virtually all of its markets, including local dial tone and long
distance service through the remainder of the 1990s. By
implementing the new Rate Plan, the Registrant has taken a
proactive step towards opening its markets to competition for
local dial tone service. While there can be no assurances that
the Registrant will be able to maintain its present levels of
profitability in this emerging competitive environment,
management believes that its ongoing investments in its network,
including the installation of digital switches and other
equipment, combined with greater flexibility in setting prices,
will enable the Registrant to compete more effectively by
providing enhanced services at affordable rates. See "Item 1.
Business" for additional information regarding the Telecom Act.
ACCOUNTING CONSIDERATIONS
As described in Note 13 to the Consolidated Financial
Statements of the Registrant, the Registrant discontinued
applying Statement of Financial Accounting Standards No. 71 (FAS
71), "Accounting for the Effects of Certain Types of Regulation,"
as of April 1, 1997. The Registrant determined that it no longer
met the criteria for following FAS 71 due to changes in the
manner in which the Registrant is regulated and the heightened
competitive environment. The accounting impact was an
extraordinary non-cash gain of $2,239,045, net of applicable
income taxes of $1,493,212. The effect on future charges for
depreciation is not expected to differ materially from what would
have been recorded under FAS 71 for the current year.
YEAR 2000 CONSIDERATIONS
The Registrant is in the process of identifying the business
issues associated with the Year 2000 that impact information
systems both internally and in relation to its external
customers, suppliers and other business associates. Factors
considered in the assessment of the business issues involved with
the Year 2000 include the evaluation of internal compliance
capabilities, significant customers' and vendors' compliance
plans and the compliance plans and status for businesses in which
the Registrant has investments.
The Registrant has identified a management team, representing
all significant areas of operation, with the responsibility of
addressing business issues associated with the Year 2000. Based
on its efforts to date, management believes that evaluation of
the Registrant's Year 2000 compliance and any modifications or
conversions will be completed well before the end of fiscal year
1999. Although the Registrant has not yet completed its
evaluation, management does not believe that any material
exposures or contingencies exist with respect to its internal
information systems and is not aware of any material exposure or
contingency related to its external business affiliates.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements
about the Registrant's financial condition and results of
operations, which are subject to certain risks and uncertainties
that could cause actual results to differ materially from those
reflected in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the
date hereof. The Registrant undertakes no obligation to publicly
revise these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from
these forward-looking statements are (1) the Registrant's ability
to respond effectively to the sweeping changes in industry
conditions created by the Telecom Act, and related state and
federal legislation and regulations, (2) the Registrant's ability
to successfully implement the Rate Plan, (3) the Registrant's
ability to recover the substantial costs to be incurred in
connection with the implementation of its PCS business, (4) the
Registrant's ability to retain its existing customer base against
local and long distance service competition, and to market such
services to new customers, (5) the Registrant's ability to
effectively manage rapid changes in technology and (6) whether
the Registrant can effectively respond to the actions of its
competitors.
Item 8. Financial Statements and Supplementary Data
A document, which includes independent auditors' (KPMG Peat
Marwick LLP) report dated February 27, 1998 entitled:
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
SCHEDULE AND AUDITORS' OPINION
ANNEXED TO ANNUAL REPORT FORM 10-K
FOR THE THREE YEARS
ENDED DECEMBER 31, 1997
OF
CT COMMUNICATIONS, INC.
is attached hereto and is filed as a part of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is (a) the name, age, principal occupation of
each director and executive officer of the Registrant, (b) the
name and principal business of the company by which such person
is employed, (c) the period during which such person has served
as a director of the Registrant, (d) all positions and offices
that such person holds with the Registrant, and (e) such person's
directorships in other companies with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") or subject to the
requirements of Section 15(d) of the Exchange Act or companies
registered as an investment company under the Investment Company
Act of 1940. All positions, offices or occupations so indicated
have been held for at least the past five years, unless otherwise
indicated.
L. D. Coltrane, III - Age 79 - Chairman of the Board. Mr.
Coltrane served as President of First Charter National Bank for
more than five years. He has served as a director since 1965.
In 1973, he was elected Assistant Secretary and Assistant
Treasurer and in 1974, Assistant to the President. At the
February 27, 1986 Board of Directors meeting, Mr. L. D.
Coltrane III was elected to President of the Registrant to
succeed his father, L. D. Coltrane, Jr., who died on December
16, 1985. He is the father of Michael R. Coltrane.
Michael R. Coltrane - Age 51 - President, Chief Executive
Officer, Director. Mr. Coltrane is the son of Mr. L. D.
Coltrane III. Prior to joining the Company on February 1,
1988, Mr. Coltrane had served as Executive Vice President of
First Charter National Bank for more than six years and Vice
President of a large regional bank for more than ten years.
Mr. Coltrane is a director of U.S. Telecom Holdings, Hilton
Head Island, South Carolina; Access/On Multimedia, Concord,
North Carolina; and First Charter Corporation, Concord, North
Carolina. He was elected a director of the Registrant April
28, 1988.
Jerry H. McClellan - Age 66 - Director. Mr. McClellan retired as
Executive Vice President and General Plant Manager on February
1, 1996, although he continues to serve as director. He served
with the Registrant since 1949 and as a director since 1984.
Mr. McClellan was elected Executive Vice President in 1985.
Phil W. Widenhouse - Age 72 - Director. Mr. Widenhouse retired
as Executive Vice President of the Registrant on July 1, 1992,
although he continues to serve the Registrant as a director.
He has served with the Registrant since 1949 and as a Director
since 1952. Mr. Widenhouse was elected Executive Vice
President in 1971 and served as Treasurer from 1973 to 1990.
He is Chairman of the Audit Review Committee and a member of
the Board Committee on Compensation. Mr. Widenhouse is a
director of Carolina First Bancshares, Inc., Lincolnton, North
Carolina.
Mr. John R. Boger, Jr. - Age 68. Director. Mr. Boger was
elected a director April 27, 1978 and serves as General Counsel
for the Registrant. Mr. Boger is a practicing attorney with
the firm of Williams, Boger, Grady, Davis and Tuttle. He is
Chairman of the Board Committee on Compensation and a member of
the Audit Review Committee. Mr. Boger is a director of
Carolina First Bancshares, Inc., Concord, North Carolina.
Mrs. Betty Gay Bivens - Age 81. Director Emeritus. Mrs. Bivens
was elected a director by action of the Board of Directors on
January 23, 1986. Mrs. Bivens is the daughter of Mr. L.D.
Coltrane, Jr., the sister of L.D. Coltrane III and the aunt of
Michael R. Coltrane. Mrs. Bivens retired from the Board of
Directors on August 22, 1996. Prior to retiring, she served as
a member of the Board Committee on Compensation and the Audit
Review Committee. Mrs. Bivens is a private investor.
Mr. Ben F. Mynatt - Age 65. Director. Mr. Mynatt was elected a
director by action of the Board of Directors on August 23,
1994. Mr. Mynatt is a member of the Board Committee on
Compensation. He is owner of Ben Mynatt Chevrolet Inc. in
Concord, North Carolina. Mr. Mynatt serves as a trustee of
Rowan-Cabarrus Community College, Salisbury, North Carolina and
Wingate University, Wingate, North Carolina.
Mr. O. Charlie Chewning - Age 62. Director. Mr. Chewning was
elected a director by action of the Board of Directors on
August 22, 1996. Mr. Chewning was the Senior Partner of the
Carolinas Offices from June 1993 to December 1994 for the
accounting firm of Deloitte & Touche LLP, Charlotte, North
Carolina. Prior to that, he was the Office Managing Partner
for the Charlotte office of Deloitte & Touche LLP. He is a
member of the Audit Review Committee.
Mr. Samuel E. Leftwich - Age 67. Director. Mr. Leftwich was
elected a director by action of the Board of Directors on
August 22, 1996. He is the retired Chairman of the Board of
Centel Corporation, a telecommunications company located in
Chicago, Illinois. Mr. Leftwich served as Chairman of Centel
Corporation from January 1990 until December 1992. He is a
member of the Board Committee on Compensation.
Mr. Thomas A. Norman - Age 57 - Senior Vice President, Assistant
Secretary. Mr. Norman was employed by the Registrant in
September 1995. He was formerly employed by Sprint/Centel of
Illinois, Des Plains, Illinois. He was Vice President/General
Manager at Sprint/Centel prior to joining the Registrant,
having served in various capacities during his 30 year
telephone career. He was elected to Senior Vice President of
Operations and Engineering and Assistant Corporate Secretary by
action of the Board of Directors on December 14, 1995.
Mr. Nicholas L. Kottyan - Age 43 - Senior Vice President,
Assistant Secretary. Mr. Kottyan was employed by the
Registrant in December 1994 to serve as President-Chief
Operating Officer of Carolinas PCS Inc. He was formerly
President of Teledial America of North Carolina, Inc. since
1991 and President of Phone America of Carolina Inc. from 1987
to 1991. Mr. Kottyan was named Vice President of Marketing and
Customer Operations on May 15, 1995. He was elected to Senior
Vice President of Marketing and Customer Operations and
Assistant Corporate Secretary by action of the Board of
Directors on December 14, 1995.
Mr. Barry R. Rubens - Age 38 - Senior Vice President and Chief
Financial Officer, Secretary, Treasurer. Mr. Rubens was employed
by the Registrant in October 1992 as Regulatory Affairs Manager.
He formerly was a management consultant with the accounting firm
of Ernst & Young, Washington, D.C. Mr. Rubens served for eleven years in
that capacity. He was elected to Senior Vice President of
Finance and Assistant Corporate Secretary by action of the
Board of Directors December 14, 1995, and was subsequently made
Corporate Secretary in February 1996.
Mr. Kenneth R. Argo - Age 64 - Vice President, Chief Information
Officer. Mr. Argo was employed by the Registrant in April 1983
as Vice President - Controller. He was elected Vice President,
Chief Information Officer by action of the Board of Directors
on October 26, 1995.
Ms. Catherine A. Duda - Age 45 - Senior Vice President. Ms. Duda
was employed by the Registrant in December 1995 as Vice
President - Marketing. Prior to joining the Registrant, Ms.
Duda was Vice President - Communications from April 1994 to
September 1995, and Vice President - Staff Group from February
1993 to April 1994, for Frontier Corporation, a
telecommunications company in Rochester, New York. Prior
thereto, Ms. Duda was President from August 1988 to February
1993 for Vista Telephone, a telecommunications company in
Burnsville, Minnesota. Ms. Duda was elected to Senior Vice
President of the Registrant's Services Group by action of the
Board of Directors on October 16, 1996.
The current directors of the Registrant were elected at the
annual stockholders' meeting held on April 24, 1997 and will
serve until the next election scheduled for April 23, 1998.
Outside directors receive $5,000 as an annual retainer and $500
per meeting. The Chairman receives $5,500 as an annual retainer
and $550 per meeting. Committee chairmen receive $300 per
meeting and committee members $250. For meeting by telephone
conference call, Board members receive $100 and committee members
$50.
The 1996 Director Compensation Plan (the "1996 Plan") reserves
11,250 shares of Class B Stock for issuance to non-employee
Directors who elect to receive part or all of their compensation
(including regular meeting, committee meeting and annual retainer
fees) in Class B Stock instead of cash. Pursuant to the 1996
Plan, dollar values for the retainer and any accumulated meeting
fees are added together, and this amount is converted to a number
of shares based on fair market value at the time of meetings.
Payments in Class B Stock are made annually following the
election of directors. Any fractional shares will be rounded up
to whole shares when issued.
Item 10A. Section 16(a) Beneficial Ownership Reporting
Compliance
Pursuant to Section 16 of the Exchange Act, directors and
executive officers of the Registrant are required to file reports
with the Securities and Exchange Commission indicating their
holdings of and transactions in the Voting Common Stock and Class
B Stock. The Registrant is aware of one late filing of Form 4,
promulgated under Section 16, by Mr. Thomas A. Norman with regard
to beneficial ownership as a result of purchase of 100 shares of
the Voting Common Stock during the first quarter of 1997. To the
Registrant's knowledge, based solely on its review of the copies
of such reports furnished to the Registrant and written
representations that no other reports were required, the
directors and executive officers of the Registrant complied with
all other filing requirements.
Item 11. Executive Compensation
Summary Compensation Table
The following Summary Compensation Table indicates for the
past three years the compensation of the Chief Executive Officer
and the four additional most highly compensated executive
officers (other than the chief executive officer) of the
Registrant in 1997 (the "named executive officers").
Annual Compensation
-------------------------------------------
Other
Name and Annual
Principal Salary Bonus Compensation
Position Year ($)(1) ($)(2) ($)(3)
- --------- ------ -------- ------- -------------
Michael R. Coltrane 1997 $220,000 $ 86,680 $ 0
President and 1996 200,000 34,538 18,634
Chief Executive 1995 164,777 25,000 15,790
Officer
Barry R. Rubens 1997 152,006 47,262 0
Senior Vice 1996 130,000 62,178 0
President 1995 125,142 5,268 0
Nicholas L. Kottyan 1997 160,006 61,430 0
Senior Vice 1996 135,000 33,405 0
President 1995 127,402 0 0
Thomas A. Norman 1997 125,000 41,938 0
Senior Vice 1996 119,000 16,885 0
President(6) 1995 62,505 0 0
Catherine A. Duda 1997 120,000 31,432 0
Senior Vice 1996 101,923 6,662 0
President(7) 1995 0 0 0
Summary Compensation Table, continued
Long Term
Compensation
------------------------
Restricted Securities All Other
Name and Stock Underlying Compensation
Principal Position Year Awards(4) Options/SAR's ($)(5)
- ------------------- ---- ---------- ------------- ------------
Michael R. Coltrane 1997 $ 172,163 $ 2,817 $ 11,333
President and Chief 1996 21,828 0 5,627
Executive Officer 1995 0 4,500 9,149
Barry R. Rubens 1997 59,385 1,281 10,323
Senior Vice 1996 10,272 0 2,265
President 1995 0 2,250 4,052
Nicholas L. Kottyan 1997 50,611 1,330 6,622
Senior Vice 1996 10,593 0 4,603
President 1995 0 2,250 0
Thomas A. Norman 1997 66,447 1,272 8,712
Senior Vice 1996 3,531 0 1,116
President(6) 1995 21,060 3,150 92
Catherine A. Duda 1997 25,038 493 5,356
Senior Vice 1996 0 450 161
President(7) 1995 0 0 0
- --------------------
(1) Amounts shown include cash and non cash compensation received
by the executive officer.
(2) An annual bonus has been a long standing tradition of the
Registrant. However, approval to pay this bonus is required
from the Board of Directors each year. Upon reaching certain
economic goals, the Board may award additional amounts at its
discretion.
(3) Gain from the exercise of stock options.
(4) Represents the value of shares of restricted stock granted
under the Registrant's 1995 Restricted Stock Award Program
(the "RSAP").
(5) Amounts represent Registrant's matching contributions to the
Employee's Savings Plan as well as contributions by the
Registrant with respect to term life insurance.
(6) Mr. Norman was employed by the Registrant on September 1,
1995.
(7) Ms. Duda was employed by the Registrant on December 18, 1995.
Stock Benefit Plans
The Registrant has in effect the Comprehensive Stock Option
Plan (the "Comprehensive Plan") pursuant to which the Registrant
may grant stock options to certain key employees of the
Registrant and its subsidiaries. During 1997, options to
purchase an aggregate of 8,489 shares of Class B Stock were
granted under the Comprehensive Plan, of which options to
purchase an aggregate of 7,193 shares of Class B Stock were
granted to named executive officers. No options were exercised
by named executive officers in 1997 under the Comprehensive Plan.
The Registrant also has in effect the 1989 Executive Stock
Option Plan (the "1989 Plan"). No options were granted to or
exercised by named executive officers in 1997 under the 1989
Plan. Pursuant to the 1989 Plan, no additional options may be
granted, and options outstanding at year-end are exercisable in
1998.
The Registrant adopted the CT Communications, Inc. Omnibus
Stock Compensation Plan (the "Omnibus Plan") effective April 24,
1997. No options were granted to or exercised by named executive
officers in 1997 under the Omnibus Plan.
The following table sets forth information regarding options
granted to the executive officers named in the Summary
Compensation Table during 1997. No free-standing stock
appreciation rights ("SARs") were granted to executive officers
during 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants(1)
- ----------------------------------------------
Percent of
Total
Number of Options/
Securities SARs Market
Underlying Granted to Exercise Price on
Options/ Employees Or Base Grant Expira-
SARs In Price Date tion
Name Granted(#) Fiscal Year ($/Sh) ($) Date
- -------- --------- ----------- ------- ------- ------
Michael R.
Coltrane 2,817 33.18% 71.33 116.67 2/28/07
Barry R.
Rubens 1,281 15.09% 71.33 116.67 2/28/07
Nicholas L.
Kottyan 1,330 15.67% 71.33 116.67 2/28/07
Thomas L.
Norman 1,272 14.98% 71.33 116.67 2/28/07
Catherine A.
Duda 493 5.81% 71.33 116.67 2/28/07
Option/SAR Grants in Last Fiscal Year, continued
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
For Option Term
------------------------------------------
Name 0%($) 5%($) 10%($)
- ------------- ------------ ----------- ------------
Michael R. Coltrane 127,722.78 334,406.07 651,515.76
Barry R. Rubens 58,080.54 152,067.51 296,269.68
Nicholas L. Kottyan 60,302.20 157,884.30 307,602.40
Thomas A. Norman 57,672.48 150,999.12 294,188.16
Catherine A. Duda 22,352.62 58,524.03 114,021.04
(1) All options were granted under the Comprehensive Plan. All
options vest 25% per year beginning on February 28, 1999.
The following table sets forth information regarding the
exercise of stock options during 1997 by the executive officers
named in the Summary Compensation Table and the value of such
executive officer's unexercised stock options held at fiscal year
end (including options outstanding under the Comprehensive Stock
Option Plan, the 1989 Plan and the Omnibus Plan).
Aggregated Option/SAR Exercises in Last
Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securities
Shares Underlying Unexercised
Acquired Options/SARs
On Value At Fiscal Year-End(#)
Exercise Realized --------------------------
Name (#) ($)(1) Exercisable Unexercisable
- -------- ---------- --------- ----------- -------------
Michael R.
Coltrane 0 $ 0 5,624 2,817
Barry R.
Rubens 0 0 3,262 1,281
Nicholas L.
Kottyan 0 0 3,150 1,330
Thomas A.
Norman 0 0 3,150 1,272
Catherine A.
Duda 0 0 450 493
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values, Continued
Value of Unexercised
In-the-money Options/SARs
At Fiscal Year-End ($)(2)
-------------------------
Name Exercisable Unexercisable
- ------------ ----------- --------------
Michael R.Coltrane $359,312 $168,090
Barry R. Rubens 212,054 76,437
Nicholas L. Kottyan 203,360 79,361
Thomas A. Norman 198,158 75,900
Catherina A. Duda 26,852 29,417
(1) Based on market value at time of exercise.
(2) Based on the last known selling price of $131.00 at
December 31, 1997.
The Registrant has in effect the 1995 Employee Stock
Purchase Plan (the "1995 ESPP") and the 1997 Employee Stock
Purchase Plan (the "1997 ESPP"). During 1997, the Registrant did
not sell any additional shares of Class B Stock to employees
under the 1995 ESPP but sold 5,355 shares at $120 per share under
the 1997 ESPP.
The Registrant also has in effect the 1995 Restricted
Stock Award Program. A total of 6,869 restricted shares of
Class B Stock with a weighted average fair value of $76.00 were
granted in 1997 pursuant to the RSAP. In accordance with the
terms of the RSAP, such restricted shares were granted to key
employees and subsidiary employees of the Registrant who achieved
certain performance goals. Pursuant to the RSAP, these shares
remain subject to certain transferability restrictions for
specified periods of four or ten years (the "Restricted Period").
Recipients of restricted stock under the RSAP are entitled to
receive any cash dividends made with respect to such shares of
restricted stock prior to the end of the Restricted Period. The
number and value of the aggregate restricted stock holdings of
the named executive officers as of December 31, 1997 were as
follows: Michael R. Coltrane -- 2,719 shares ($356,189);
Barry R. Rubens -- 1,156 shares ($151,436); Nicholas L. Kottyan
- -- 857 shares ($112,267); Thomas A. Norman -- 1,494 shares
($195,714); and Catherine A. Duda -- 494 shares ($64,714)
Employment Agreements
The Registrant entered into Change in Control Agreements
(the "Agreements") with Michael R. Coltrane, Barry R. Rubens,
Nicholas L. Kottyan, Thomas A. Norman and Catherine A. Duda,
which provide that upon the occurrence of a Change of Control in
the Registrant the executives will receive additional
compensation for a period of 35 months following such Change in
Control. The executives entering into such Agreements also would
be entitled to receive additional medical and other fringe
benefits for a period following a Change in Control. In
consideration for entering into the Agreements, the executives
entered into covenants not to compete and not to disclose
confidential information.
SERP
The Registrant established a Supplemental Executive
Retirement Plan (the "SERP") to provide additional benefits for
key executive employees. These employees include Michael R.
Coltrane, Barry R. Rubens, Nicholas L. Kottyan, Thomas A. Norman
and Catherine A. Duda. The SERP is intended to provide an
aggregate income placement ratio of 60% of such employee's
pre-retirement average compensation when taking into account the
Registrant's pension benefit plan and Social Security.
Pension Plan
The Registrant has in effect a non-contributory pension
plan which applies to all employees including officers who have
completed one year of service and attained age 21. The amount of
annual benefit to be paid in monthly installments for life, based
on service to normal retirement date and straight life annuity,
is the sum of: (i) 1.1 percent of average compensation multiplied
by creditable service not in excess of 40 years; plus (ii) .65
percent of average compensation in excess of covered compensation
multiplied by creditable service not in excess of 35 years.
Covered compensation is determined from Internal Revenue
Service tables published annually. Payments under the Pension
Plan are not offset by Social Security.
Contributions for officers to the Registrant's Pension
Plan fund are not included since they cannot be readily
calculated by the regular actuary for the Plan.
Pension Plan Table*
Estimated Annual Benefits Payable
5-year Average Upon Retirement With Years of
Annual Pay Creditable Service Indicated
----------------------------------------------
15 20 25 30 35 40
------ ------ ------ ------ ------ ------
$ 50,000 $10,200 $13,600 $17,000 $20,400 $23,800 $26,550
75,000 16,763 22,350 27,938 33,525 39,113 43,238
100,000 23,325 31,100 38,875 46,650 54,425 59,925
125,000 29,888 39,850 49,813 59,775 69,738 76,613
150,000 36,450 48,600 60,750 72,900 85,050 93,300
175,000 43,013 57,350 71,688 86,025 100,363 109,988
200,000 49,575 66,100 82,625 99,150 115,675 126,675
225,000 56,138 74,850 93,563 112,275 130,988 143,363
250,000 62,700 83,600 104,500 125,400 146,300 160,050
*Assuming a normal retirement date of 12/31/97.
As of December 31, 1997, the credited years of service and
compensation covered by the Pension Plan, for each named
executive officer, were approximately as follows: Mr. Coltrane
- -- 10 years ($149,350), Mr. Kottyan -- 3 years ($145,219),
Mr. Rubens -- 5 years ($123,607), Mr. Norman -- 3 years
($128,015) and Ms. Duda -- 2 years ($128,791). Under the terms
of the Pension Plan, Messrs. Kottyan and Norman and Ms. Duda will
not have any vested benefit until each of them attains 5 years of
service with the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table presents information as of January 31,
1997 regarding the beneficial ownership of the equity securities
of the Registrant of (i) all current directors and nominees for
director, (ii) each executive officer of the Corporation named in
the Summary Compensation Table contained elsewhere herein and
(iii) all directors, nominees for director and executive officers
as a group. The table also sets forth the beneficial ownership
of any person owning more than 5% of the Voting Common Stock.
A. Voting Common
Shares
Beneficially Owned(1)
----------------------
Percent of
Name and Address Number Class
- -------------------- -------- -----------
L. D. Coltrane III 51,101(2) 15.1%
P.O. Box 227
Concord, NC 28026-0227
Betty Gay Bivens 43,011 12.7%
400 Avinger Lane
Davidson, NC 28036
Michael R. Coltrane 43,746(3) 12.9%
P.O. Box 227
Concord, NC 28026-0227
Ramark & Co. 26,121 7.7%
(Nominee Name of First Charter
National Bank Trust Department)
P.O. Box 228
Concord, NC 28026-0228
Mrs. Mariam C. Schramm 23,287 6.9%
(Mrs. T. M. Schramm)
400 Avinger Lane
Davidson, NC 28036
World Div. Bd. of Global Min. 22,643 6.7%
U. M. Church
475 Riverside Drive
15th Floor
New York, NY 10027
Phil W. Widenhouse 3,651 (4) 1.1%
824 Livingstone Ct NE
Concord, NC 28025
Jerry H. McClellan 694 (5) *
Neisler Road
Concord, NC 28025
O. C. Chewning, Jr. 557 *
3249 Shillington Place
Charlotte, NC 28210
Ben F. Mynatt 514 (6) *
1980 Hwy. 73 E.
Concord, NC 28025
John R. Boger 195 *
147 Union St. S.
Concord, NC 28025
Thomas A. Norman 150 *
P.O. Box 227
Concord, NC 28026-0227
S. E. Leftwich 82 *
223 Maple Hill Drive
Flat Rock, NC 28601
Catherine A. Duda 81 *
P. O. Box 227
Concord, NC 28026-0227
Kenneth R. Argo 68 *
P.O. Box 227
Concord, NC 28026-0227
Nicholas L. Kottyan 45 *
P.O. Box 227
Concord, NC 28026-0227
Barry R. Rubens 30 *
P.O. Box 227
Concord, NC 28026-0227
B. Class B Nonvoting Common
Mrs. Mariam C. Schramm 107,476 5.6%
(Mrs. T. M. Schramm)
400 Avinger Lane
Davidson, NC 28036
Michael R. Coltrane 38,068(7) 2.0%
P.O. Box 227
Concord, NC 28026-0227
Phil W. Widenhouse 21,392(8) 1.1%
824 Livingstone Ct NE
Concord, NC 28025
Betty Gay Bivens 10,249 *
400 Avinger Lane
Davidson, NC 28036
Jerry H. McClellan 6,128 (9) *
Neisler Road
Concord, NC 28025
Kenneth R. Argo 4,498 (10) *
P.O. Box 227
Concord, NC 28026-0227
Barry R. Rubens 4,751 (11) *
P.O. Box 227
Concord, NC 28026-0227
Nicholas L. Kottyan 4,577 (12) *
P.O. Box 227
Concord, NC 28026-0227
Thomas A. Norman 4,876 (13) *
P.O. Box 227
Concord, NC 28026-0227
Ben F. Mynatt 2,474 (14) *
1980 Hwy. 73 E.
Concord, NC 28025
L. D. Coltrane III 2,376 (15) *
P.O. Box 227
Concord, NC 28026-0227
Catherine A. Duda 1,094 (16) *
P.O. Box 227
Concord, NC 28026-6227
S. E. Leftwich
223 Maple Hill Drive
Flat Rock, NC 28601 321 *
O. C. Chewning, Jr. 224 *
3249 Shillington Place
Charlotte, NC 28210
John R. Boger, Jr. 747 *
147 Union St. S.
Concord, NC 28025
E. All directors, Voting Common 167,212 49.5%
nominees and Class B Stock 209,251 10.0%
Executive officers 5% Preferred 0 0
Of the Registrant 4-1/2% Preferred 0 0
As a group (15)
Persons (17)
- ------------------
*Less than 1%.
(1) Unless otherwise noted, all shares of Voting Common Stock and
Class B Nonvoting Common Stock set forth in the table are
directly owned, with sole voting and investment power, by
such shareholder.
(2) Includes 7,131 shares owned by spouse.
(3) Includes 21,793 shares held by trusts for which Mr. Coltrane
is a co-trustee with Phyllis C. Ausband, his sister, with
whom he shares voting and investment power, and 1,268 shares
owned by spouse.
(4) Includes 189 shares owned by spouse.
(5) Includes 202 shares owned by spouse.
(6) Includes 514 shares owned by spouse.
(7) Includes 21,793 shares held by trusts for which Mr. Coltrane
is a co-trustee with Phyllis C. Ausband, his sister, with
whom he shares voting and investment power, 225 shares owned
by spouse, and 5,624 shares represented by currently
exercisable options.
(8) Includes 12,627 shares owned by spouse.
(9) Includes 1,345 shares owned by spouse and 1,124 shares
represented by currently exercisable options.
(10)Includes 147 shares owned by spouse and 483 shares
represented by currently exercisable options.
(11)Includes 3,262 shares represented by currently
exercisable options.
(12)Includes 3,150 shares represented by currently
exercisable options.
(13)Includes 3,150 shares represented by currently
exercisable options.
(14)Includes 451 shares owned by spouse.
(15)Includes 13 shares owned by spouse and 1,012 shares
represented by currently exercisable options.
(16)Includes 450 shares represented by currently exercisable
options.
(17)Does not include 21,456 shares of Voting Common Stock,
87,397 shares of Class B Stock held by First Charter
National Bank. Mr. L. D. Coltrane III and Mr. Michael R
Coltrane are shareholders and Mr. Michael R. Coltrane is
a director of First Charter Corporation, the parent
corporation of First Charter National Bank.
Item 13. Certain Relationships and Related Transactions
The Registrant may from time to time have short-term loans
outstanding with First Charter National Bank, Concord, North
Carolina ("FCNB"). With respect to FCNB, Mr. L.D. Coltrane III
is a member of the Advisory Board and a shareholder and Mr.
Michael R. Coltrane is a shareholder and a director. As of
December 31, 1997, the Registrant had no outstanding loans with FCNB.
The Registrant also has an available line of credit totaling $3.5 million at
FCNB. None of this amount was outstanding at December 31, 1997
and none was used during 1997.
FCNB is the Trustee of the Registrant's Employee Stock
Ownership Plan, the Employee Savings Plus Plan and the Employees
Pension Plan of the Concord Telephone Company. CTC paid FCNB a
fee of $111,338 for such services in 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) Documents filed as part of this report
(1) Financial Statements: The following financial
statements, together with reports thereon of
independent auditors are included in response
to Item 8:
(A) Consolidated Financial Statements
* Independent Auditors' Report F-2
* Consolidated balance sheets as
of December 31, 1997 and 1996 F-3
* Consolidated statements of income
for the years ended December 31,
1997, 1996, and 1995 F-5
* Consolidated statements of stock-
holders' equity for the years ended
December 31, 1997, 1996, and 1995 F-6
* Consolidated statements of cash
flows for the years ended
December 31, 1997, 1996, and 1995 F-8
* Notes to consolidated financial
statements for the years ended
December 31, 1997, 1996, and 1995 F-9
(B) Consolidated Financial Statement Schedules
The following financial statement schedule is
included:
* Schedule II - Valuation and Qualifying
Accounts F-35
Other schedules are omitted because the required
information is included in the financial statements
or is not applicable.
(C) Financial Statements of North Carolina
RSA 15 Cellular Partnership F-36
(2) Exhibits: The following exhibits are filed with this
report or, as noted, incorporated by reference herein:
2 The Reorganization and Share Exchange
Agreement by and between The Concord Telephone
Company and CT Communications, Inc. dated as of
August 1, 1993. (Incorporated by reference to
Exhibit 2.1 of registrant's current report on Form
8-K filed November 8, 1993.)
3.1 Articles of Incorporation of the Registrant
effective October 25, 1993. (Incorporated by
reference to Exhibit of the Registrant's Annual
Report Form 10-K dated March 29, 1994.)
3.2 Bylaws of the Registrant effective October 25,
1993. (Incorporated by reference to Exhibit of the
Registrant's Annual Report Form 10-K dated
March 29, 1994.)
4.1 The Registrant has certain long-term debt, but
has not filed the instruments evidencing such debt
as part of Exhibit 4 because such instruments
do not authorize the issuance of debt exceeding
10% of the total consolidated assets of the
Registrant. The Registrant agrees to furnish a
copy of such instruments to the Commission upon
request.
10.1 Partnership Agreement between Alltel Mobile
Communications of the Carolinas, Inc. (Alltel)
and The Concord Telephone Company dated September
15, 1989. (Incorporated by reference to Exhibit
10(a) to Registrant's Annual Report Form 10-K dated
March 28, 1991.)
10.2 Partnership Agreement between Alltel Mobile
Communications of the Carolinas, Inc. (Alltel)
and The Ellerbe-Concord Cellular Company dated
September 20, 1989. (Incorporated by reference to
Exhibit 10(b) to Registrant's Annual Report Form
10-K dated March 28, 1991.)
10.3 BellSouth Carolinas PCS Limited Partnership
Agreement dated December 8, 1994. (Incorporated
by reference to Exhibit 10(h) to Registrant's
Amendment No. 1 to Annual Report Form 10-K/A dated
July 14, 1995.)
10.4 Limited Liability Company Agreement of
Wireless One of North Carolina, L.L.C. dated
October 10, 1995 by and among CT Wireless Cable,
Inc., Wireless One, Inc. and O. Gene Gabbard.
(Incorporated by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K dated
March 31, 1997.)
10.5 North Carolina Utilities Commission order
approving the issuance and sale of Class B
Nonvoting Common Stock for use in an Executive
Stock Option Plan dated March 12, 1990 effective
April 27, 1989. (Incorporated by reference to
Exhibit 10(c) to Registrant's Annual Report Form
10-K dated March 31, 1993.)*
10.6 1989 Executive Stock Option Plan dated April
26, 1989.(Incorporated by reference to Exhibit
10(d) to Registrant's Annual Report Form 10-K
dated March 29, 1994.)*
10.7 Comprehensive Stock Option Plan dated April
27, 1995. (Incorporated by reference to Exhibit
99.1 to Registrant's Registration Statement on
Form S-8 (No.33-59645) dated May 26, 1995.)*
10.8 Employee Stock Purchase Plan dated April 27,
1995.(Incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form
S-8 (No. 33-59643) dated May 26, 1995.)*
10.9 Restricted Stock Award Program dated April 27,
1995. (Incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form
S-8 (No. 33-59641) dated May 26, 1995.)*
10.10 Omnibus Stock Compensation Plan dated
April 24, 1997.*
10.11 1997 Employee Stock Purchase Plan dated
April 24, 1997.*
10.12 Change in Control Agreement, dated October 1,
1997, between the Registrant and Michael R.
Coltrane.*
10.13 Change in Control Agreement, dated October 1,
1997, between the Registrant and Barry R. Rubens.*
10.14 Change in Control Agreement, dated October 1,
1997, between the Registrant and Nicholas
L. Kottyan.*
10.15 Change in Control Agreement, dated October 1,
1997, between the Registrant and Thomas A.
Norman.*
10.16 Change in Control Agreement, dated October 1,
1997, between the Registrant and Catherine A.
Duda.*
10.17 Form of Supplemental Executive Retirement Plan, dated
June 27, 1997.*
10.18 Contribution Agreement by and among Palmetto
MobileNet, L.P., PMN, Inc., the Registrant and
Ellerbe Telephone Co., dated as of January 1,
1998
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
* Indicates management contract or compensatory plan required
to be filed as an Exhibit.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during
the three months ended December 31, 1997.
(c) The following exhibits are filed herewith and follow the
signature pages:
10.10 Omnibus Stock Compensation Plan dated April 24,
1997.
10.11 1997 Employee Stock Purchase Plan dated April 24,
1997.
10.12 Change in Control Agreement, dated October 1,
1997, between the Registrant and Michael R.
Coltrane.
10.13 Change in Control Agreement, dated October 1,
1997, between the Registrant and Barry R. Rubens.
10.14 Change in Control Agreement, dated October 1,
1997, between the Registrant and Nicholas L.
Kottyan.
10.15 Change in Control Agreement, dated October 1,
1997, between the Registrant and Thomas A.
Norman.
10.16 Change in Control Agreement, dated October 1,
1997, between the Registrant and Catherine A.
Duda.
10.17 Form of Supplemental Executive Retirement Plan, dated
June 27, 1996.
10.18 Contribution Agreement by and among Palmetto
MobileNet, L.P., PMN, Inc., the Registrant and
Ellerbe Telephone Co., dated as of January 1,
1998
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
(d) The financial statements listed in Item 14(a)(1) above begins
on page F-2.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CT COMMUNICATIONS, INC.
By: /s/ MICHAEL R. COLTRANE
Michael R. Coltrane
President and Chief
Executive Officer
Date: April 9, 1998
/s/ BARRY R. RUBENS
Barry R. Rubens
Senior Vice President,
Treasurer and Chief Financial
Officer
(Principal Financial and
Principal Accounting Officer)
Date: April 9, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the
dates indicated.
Signature Title Date
- --------------------- ------------------- -------------
/S/ MICHAEL R. COLTRANE President, Chief April 9, 1998
Michael R. Coltrane Executive Officer
and Director
(Principal Executive
Officer)
/s/ L.D. COLTRANE III Chairman of the Board April 9, 1998
L.D. Coltrane III and Director
/s/ JOHN R. BOGER, JR. Director April 9, 1998
John R. Boger, Jr.
/s/ PHIL W. WIDENHOUSE Director April 9, 1998
Phil W. Widenhouse
/s/ JERRY H. MCCLELLAN Director April 9, 1998
Jerry H. McClellan
/s/ BEN F. MYNATT Director April 9, 1998
Ben F. Mynatt
/s/ O. CHARLIE CHEWNING Director April 9, 1998
O. Charlie Chewning
/s/ SAMUEL E. LEFTWICH Director April 9, 1998
Samuel E. Leftwich
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Schedules
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements Index
December 31, 1997, 1996 and 1995
(1) Consolidated Financial Statements
The following financial statements, together with
independent auditors' report thereon, are included:
* Independent Auditors' Report F - 2
* Consolidated balance sheets as of
December 31, 1997 and 1996 F - 3 and F - 4
* Consolidated statements of income for
the years ended December 31, 1997, 1996
and 1995 F - 5
* Consolidated statements of stockholders'
equity for the years ended December 31,
1997, 1996 and 1995 F - 6 and F - 7
* Consolidated statements of cash flows for
the years ended December 31, 1997, 1996
and 1995 F - 8
* Notes to consolidated financial statements
for the years ended December 31, 1997, 1996
and 1995 F - 9 to F - 34
(2) Consolidated Financial Statement Schedules
The following financial statement schedule is included:
* Schedule II - Valuation and Qualifying
Accounts F - 35
Other schedules are omitted because the required information
is included in the financial statements or is not applicable.
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1997, 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 PEAT MARWICK LLP
Charlotte, North Carolina
February 27, 1998
F-2
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
Current assets:
Cash and cash equivalents $ - 2,162,698
Short-term investments (note 3) 168,979 316,158
Accounts receivable, net of
allowance for doubtful accounts
of $100,000 in 1997 and 1996 8,842,922 7,614,737
Notes receivable 1,810,500 -
Refundable income taxes - 14,736
Materials and supplies 2,696,432 2,860,114
Deferred income taxes (note 12) 1,545,470 103,399
Prepaid expenses and other assets 950,254 476,774
---------- ----------
Total current assets 16,014,557 13,548,616
---------- ----------
Investment securities (note 3) 14,624,757 3,637,445
Investments in affiliates (note 4) 29,550,326 25,888,315
Property, plant, and equipment:
Telephone plant in service (note 1c):
Land, buildings, and general
equipment 28,730,045 22,146,226
Central office equipment 64,227,829 58,691,229
Poles, wires, cables and conduit 80,143,917 72,466,757
Construction in progress 277,070 -
----------- ------------
173,378,861 153,304,212
Less accumulated depreciation 86,229,072 81,314,625
----------- ------------
Net property, plant, and
equipment 87,149,789 71,989,587
------------ ------------
147,339,429 115,063,963
=========== ============
See accompanying notes to consolidated financial statements.
F-3
Liabilities and Stockholders'
Equity 1997 1996
------------------------------ --------- ----------
Current liabilities:
Current portion of long-term debt
and redeemable preferred stock
(notes 6 and 7) $632,500 2,072,500
Accounts payable 9,697,000 9,962,149
Customer deposits and advance
billings 1,591,284 1,271,562
Accrued payroll 1,304,573 1,250,396
Income taxes payable 992,750 -
Accrued pension cost (note 11) 1,970,956 1,043,974
Other accrued liabilities 1,428,372 469,492
---------- ----------
Total current liabilities 17,617,435 16,070,073
---------- ----------
Long-term debt (note 6) 11,239,000 2,014,000
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes (note 12) 7,497,167 1,106,910
Investment tax credits (note 12) 919,080 1,033,965
Regulatory liability (note 1 g) - 2,507,029
Postretirement benefits other than
pension (note 11) 10,026,128 9,422,573
Other 1,573,668 1,103,098
---------- ----------
20,016,043 15,173,575
---------- ----------
Redeemable preferred stock: 4.8%
series; authorized 5,000 shares;
issued and outstanding 1,500 and
1,625 shares in 1997 and 1996,
respectively (note 7) 137,500 150,000
---------- ----------
Total liabilities 49,009,978 33,407,648
Minority interest 1,360,998 -
Stockholders' equity:
Preferred stock not subject to
mandatory redemption (note 8):
5% series, $100 par value;
3,631 and 15,087 shares
outstanding in 1997 and 1996,
respectively 363,100 1,508,700
4.5% series, $100 par value;
1,218 and 2,000 shares out-
standing in 1997 and 1996,
respectively 121,800 200,000
Discount on 5% preferred stock - (16,059)
Common stock (note 8):
Voting; 338,429 and 340,528
shares outstanding in 1997
and 1996, respectively 3,772,298 4,021,094
Nonvoting; 1,900,361 and
1,887,535 shares outstanding in
1997 and 1996, respectively 25,268,447 23,377,120
Other capital 298,083 298,083
Unearned compensation (note 9) (817,903) (188,055)
Unrealized gain on securities
available-for-sale, net of tax 6,169,443 195,419
Retained earnings 61,793,185 52,260,013
----------- -----------
Total stockholders' equity 96,968,453 81,656,315
----------- -----------
Contingency (note 14)
$ 147,339,429 115,063,963
============ ===========
F-4
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
------ -------- ----------
Operating revenues:
Local service $ 29,197,401 24,715,038 21,230,607
Access and toll
service 34,877,748 31,653,259 29,971,626
Other and unregulated 14,790,122 11,008,784 9,551,076
Less: provision for
uncollectible
accounts (381,757) (323,075) (335,958)
------------- ----------- -----------
Total operating
revenues 78,483,514 67,054,006 60,417,351
------------- ----------- -----------
Operating expenses (note 1c):
Plant specific 25,087,883 20,026,094 15,627,931
Depreciation and
amortization 9,612,085 10,104,802 11,968,090
Customer operations 11,884,452 11,224,067 8,348,246
Corporate operations 10,785,952 9,995,004 7,256,798
Expense related to
early retirement
plan 1,020,000 - -
------------ ----------- ------------
Total operating
expenses 58,390,372 51,349,967 43,201,065
------------ ----------- -----------
Net operating
revenues 20,093,142 15,704,039 17,216,286
------------ ----------- ------------
Other income (expenses):
Equity in income of
affiliates, net
(note 4) 130,637 1,801,952 2,203,706
Interest, dividend
income and gain on
sale of investments 261,459 244,213 939,139
Other expenses,
principally interest (985,275) (705,112) (581,764)
------------ ---------- ------------
Total other income (593,179) 1,341,053 2,561,081
------------ ---------- ------------
Income before income
taxes and extraordinary
item 19,499,963 17,045,092 19,777,367
Income taxes (note 12) 7,898,159 6,583,671 6,760,624
---------- ---------- -----------
Net income before
extraordinary item 11,601,804 10,461,421 13,016,743
Extraordinary item -
discontinuance of SFAS
71, net of income taxes
of $1,493,312 (note 13) 2,239,045 - -
---------- ---------- ---------
Net income after
extraordinary item 13,840,849 10,461,421 13,016,743
Dividends on preferred
stock 73,073 92,535 93,135
---------- ---------- ----------
Earnings for common
stock $ 13,767,776 10,368,886 12,923,608
=========== ========== ==========
Basic earnings per
common share:
Earnings before
extraordinary item $ 5.16 4.65 5.83
========== ========== ==========
Extraordinary item $ 1.00 - -
========== =========== ==========
Earnings per common
share $ 6.16 4.65 5.83
========== =========== ==========
Diluted earnings per
common share:
Earnings before
Extraordinary item $ 5.13 4.64 5.82
========== =========== =========
Extraordinary item $ 1.00 - -
========= =========== ==========
Earnings per common
share $ 6.13 4.64 5.82
========== ========== ==========
Basic weighted average
shares outstanding $2,236,188 2,227,184 2,218,383
========== =========== ===========
Diluted weighted average
shares outstanding $2,244,996 2,233,847 2,221,071
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
5% Series 4.5% Series Discount Voting
Preferred Preferred Of 5% Common
Stock Stock Preferred Stock
--------- ----------- ---------- -------
Balances at
December 31, 1994 $ 1,508,700 200,000 (16,059) 4,021,094
Net Income - - - -
Issuance of 3,616 shares
of nonvoting common
stock - - - -
Dividends declared:
5% preferred - - - -
4.8% preferred - - - -
4.5% preferred - - - -
Voting common - - - -
Nonvoting common - - - -
Tax Benefit from
exercise of stock
options - - - -
Realized gain on
investment in
affiliates - - - -
Unrealized gain on
investment
securities, net of
tax effect of
$583,297 - - - -
Unearned compensation
related to the
granting of 363 shares
of restricted nonvoting
common stock, net of
$4,256 earned during
the year - - - -
----------- ----------- -------- --------
Balances at
December 31, 1995 1,508,7800 200,000 (16,059) 4,021,194
----------- ----------- -------- ---------
Net Income - - - -
Issuance of 3,534 shares
of nonvoting common
stock - - - -
Dividends declared:
5% preferred - - - -
4.8% preferred - - - -
4.5% preferred - - - -
Voting common - - - -
Nonvoting common - - - -
Tax Benefit from
exercise of stock
options - - - -
Unrealized loss on
investment
securities, net of
tax effect of
$640,204 - - - -
Unearned compensation
related to the
granting of 2,137 shares
of restricted nonvoting
common stock, net of
$25,172 earned during
the year - - - -
----------- ------------ ---------- ---------
Balances at
December 31, 1996 1,508,700 200,000 (16,059) 4,021,094
----------- ------------ ---------- ---------
Net Income - - - -
Issuance of 13,269 shares
of nonvoting common
stock - - - -
Issuance of stock options - - - -
Repurchases of shares:
11,456 shares of
5% preferred (1,145,600) - 16,059 -
782 shares of 4.5%
preferred - (78,200) - -
2,016 shares of
voting common - - - (248,796)
55 shares of
Nonvoting common - - - -
Dividends declared:
5% preferred - - - -
4.8% preferred - - - -
4.5% preferred - - - -
Voting common - - - -
Nonvoting common - - - -
Unrealized loss on
investment
securities, net of
tax effect of
$3,929,182 - - - -
Unearned compensation
related to the
granting of 6,869 shares
of restricted nonvoting
common stock, net of
$140,931 earned during
the year - - - -
---------- ----------- ----------- ---------
Balances at
December 31, 1997 $363,100 121,800 - 3,772,298
=========== =========== =========== =========
CT Communications, Inc. And Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995, continued
Unrealized
Non- Gain on
Voting Securities
Common Other Unearned Available
Stock Capital Compensation For sale
-------- ------- ------------ ---------
Balances at
December 31, 1994 22,528,102 298,083 - 284,396
Net Income - - - -
Issuance of 3,616 shares
of nonvoting common
stock 586,675 - - -
Dividends declared:
5% preferred - - - -
4.8% preferred - - - -
4.5% preferred - - - -
Voting common - - - -
Nonvoting common - - - -
Tax Benefit from
exercise of stock
options - - - -
Realized gain on
investment in
affiliates - - - -
Unrealized gain on
investment
securities, net of
tax effect of
$583,297 - - - 912,370
Unearned compensation
related to the
granting of 363 shares
of restricted nonvoting
common stock, net of
$4,256 earned during
the year - - (60,752) -
---------- --------- -------- -----------
Balances at
December 31, 1995 23,114,777 298,083 (60,752) 1,196,766
---------- --------- --------- ----------
Net Income - - - -
Issuance of 3,534 shares
of nonvoting common
stock 262,343 - - -
Dividends declared:
5% preferred - - - -
4.8% preferred - - - -
4.5% preferred - - - -
Voting common - - - -
Nonvoting common - - - -
Tax Benefit from
exercise of stock
options - - - -
Unrealized loss on
investment
securities, net of
tax effect of
$640,204 - - - (1,001,347)
Unearned compensation
related to the
granting of 2,137 shares
of restricted nonvoting
common stock, net of
$25,172 earned during
the year - - (127,303) -
--------- ---------- --------- ----------
Balances at
December 31, 1996 23,377,120 298,083 (188,055) 195,419
Net Income - - - -
Issuance of 13,269 shares
of nonvoting common
stock 1,412,339 - - -
Issuance of stock options 74,279 - - -
Repurchases of shares:
11,456 shares of
5% preferred 362,039 - - -
782 shares of 4.5%
preferred 46,920 - - -
2,016 shares of
voting common - - - -
55 shares of
Nonvoting common (4,250) - - -
Dividends declared:
5% preferred - - - -
4.8% preferred - - - -
4.5% preferred - - - -
Voting common - - - -
Nonvoting common - - - -
Unrealized loss on
investment
securities, net of
tax effect of
$3,929,182 - - - 5,974,024
Unearned compensation
related to the
granting of 6,869 shares
of restricted nonvoting
common stock, net of
$140,931 earned during
the year - - (629,848) -
-------- ----------- --------- --------
Balances at
December 31, 1997 25,268,447 298,083 (817,903) 6,169,443
========== ============ ========== =========
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995, Continued
Equity in Total
Earnings of Retained Stockholders'
Investment Earnings Equity
------------ ---------- -----------
Balances at
December 31, 1994 260,624 37,065,596 66,150,536
Net Income - 13,016,743 13,016,743
Issuance of 3,616 shares
of nonvoting common
stock - - 586,675
Dividends declared:
5% preferred - (75,435) (75,435)
4.8% preferred - (8,700) (8,700)
4.5% preferred - (9,000) (9,000)
Voting common - (612,951) (612,951)
Nonvoting common - (3,381,472) (3,381,472)
Tax Benefit from
exercise of stock
options - 15,312 15,312
Realized gain on
investment in
affiliates (260,624) - (260,624)
Unrealized gain on
investment
securities, net of
tax effect of
$583,297 - - 912,370
Unearned compensation
related to the
granting of 363 shares
of restricted nonvoting
common stock, net of
$4,256 earned during
the year - - (60,752)
------------ -------------- --------------
Balances at
December 31, 1995 - 46,010,093 76,272,702
Net Income - 10,461,421 10,461,421
Issuance of 3,534 shares
of nonvoting common
stock - - 262,343
Dividends declared:
5% preferred - (75,435) (75,435)
4.8% preferred - (8,100) (8,100)
4.5% preferred - (9,000) (9,000)
Voting common - (631,870) (631,870)
Nonvoting common - (3,501,222) (3,501,222)
Tax Benefit from
exercise of stock
options - 14,126 14,126
Unrealized loss on
investment
securities, net of
tax effect of
$640,204 - - (1,001,347)
Unearned compensation
related to the
granting of 2,137 shares
of restricted nonvoting
common stock, net of
$25,172 earned during
the year - - (127,303)
--------- ------------- ----------------
Balances at
December 31, 1996 - 52,260,013 81,656,315
--------- ------------- ----------------
Net Income - 13,840,849 13,840,849
Issuance of 13,269 shares
of nonvoting common
stock - - 1,412,339
Issuance of stock options - - 74,279
Repurchases of shares:
11,456 shares of
5% preferred - - (767,502)
782 shares of 4.5%
preferred - - (31,280)
2,016 shares of
voting common - - (248,796)
55 shares of
Nonvoting common - - (4,250)
Dividends declared:
5% preferred - (56,298) (56,298)
4.8% preferred - (7,775) (7,775)
4.5% preferred - (9,000) (9,000)
Voting common - (641,785) (641,785)
Nonvoting common - (3,592,819) (3,592,819)
Unrealized loss on
investment
securities, net of
tax effect of
$3,929,182 - - 5,974,024
Unearned compensation
related to the
granting of 6,869 shares
of restricted nonvoting
common stock, net of
$140,931 earned during
the year - - (629,848)
---------- ----------- ----------------
Balances at
December 31, 1997 - 61,793,185 96,968,453
========== =========== ================
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating
activities:
Net income $13,840,849 10,461,421 13,016,743
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Extraordinary item (2,239,045) - -
Depreciation and
amortization 9,612,085 10,104,802 11,968,090
Postretirement
benefits 603,555 1,317,608 1,811,771
Loss (gain) on sale
of investment
securities 23,667 75,667 5,745
Undistributed income
of affiliates (130,637) (1,801,952) (1,079,323)
Deferred income taxes
and tax credits (589,093) 31,700 (2,532,397)
Changes in operating
assets and liabilities:
Accounts receivable(1,228,185) 1,263,961 (1,833,729)
Materials and
supplies 163,682 (1,056,695) (381,013)
Other current assets (473,480) 56,611 (294,806)
Accounts payable (1,565,023) 1,109,877 710,595
Customer deposits
and advance billings 319,722 190,789 90,963
Accrued liabilities 1,878,013 525,529 203,657
Refundable income
taxes 14,736 161,492 (1,350,587)
Income taxes payable 992,750 - -
---------- ---------- -----------
Net cash provided
by operating
activities 21,223,596 22,440,810 20,335,709
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures,
net (21,573,658) (24,118,712)(16,103,344)
Purchases of investments
in affiliates (11,148,674) (4,263,200) (8,665,390)
Purchases of investment
securities (356,268) (1,067,060) (9,787,257)
Proceeds from sale of
investment securities 2,306,812 4,606,652 10,316,461
Maturities of investment
securities 476,487 2,751,739 4,681,351
Partnership capital
distribution 4,229,675 1,965,792 713,761
Issuance of notes
receivable (1,810,500) - -
----------- ---------- ----------
Net cash used in
investing activities (27,876,126) (20,124,789)(18,844,418)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term
debt (2,215,000) (640,000)(1,527,500)
Proceeds from new debt 10,000,000 - -
Redemption of preferred
stock (12,500) (12,500) (12,500)
Dividends paid (4,307,677) (4,225,627)(4,087,558)
Repurchases of common
and preferred stock (1,067,468) - -
Proceeds from common
stock issuances 643,600 109,869 586,675
Minority interest 1,360,998 - -
Other 87,879 (136,269) (45,439)
----------- ---------- --------
Net cash used in
financing activities 4,489,832 (4,904,527)(5,086,322)
---------- ----------- ----------
Net (decrease) increase in
cash and cash equivalents (2,162,698) (2,588,506)(3,595,031)
Cash and cash equivalents -
beginning of year 2,162,698 4,751,204 8,346,235
----------- ----------- ----------
Cash and cash equivalents
- end of year $ - 2,162,698 4,751,204
============ =========== ===========
Supplemental cash flow
information:
Cash paid for income
taxes $ 7,912,449 6,474,267 10,589,211
Cash paid for
interest 390,735 310,099 398,376
See accompanying notes to consolidated financial
statements
F-8
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(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
(Concord Telephone), CTC Long Distance Services (CTC LDS), CT
Cellular, Carolinas Personal Communications (dba CTC Wireless),
CT Wireless Cable, CTC Exchange Service and its majority-owned
subsidiary, CT Global Telecommunications. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
CT Communications, Inc. and subsidiaries operate entirely in
the communications industry. Concord Telephone, 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 two
general partnerships which provide cellular mobile telephone
services to various counties in North Carolina. CTC Wireless,
which began operations in 1996, 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, which was established in 1996, accounts for an investment
in Wireless One of North Carolina, LLC, which participates in the
wireless cable television market in North Carolina. CTC Exchange
Service, which was established in 1997, was formed to provide
competitive local telephone service in North Carolina. CT
Global, which became a subsidiary in 1997, was formed to build
telecommunications networks outside of the United States. The
Company is under the jurisdiction of the North Carolina Utilities
Commission.
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 13 for further discussion of the impacts
of discontinuance of SFAS No. 71.
F-9
(1) Summary of Significant Accounting Policies, Continued
(b) Reclassifications
In certain instances, amounts previously reported in the
1996 and 1995 consolidated financial statements have been
reclassified to conform with the 1997 consolidated financial
statement presentation. Such reclassifications have no effect on
net income or retained earnings as previously reported.
(c) Property, Plant and Equipment
Telephone plant in service 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 13), depreciation on telephone
plant in service was provided on a straight-line basis using
composite rates acceptable to the regulatory authorities. During
1996 and 1995, under authority of the North Carolina Utilities
Commission (the Commission), the Company recorded additional
amortization relating to certain telephone plant accounts. Such
"special amortization", as approved by the Commission, increased
the Company's total depreciation and amortization expense and
related accumulated depreciation by $574,363 in 1996 and
$3,708,000 in 1995.
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.
See note 13 for a discussion of SFAS No. 71 and its effect
on property, plant and equipment.
F-10
(1) Summary of Significant Accounting Policies, Continued
(d) Investment Securities
Investment securities at December 31, 1997 and 1996 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 stockholders' equity until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
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 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, 1997 and 1996, 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.
F-11
(1) Summary of Significant Accounting Policies, Continued
(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.
Due to the reduction in corporate federal income tax rates
as a result of the Tax Reform Act of 1986, there existed excess
deferred income taxes at December 31, 1996. Pursuant to SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation,"
a regulatory liability and a corresponding reduction in net
deferred income taxes payable were recorded relative to the
excess deferred income taxes, and the regulatory impact thereof.
See note 13 for a discussion of the impacts of discontinuance of
SFAS No. 71.
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
treated 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.
(i) Earnings Per Share
During 1997, the Company implemented SFAS No. 128, "Earnings
per Share." Basic earnings per common share are based on the
weighted average number of common shares outstanding each year.
Diluted earnings per common share are based on the weighted
average number of common and potential common shares outstanding
each year. Both measures of earnings per share have been
adjusted for subsequent stock splits and restated for the effects
of implementing SFAS No. 128.
F-12
(1) Summary of Significant Accounting Policies, Continued
(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 exceed 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 in 1995 and
future years 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
(1) Summary of Significant Accounting Policies, Continued
(n) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130 "Reporting Comprehensive Income." SFAS No. 130 requires
companies to display, with the same prominence as other financial
statements, the components of comprehensive income. SFAS No. 130
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company's
financial statements will include the disclosure of comprehensive
income in accordance with the provisions of SFAS No. 130
beginning in the first quarter of 1998.
In June 1997, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business enterprises are
to report information about operating segments in annual
financial statements and requires those enterprises to report
selected financial information about operating segments in
interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997.
(2) Notes Receivable
At December 31, 1997, the Company had notes receivables of
$1,810,500 due from US Telecom Holdings, Inc. ("USTH") with
interest at 10.5%. $800,000 of the notes is secured by 72,487
shares of common stock of Hungarian Telephone and Cable Corp. and
is due April 17, 1998. $1,010,500 of the notes is secured by a
first priority security interest in 4,950.50 shares of common
stock of Telco Investors II, Inc. owned by USTH and is due April
1, 1998. Interest due to the Company as of December 31, 1997 was
$58,245.
F-14
(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, 1997 and 1996, were as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
At December 31, 1997
Available-for-sale:
Certificates of
deposit $ 280,279 - - 280,279
Equity securities 4,290,011 13,054,451 (2,831,005)14,513,457
--------- ---------- --------- ----------
$4,570,290 13,054,451 (2,831,005)14,793,736
========= ========== ========== ==========
At December 31, 1996
Available-for-sale:
State, county and
municipal debt
securities $2,756,158 169,230 (168,109) 2,757,279
Equity securities 877,205 2,238,449 (1,919,330) 1,196,324
--------- ---------- --------- ---------
$3,633,363 2,407,679 (2,087,439) 3,953,603
========= ========== =========== =========
In 1997, proceeds from the sale of investment securities
available for sale were $2,306,812 and included in income were
gross realized gains of $1,389 and gross realized losses of
$25,162.
Maturities of debt securities were as follows at December
31, 1997:
Amortized Fair
Cost Value
---------- -------
Currently due $ 168,979 168,979
Due after one year through
five years 111,300 111,300
Equity securities 4,610,251 14,513,457
--------- ----------
$4,890,530 14,793,736
========== ============
F-15
(4) Investments in Affiliated Companies
Investments in affiliated companies consist of the
following:
1997
Ownership
Percentage 1997 1996
------------ ------ ------
Equity Method:
RSA 15 Partnership 50.00% $ 7,478,888 6,516,008
Amaritel, S.A. DE C.V. 35.86% 6,860,000 -
Wireless One of North
Carolina, LLC 48.50% 4,100,204 1,371,000
BellSouth Carolinas PCS, LP 1.95% 3,752,556 5,581,051
U.S. Telecom Holdings 27.70% 1,895,385 3,556,294
Ellerbe-Concord Partnership 49.00% 1,268,571 1,188,967
Access On 19.58% 186,919 199,095
Cost Method:
ITC Associates Partnership - $ - 5,519,832
Illuminet Holdings, Inc. 4.00% 1,068,624 1,068,624
ITC Holding Company 4.4% 2,724,129 658,354
Other various 215,050 229,090
------------ ---------
$29,550,326 25,888,315
============ =========
The RSA 15 Partnership is a partnership with Alltel which is in
the business of providing cellular service in Cabarrus, Stanly
and parts of Iredell and Rowan counties of North Carolina.
Amaritel, S.A. DE C.V. ("Amaritel") is creating a competitive
telecommunications company offering local, long distance, and
network telecommunications services in Mexico. The Company's
investment in Amaritel is through its majority-owned subsidiary,
CT Global. The Company has recorded minority interest of
$1,360,998 related to CT Global in the accompanying consolidated
balance sheet at December 31, 1997. Equity in earnings from this
investment were insignificant during 1997.
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
personal communications services which is a new wireless
communications service that will compete with cellular phone
service. Due to the company's significant influence over this
partnership's operating and financial policies, this investment
is accounted for under the equity method.
F-16
(4) Investments in Affiliated Companies, Continued
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
also develops and sells operating software systems for the
telecommunications industry.
Ellerbe-Concord Partnership has a 50% partnership with
Alltel Mobile which is in the business of providing cellular
service in Anson, Lincoln, Montgomery and Richmond counties of
North Carolina.
Access On was formed in cooperation with the Company and
thirteen other North Carolina independent telephone companies.
Access On was formed to build and operate a broadband backbone
telecommunications network throughout much of North Carolina.
Due to the Company's significant influence over this company's
operating and financial policies, this investment is accounted
for under the equity method.
Prior to its dissolution in January 1997, the purpose of the
ITC Associates partnership was to acquire, own or hold, manage
and sell ITC Holding Company common stock. The Partnership
distributed to each Partner the shares of ITC Holding common
stock contributed to the Partnership by such Partner.
In addition, 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.
Illuminet Holdings, Inc., formerly USTN Holdings, Inc.,
provides network services such a seamless routing for wireless
services and database and billing support.
Included in the Company's share of earnings from affiliates
accounted for under the equity method were total losses of
$5,044,749 and total income of $5,175,386. Over 59% of the
losses and 89% of the income was attributable to Bell South
Carolinas PCS and the RSA 15 Partnership, respectively.
F-17
(4) Investments in Affiliated Companies, Continued
Summarized unaudited combined financial position information for
these two entities as of December 31, 1997 and 1996 is as
follows: current assets - $25,020,000 and $16,182,000; property
and other non-current assets - $513,995,000 and $372,325,000;
current liabilities - $340,435,000 and $108,475,000; equity -
$198,580,000 and $280,032,000. Summarized unaudited combined
results of operations for these two entities for the years ended
December 31, 1997, 1996 and 1995, respectively, is as follows:
revenues - $88,597,000, $27,176,000 and $16,680,000; operating
income (loss) - ($131,683,000), ($81,861,000), and ($14,982,000);
and net income (loss) - ($141,067,000), ($86,351,000) and
($14,381,000).
(5) 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, short-term investments, 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.
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 for
which carrying value does not approximate fair value at December
31, 1997 and 1996 are as follows:
1997 1996
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Financial liabilities
Long-term debt and
redeemable preferred
stock, including
current maturities $12,009,000 12,009,000 4,236,500 4,154,645
=========== ========== ========= =========
F-18
(6) Long-Term Debt
Long-term debt at December 31, 1997 and 1996, consists of
the following:
1997 1996
---- ----
Line of credit (at 7.25%)
due in 1999 $10,000,000 -
Note payable to a bank (at 7.25%),
due in installments until 2001 1,859,000 2,634,000
6.25% Series F first mortgage bonds,
paid in 1997 - 1,440,000
---------- ---------
Total long-term debt 11,859,000 4,074,000
Less: current installments 620,000 2,060,000
---------- ---------
Long-term debt, excluding
current installments $11,239,000 2,014,000
========== =========
Annual maturities of the long-term debt outstanding for the
five-year periods subsequent to December 31, 1997, are as
follows: $620,000 in 1998, $10,620,000 in 1999, $620,000 in 2000,
and $154,000 in 2001.
The Company has available lines of credit totaling
$18,500,000, of which $10,000,000 was outstanding at December 31,
1997.
(7) 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, 1997, other than the
annual sinking fund requirement of $12,500.
(8) Common Stock and Preferred Stock Not Subject to Mandatory
Redemption
Common stock is comprised of Voting and Nonvoting Class B
stock. There are 3,000,000 shares of Voting Common Stock
authorized. There are 15,000,000 shares of Nonvoting Common
Stock authorized.
F-19
(8) Common Stock and Preferred Stock Not Subject to Mandatory
Redemption, Continued
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. 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:
$1.90 in 1997, $1.85 in 1996; and $1.80 in 1995.
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. These preferred stocks are callable in whole
or in part at the option of the Company at $100 per share plus
accumulated dividends.
(9) Stock Compensation Plans
At December 31, 1997, 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:
1997 1996
---- ----
Net Income As Reported $13,840,849 10,461,421
Pro forma $13,813,602 10,120,715
Basic earnings per
common share As Reported $ 6.16 4.65
Pro forma 6.14 4.58
Diluted earnings per
common share As Reported $ 6.13 4.64
Pro Forma $ 6.12 4.57
F-20
(9) Stock Compensation Plans, Continued
The Company has an Executive Stock Option Plan (the Plan) to
allow key employees to increase their holdings of the Company's
common stock. 11,250 shares of Nonvoting Class B common stock
were reserved for issuance under the Plan. At December 31, 1997,
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,
1997, is as follows:
Weighted
Number Average Exercise
of Options Price
---------- ----------------
Options outstanding and
exercisable at December 31, 1994 8,878 $ 50
Options granted - -
Options exercised (2,668) 49
--------
Options outstanding and
exercisable at December 31, 1995 6,210 51
Options granted - -
Options exercised (869) 40
--------
Options outstanding and
exercisable at December 31, 1996 5,341 52
Options granted - -
Options exercised (112) 46
Options forfeited (6) 46
---------
Options outstanding and
exercisable at December 31, 1997 5,223 $51
====== ====
As of December 31, 1997, the 5,223 options outstanding and
exercisable have exercise prices between $43 and $57 and a
weighted-average remaining contractual life of 1.3 years.
The Company has a comprehensive Stock option plan (the Plan)
to allow key employees to increase their holdings of the
Company's stock. 22,500 shares of nonvoting class B Common Stock
have been reserved for issuance under the Plan. At December 31,
1997, the number of nonvoting Class B common stock reserved for
issuance but ungranted was 60 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 6 months to four years after the
grant date.
Activity under the Plan for each of the years in the
three-year period ended December 31, 1997 is as follows:
F-21
(9) Stock Compensation Plans, Continued
Weighted
Number Average Exercise
of Options Price
---------- ---------------
Options outstanding at
December 31, 1994 - $ -
Options granted 13,950 71
Options exercised - -
------- --------
Options outstanding at
December 31, 1995 13,950 71
Options granted - -
Options exercised - -
-------- ---------
Options outstanding at
December 31, 1996 13,950 71
Options granted 8,489 71
Options exercised (150) 71
Options forfeited (750) 71
-------- ----------
Options outstanding at
December 31, 1997 21,539 $ 71
======== ==========
Options exercisable at
December 31, 1997 13,050 $ 71
======== ==========
As of December 31, 1997, the 21,539 options outstanding have
exercise prices between $60 and $71 and a weighted-average
remaining contractual life of 8.5 years.
The per share fair value of stock options granted in 1997
and 1995 was $25 and $21, respectively, 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: 1995 - dividend yield of
2.5%; expected volatility of 20%; risk-free interest rate of 6%,
and expected lives of 10 years; 1997 - Dividend yield of 2.7%,
expected volatility of 20%; risk-free interest rate of 6%; and
expected lives of 10 years.
F-22
(9) Stock Compensation Plans, Continued
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 Class B common stock that may be awarded
to participants under the Program is 22,500 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 4 to 10
years. In 1997, 1996 and 1995, respectively, the Company granted
6,869, 2,137 and 1,089 shares to participants with a
weighted-average fair value of $76, $71 and $60. Deferred
compensation at December 31, 1997 and 1996, respectively was
$817,903 and $188,055, which is disclosed net of accumulated
amortization of $170,359 and $29,428, 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 Class B
common stock or cash, at the Director's discretion. An aggregate
of 11,250 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 Class B 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 Class B stock based
upon the fair market value of the Class B stock on the date such
compensation is paid or made available to the Director. During
1997 and 1996, the Company granted 783 and 528 shares,
respectively, with an average fair market value of $116 and $86,
respectively.
During 1997, the CT Communications, Inc. Omnibus Stock
Compensation Plan (the Plan) was approved. 100,000 shares of
Class B 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, 1997, no awards have
been granted under the Plan.
F-23
(10) Employee Stock Purchase Plan
The Company approved Employee Stock Purchase Plans in 1997
and 1995 (the Plans) which authorized 12,000 and 11,250 shares,
respectively, shares of Class B Non-Voting shares 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. 5,355 and 7,092 shares were issued
under the Plans at a purchase price of $120 and $55 per share in
1997 and 1995, respectively. No shares were issued in 1996.
(11) 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 1997
or 1996. 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, 1997 and 1996.
1997 1996
---- -----
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$22,147,568 in 1997 $20,657,133
in 1996, respectively $22,457,476 20,950,012
========== ==========
Projected benefit obligation (28,633,948) (26,375,271)
Plan assets at fair value 40,472,587 32,848,100
---------- -----------
Excess of plan assets over the
projected benefit obligation 11,838,639 6,472,829
Unrecognized net gain deferred (13,440,795) (7,078,443)
Unrecognized prior service cost (38,490) (41,989)
Unrecognized net asset being
amortized over 16 years from
January 1, 1987 (330,310) (396,371)
---------- -----------
Net accrued pension cost $(1,970,956) (1,043,974)
========== ===========
F-24
(11) Employee Benefit Plans, Continued
Net pension cost for 1997, 1996, and 1995 included the
following:
1997 1996 1995
---- ---- ----
Service cost, benefits
earned during the period $ 666,447 651,591 571,935
Interest cost on projected
benefit obligation 1,893,377 1,724,700 1,610,208
Actual return on plan assets (9,452,700)(3,784,646)(6,013,024)
Net amortization and deferral 6,776,734 1,309,296 4,006,215
---------- --------- ---------
Net periodic pension cost $ (116,142) (99,059) 175,334
========== =========== =========
The weighted average discount rate of 7% in 1997, 1996 and
1995 and the rate of increase in future compensation levels of 5%
in 1997, 1996 and 1995 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 1997, 1996 and 1995.
(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 $265,746, $229,500 and
$322,867 in 1997, 1996, and 1995, 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.
F-25
(11) Employee Benefit Plans, Continued
(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.
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, 1997
and 1996:
1997 1996
---- ----
Accumulated postretirement benefit
obligation:
Retirees $4,076,863 5,198,219
Fully eligible active plan
participants 2,230,590 3,046,889
Other active plan participants 3,225,113 4,544,602
---------- ---------
9,532,566 12,789,710
Unrecognized net gain (loss) 1,868,016 2,139,040
Unrecognized transition obligation (4,894,379) (5,506,177)
Unrecognized prior service cost 3,519,925 -
---------- -----------
Accrued postretirement benefit
cost $10,026,128 9,422,573
========== =========
During 1997, Plan benefits were expanded to include Medicare
supplements and additional medical benefits resulting in
increased postretirement benefit costs.
F-26
(11) Employee Benefit Plans, Continued
Net periodic postretirement benefit cost for 1997, 1996 and
1995 includes the following components:
1997 1996 1995
---- ---- ----
Service cost $ 216,693 321,990 331,470
Interest cost 631,910 828,192 931,037
Amortization of transition
obligation over 15 years 611,798 611,798 611,798
Amortization of gain (74,769) (72,216) -
Amortization of prior service
cost (502,847) - -
--------- --------- --------
Net periodic postretirement
benefit cost $ 882,785 1,689,764 1,874,305
========= =========== ==========
For measurement purposes, a 13.5% percent annual rate of
increase in the per capita cost of covered benefits (i.e., health
care cost trend rate) was assumed for 1995 and the rate was
assumed to decrease annually to 6.5% by the year 2002 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, 1997, to
approximately $10,806,167 and the aggregate of the service and
interest cost components of net periodic post retirement benefit
cost for the year ended December 31, 1997 by approximately
$975,504.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7% in 1997,
1996 and 1995.
F-27
(12) Income Taxes
Total income taxes for the years ended December 31, 1997,
1996 and 1995 were allocated as follows:
1997 1996 1995
---- ----- -----
Income before extraordinary
item $ 7,898,159 6,583,671 6,760,624
Extraordinary item 1,493,312 - -
---------- --------- ----------
$ 9,391,471 6,583,671 6,760,624
=========== ========== ===========
Stockholders' equity, for
unrealized holding gain
on debt and equity
securities recognized
for financial reporting
purposes $ 3,929,182 (640,204) 583,297
=========== =========== ===========
Income tax expense (benefit) attributable to income before
extraordinary item for the years ended December 31, 1997, 1996,
and 1995, consists of:
1997 1996 1995
---- ---- ----
Current:
Federal $6,694,381 5,385,969 7,500,277
North Carolina 1,965,013 1,292,799 1,792,744
---------- --------- ----------
8,659,394 6,678,768 9,293,021
Deferred:
Federal, net of investment
tax credit amortization (651,140) (111,920)(2,166,780)
North Carolina (110,095) 16,823 (365,617)
---------- -------- ----------
(761,235) (95,097)(2,532,397)
---------- --------- ----------
Total $7,898,159 6,583,671 6,760,624
========== ========== ==========
F-28
(12) Income Taxes, Continued
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:
1997 1996 1995
---- ---- ----
Amount computed at statutory
rate $ 6,824,987 5,965,782 6,922,078
State income taxes, net
of federal income tax
benefit 1,205,697 851,254 927,633
Nontaxable interest income (12,133) (104,315) (263,375)
Amortization of federal
investment tax credit (114,885) (114,885) (248,538)
Amortization of deferred
regulatory liability - (126,256) (69,356)
Other, net (5,507) 112,091 (507,818)
---------- ---------- ---------
Income tax expense $7,898,159 6,583,671 6,760,624
========== ========= =========
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities as of December 31, 1997 and 1996 were as follows:
1997 1996
---- ----
Deferred tax assets:
Accrued postretirement
and pension benefits $ 4,804,705 4,190,884
Regulatory liability - 971,646
Deferred investment tax credits 321,678 351,548
Environmental remediation costs 142,280 142,425
Accrued incentive 492,558 237,442
Intangibles 99,750 -
Net operating loss carryforwards 394,000 -
Other accrued expenses and
allowances 529,439 103,399
Other 371,174 106,864
--------- ---------
Total gross deferred tax
assets 7,155,584 6,104,208
--------- ---------
Less valuation allowance (394,000) -
--------- ---------
Net deferred tax assets 6,761,584 6,104,208
--------- ---------
F-29
(12) Income Taxes, Continued, Continued
1997 1996
---- ----
Deferred tax liabilities:
Property, plant and equipment,
primarily related to
depreciation differences 8,659,278 6,772,715
Unrealized gain on securities 4,054,003 124,821
Other - 210,183
---------- ----------
Total gross deferred
tax liabilities 12,713,281 7,107,719
------------ ---------
Net deferred tax liability $ 5,951,697 1,003,511
============ ==========
There was no valuation allowance for deferred tax assets as
of January 1, 1997 or 1996. The net change in the total
valuation allowance for the year ended December 31, 1997 was an
increase of $394,000. 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, 1997. 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,
1997, will be allocated to income tax expense.
At December 31, 1997, the Company has net operating loss
carryforwards for state income tax purposes of approximately
$5,800,000 which will expire in the years 2000-2012.
(13) Accounting for the Effects of Regulation
Prior to April 1, 1997 the Company's regulated operations
were subject to the provisions of SFAS 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 71.
F-30
(13) Accounting for the Effects of Regulation, Continued
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 past 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 for the current year. The components of the
gain, pretax, are as follows:
Change in recorded value of long lived
telephone plant $ 1,757,824
Elimination of regulatory liabilities 1,974,433
----------
Total $ 3,732,257
==========
The increase in net telephone plant, $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 Estimate 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, was 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.
F-31
(13) Accounting for the Effects of Regulation, Continued
The Company's consolidated balance sheet as of December 31,
1996 included a regulatory liability of approximately $2.5
million which was recorded to offset deferred income taxes {see
note 1(g)}.
During 1996, the Company filed a price regulation plan with
its state regulators seeking permission to become regulated based
on prices rather than traditional rate base rate of return
regulation. During 1997, the Company's plan was approved. Under
the plan, the Company "rebalanced" its rates, lowering or
eliminating many toll rates while bringing the price of monthly
local services closer to its underlying costs and significantly
expanding it's local and discounted toll calling areas. In
exchange for the greater flexibility in setting prices, the
Company agreed to open up its markets for competition for local
dial-tone services. By rebalancing rates, management believes
the Company can compete in emerging markets and still sustain
local rates that are affordable.
(14) Environmental Remediation Costs
The Company, along with approximately 70 other companies,
has entered into a Consent Decree with the United States to clean
up the Bypass 601 Groundwater Contamination Site (the Site) in
Concord, North Carolina. The companies also have agreed to
reimburse the U.S. Environmental Protection Agency (EPA) for
approximately $4 million in costs that have been incurred thus
far at the Site. The Site includes the former Martin Scrap
Recycling, Inc. facility, which operated a battery salvage and
recycling operation.
EPA has chosen a preferred remedy, which includes stabilization
of lead-contaminated soils and extraction and treatment of
contaminated groundwater. The remedy is estimated to cost
approximately $40 million and should take at least 10 years to
complete. Recent data indicate that a modification to the remedy
may be necessary because groundwater contamination does not
appear to be as extensive as previously thought which would
reduce the remedy to less than $20 million.
EPA has agreed to pay approximately 30% of the cleanup costs, up
to a maximum of $10 million, out of the federal "Superfund".
Also, the federal government has tentatively agreed to contribute
another $4.75 million, reflecting the amount of batteries it sent
to the Site. If EPA's estimate of cleanup costs is correct and
the proposed modification is finalized, the remaining cleanup
costs to be borne by the companies that signed the Consent Decree
would be $15 million.
F-32
(14) Environmental Remediation Costs, Continued
The companies that entered into the Consent Decree have formed a
group (the PRP Group) to implement the remedy. The PRP Group has
filed civil actions for contribution against more than 100 other
parties that allegedly arranged to send lead-bearing materials to
the site. That litigation is at a very preliminary state.
The PRP Group has decided to allocate the remaining costs of the
cleanup among its members primarily in proportion to their
respective contributions of batteries to the Site. According to
EPA's records, the Company sent a total of 466,412 pounds of
batteries, wire and other waste material to the Site. Therefore,
the Company's "nominal" share -- the portion it would pay if
every member pays its full amount -- is 0.405%. Based on the
estimated costs outlined above, the Company's nominal share would
be $60,750. A number of members are not financially strong
enough to pay their nominal shares, however. The PRP Group
anticipates that the amounts to be paid by those members that are
financially able to pay may exceed their nominal shares by two or
three times. At December 31, 1997, the Company has accrued
$355,700 for the share of the liability plus legal fees.
In the opinion of management, the Company has adequately accrued
for its proportionate share of the estimated liability at
December 31, 1997.
(15) Reconciliation of Basic and Diluted Weighted Average
Shares Outstanding
1997:
Basic weighted average shares outstanding $2,236,188
Effect of dilutive securities:
Stock options 8,808
----------
Diluted weighted average shares outstanding $2,244,996
==========
1996:
Basic weighted average shares outstanding $2,227,184
Effect of dilutive securities:
Stock options 6,663
----------
Diluted weighted average shares outstanding $2,233,847
==========
1995:
Basic weighted average shares outstanding $2,218,383
Effect of dilutive securities:
Stock options 2,688
----------
Diluted weighted average shares outstanding $2,221,071
==========
F-33
(16) Summary of Income Statement Information (Unaudited)
A summary of quarterly income statement information for the
years ended December 31, 1997 and 1996, follows:
1997 Quarters Ended
-------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- --------- --------- -----------
Operating
revenues $17,852,229 19,465,534 20,200,736 20,965,015
Income before
other income
(expenses) and
income taxes 5,272,271 4,675,029 4,547,808 5,598,034
Net income 2,649,392 5,315,069 3,008,584 2,867,804
Basic earnings
per common
share $ 1.18 2.37 1.33 1.28
========== ========= ========= ==========
Diluted
earnings
per common
share $ 1.17 2.36 1.33 1.27
=========== ========== ========= ==========
1996 Quarters Ended
----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------- ----------- ----------- -----------
Operating
revenues $ 15,473,079 15,576,999 17,688,002 18,315,926
Income before
other income
(expenses) and
income taxes 4,636,111 2,667,387 3,891,375 4,509,166
Net income 3,332,600 2,087,412 2,561,567 2,479,842
Basic earnings
per common
share $ 1.48 .93 1.14 1.10
=========== ========= =========== ===========
Diluted
earnings
per common
share $ 1.48 .92 1.14 1.10
=========== ========= =========== ===========
Earnings per common share for the third and fourth quarters of
1996 reflect the special amortization of telephone plant in
service as directed by the Commission of $574,363 as mentioned in
note 1c. Earnings per common share for the second quarter of
1997 reflect an extraordinary gain from the discontinuance of FAS
71 of $2,239,045, net of income taxes of $1,493,312, as mentioned
in note 13. Amounts have also been adjusted for the effects of
implementing SFAS No. 128.
F-34
Schedule II
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
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,
1997 $ 100,000 381,757 381,757 100,000
======== ======= ======= =======
Year ended
December 31,
1996 $ 100,000 323,075 323,075 100,000
======== ======= ======= =======
Year ended
December 31,
1995 $ 100,000 335,958 335,958 100,000
======== ======= ======= =======
Note: Represents balances written-off as uncollectible less
collections on balances previously written off of $204,760,
$508,391 and $432,117 for 1997, 1996, and 1995, respectively.
F-35
NORTH CAROLINA RSA 15 CELLULAR PARTNERSHIP
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORTS
F-36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of North Carolina RSA 15 Cellular Partnership:
We have audited the accompanying balance sheets of North Carolina
RSA 15 Cellular Partnership (a North Carolina general
partnership) as of December 31, 1997 and 1996, and the related
statements of operations, changes in partners' capital and cash
flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above
present fairly, in all material respects, the financial position
of North Carolina RSA 15 Cellular Partnership as of December 31,
1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
January 23, 1998.
F-37
NORTH CAROLINA RSA 15 CELLULAR PARTNERSHIP
BALANCE SHEETS
AS OF DECEMBER 31,
1997 1996
ASSETS ---- ----
Current assets:
Cash $ 2,500 $2,500
Accounts receivable:
Customers - less allowance
for doubtful accounts of
$148,925 and $273,238 2,089,859 2,346,336
Roamers 343,470 295,773
Other 61,234 110,202
--------- ---------
Total accounts receivable 2,494,563 2,752,311
Affiliate receivable, net 1,215,805 349,242
Prepaid expenses 20,691 8,273
--------- --------
Total current assets 3,733,559 3,112,326
--------- --------
Property and equipment (at cost):
Land and improvements 1,000,066 1,008,739
Buildings and improvements 1,628,788 1,523,220
Equipment 11,790,249 10,743,572
Furniture and fixtures 501,825 486,355
Assets under construction 1,368,646 28,421
---------- ----------
16,289,574 13,790,307
Less accumulated depreciation 5,118,713 3,396,159
---------- ----------
Property and equipment, net 11,170,861 10,394,148
Other assets, net 60,480 70,936
---------- ----------
Total assets $14,964,900 $13,577,410
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 192,032 $ 211,456
Customer deposits 105,281 67,135
Other accrued liabilities 133,980 209,824
--------- ----------
Total current liabilities 431,293 488,415
Commitments (Note 3)
Partners' capital 14,533,607 13,088,995
---------- ----------
Total liabilities and
partners' capital $14,964,900 $13,577,410
=========== ===========
The accompanying notes are an integral part of these balance
sheets.
F-38
NORTH CAROLINA RSA 15 CELLULAR PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Revenue and Sales:
Service revenue $ 22,083,366 $ 20,377,059 $ 16,759,288
Equipment Sales 1,155,243 1,087,024 985,888
----------- ---------- ----------
23,238,609 21,464,083 17,745,176
Cost and Expenses:
Cost of Services 3,742,605 3,450,524 2,803,334
Cost of Goods Sold 1,833,729 2,161,139 2,599,319
Selling, General and
Administrative 7,219,192 7,579,020 7,119,876
Depreciation and
Amortization 1,735,869 1,215,894 792,897
---------- ---------- ---------
Total operating expenses 14,531,395 14,406,577 13,315,426
Operating Income 8,707,214 7,057,506 4,429,750
---------- ---------- ----------
Other (Expense) Income (12,153) 320 33
Interest Income, Net 134,192 91,725 20,380
Net Income $ 8,829,253 $ 7,149,551 $ 4,450,163
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-39
NORTH CAROLINA RSA 15 CELLULAR PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
ALLTEL Mobile
Communications
of the CT
Total Carolinas, Inc. Cellular, Inc.
--------- ---------------- -----------------
Balance,
December 31, 1994 $ 6,611,647 $ 3,305,824 $ 3,305,823
Capital
distributions (1,427,526) (713,763) (713,763)
Net income for
the year ended
December 31, 1995 4,450,163 2,225,081 2,225,082
---------- ----------- -----------
Balance,
December 31, 1995 $ 9,634,284 $ 4,817,142 $ 4,817,142
Capital
distributions (3,694,840) (1,847,420) (1,847,420)
Net income for
the year ended
December 31, 1996 7,149,551 3,574,775 3,574,776
--------- ---------- -----------
Balance,
December 31, 1996 13,088,995 6,544,497 6,544,498
Capital
distributions (7,384,641) (3,692,320) (3,692,321)
Net income for
the year ended
December 31, 1997 8,829,253 4,414,627 4,414,626
---------- ---------- -----------
Balance,
December 31, 1997 $ 14,533,607 $ 7,266,804 $ 7,266,803
========== ========== ===========
The accompanying notes are an integral part of the statements.
F-40
NORTH CAROLINA RSA 15 CELLULAR PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
ASSETS ---- ---- ----
Cash flows from operating
activities:
Net Income $ 8,829,253 $ 7,149,551 $ 4,450,163
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,735,869 1,215,894 792,897
Provision for uncollectible
accounts 375,269 961,042 865,742
Changes in operating assets
and liabilities:
Increase in accounts
receivable (117,521) (1,225,666) (1,939,545)
Increase in prepaid expenses (12,418) (3,239) (1,772)
(Decrease) increase in current
liabilities (57,122) 269 (129,375)
----------- ---------- -----------
Net cash provided by
operating activities 10,753,330 8,097,851 4,038,110
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (2,502,126) (4,930,313) (2,997,385)
Sale of equipment to affiliate - 47,788 -
----------- --------- ----------
Net cash used in investing
activities (2,502,126) (4,882,525) (2,997,385)
------------ --------- -----------
Cash flows from financing activities:
Distributions to partner (3,692,321) (1,847,420) (713,763)
Change in affiliate receivable, net (4,558,883) (1,367,356) (326,562)
----------- --------- ----------
Net cash used in financing
activities (8,251,204) (3,214,776) (1,040,325)
----------- --------- ----------
Net change in cash - 550 400
Cash, beginning of year 2,500 1,950 1,550
----------- --------- ----------
Cash, end of year $ 2,500 $ 2,500 1,950
=========== ========= ==========
Supplemental cash flow information:
Interest paid (net of
capitalized interest) $ 6,202 $ 3,776 3,258
=========== ========= ==========
The accompanying notes are an integral part of these balance
statements.
F-41
NORTH CAROLINA RSA 15 CELLULAR PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1996
1. ORGANIZATION:
North Carolina RSA 15 Cellular Partnership (the "Partnership"), a
North Carolina general partnership, was formed on September 15,
1989. The Partnership was formed to fund, develop, and offer
cellular technology in the area of the State of North Carolina
designated by the Federal Communications Commission as North
Carolina Rural Service Area ("RSA") 15. The Partnership
commenced operations on April 17, 1991.
The partners and their respective ownership percentages as of
December 31, 1997 and 1996, are as follows:
Manager and general partner:
ALLTEL Mobile Communications
of the Carolinas, Inc.("AMC")
50%
General partner:
CT Cellular, Inc. ("CT Cellular")
50%
AMC, a wholly-owned subsidiary of ALLTEL Mobile Communications,
Inc. ("ALLTEL Mobile"), is responsible for managing and operating
the Partnership. Pursuant to the terms of the Partnership
Agreement (the "Agreement"), the general partners are liable for
all obligations of the Partnership to the extent not paid by the
Partnership.
The partners make capital contributions to, share in the
operating results of, and receive distributions from the
Partnership in accordance with their respective ownership
percentages as defined in the Agreement.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates -
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amount of assets,
liabilities, revenues, and expenses reported in the accompanying
financial statements. The estimates and assumptions used in the
accompanying financial statements are based upon management's
evaluation of the relevant facts and circumstances as of the date
of the financial statements. Actual results realized may differ
from these estimates.
Certain prior year amounts have been reclassified to conform with
the current year financial statement presentation.
Revenue Recognition -
The Partnership earns service revenue by providing access to the
cellular network (access revenue) and for usage of the cellular
network (airtime and toll revenues). Access revenue is
recognized when billed. Revenue that results from usage of the
cellular network is recognized when the services are rendered.
Other cellular service revenues are recognized when services are
provided and primarily
F-42
include connection, detailed billing, retail paging, and custom
calling feature revenues. Equipment sales are recognized upon
delivery of the equipment to the customer. Unbilled revenues associated
with the Partnership's Service revenues totaled $316,770, $294,713 and
$218,997 at December 31, 1997, 1996 and 1995, respectively.
Operating Expenses -
Operating expenses include expenses incurred directly by the
Partnership, as well as an allocation of costs incurred by the
managing partner or its affiliates on behalf of the Partnership.
See Note 4 for additional discussion of allocated costs and
related-party transactions, Selling and marketing expense
includes a net loss on equipment sales of $678,486, $1,074,115
and $1,613,431 in 1997, 1996 and 1995, respectively.
Interest Income Net -
The accompanying statements of operations reflect total interest
income, net of interest expense and interest capitalized. The
components of Interest income, net are as follows for the years
ended December 31, 1997 and 1996:
1997 1996 1995
---- ---- ----
Interest income $140,394 $95,501 $23,638
Interest expense (6,404) (3,776) (6,904)
Interest capitalized 202 - 3,646
------- ------ --------
Interest income, net $134,192 $ 91,725 $20,380
======= ====== ========
Income Taxes -
All income, losses, and tax credits are not separately taxable to
the Partnership under the Internal Revenue Code and applicable
state statutes, but rather are allocated directly to the
partners. Accordingly, no provision for federal or state income
taxes has been made in the accompanying financial statements.
Affiliate Receivable, Net -
Since the Partnership does not maintain a cash account for
operations, the cash receipts from revenues are recorded in an
ALLTEL Mobile cash account and reflected as advances to
affiliate. Likewise, all cash disbursements of the Partnership
are made by ALLTEL Mobile on behalf of the Partnership and are
reflected as advances from affiliate. In addition, AMC's capital
distributions/contributions are recorded through the advance
accounts. AMC's capital distributions of $3,692,320, $1,847,420
and $713,763 in 1997, 1996 and 1995, respectively, were recorded as
advances from affiliate. These advances are presented on a net
basis in the accompanying financial statements as Affiliate
receivable, net.
The Partnership is charged interest on advances provided by
ALLTEL Mobile and earns interest on advances provided to ALLTEL
Mobile. The average interest rate on advances provided to the
Partnership was 6.89%, 7.05% and 7.82% in 1997, 1996 and 1995,
respectively. The average interest rate on advances provided
by the Partnership was 5.45%, 5.21% and 5.71% in 1997, 1996 and
1995, respectively.
F-43
Provisions for Bad Debts and Sales Allowance
The Partnership establishes reserves for bad debt based upon analyses
of its aged accounts receivables and any identified collection issues.
The actitivity of the allowance account for the years ended December 31
is as follows:
1997 1996 1995
---- ---- ----
Balance, Beginning of Year $273,238 $339,914 $150,660
Write-offs (717,771) (1,272,087) (712,214)
Recoveries 218,129 244,369 35,726
Provision 375,269 961,042 865,742
------- --------- -------
Balance, End of Year $148,925 $273,238 $339,914
======= ======= =======
Inventories -
Inventories are purchased for the Partnership by an adjacent
Metropolitan Statistical Area ("MSA"), operated by the managing
partner. Upon sale, the related cost of the inventory is
transferred to the Partnership at the MSA's cost basis and is
reflected in the accompanying statements of operations as Costs of
Goods Sold.
Property and Equipment -
Property and equipment represent the costs incurred to construct
a cellular mobile telephone system and cellular equipment, and
include capitalized interest and overhead charges related to
direct labor costs capitalized. Depreciation is recorded using
the straight-line method over the estimated useful lives of the
assets, which are as follows:
Years
-----
Buildings and improvements 7-25
Equipment 7-10
Furniture and fixtures 10
Land improvements 7
When property is retired, the cost of the property and the
related accumulated depreciation are removed from the balance
sheet, and any gain or loss on the transaction is included in the
accompanying statements of operations. See Note 4 concerning
the transfer of equipment to affiliates.
Assets under construction primarily represent the costs incurred
for the construction of cell sites and include capitalized
interest and allocated overheads related to the direct labor
costs capitalized. When these assets are placed in service, they
are recorded in the appropriate property and equipment accounts
and are depreciated from that time forward. Depreciation expense
was $1,725,413, $1,205,438 and $782,445 for 1997, 1996 and 1995,
respectively.
Other Assets, Net -
Other assets, net consist primarily of costs associated with the
acquisition of options to lease land relating to future or
existing cell sites. These costs are amortized using the
straight-line method over a 10 year term. Amortization expense
totaled $10,456, 10,456 and $10,452 for 1997, 1996 and 1995,
respectively.
3. COMMITMENTS:
Future minimum payments required under operating leases for real
estate, office space and tower space that have non-cancelable
lease terms in excess of one year as of December 31, 1997, are as
follows:
1998 $226,300
1999 103,569
2000 90,687
2001 49,687
2002 1,612
Thereafter 228
--------
$472,083
========
These leases permit renewals at various intervals with provisions
for increased rentals at each renewal. Rent expense totaled
$274,010, $229,629 and $180,629 in 1997, 1996 and 1995, respectively, and is
included in System and operations expense in the accompanying
statements of operations.
F-44
4. RELATED-PARTY TRANSACTIONS:
ALLTEL Mobile, a wholly-owned subsidiary of ALLTEL Corporation,
provides certain services necessary for the operation,
management, and administration of the Partnership. Services
provided to the Partnership include accounting, cash management,
strategic planning, human resources, legal, marketing, customer
service, systems, and engineering. These costs are allocated to
the Partnership based on various factors, which are modified
periodically to more closely align costs with services received.
In accordance with the terms of the Agreement, ALLTEL Mobile is
reimbursed for its costs incurred on behalf of the Partnership in
providing these services. These costs amounted to $1,036,595,
$847,540 and $695,715 in 1997, 1996 and 1995, respectively.
A contiguous MSA, having common ownership with the Partnership,
provides the Partnership certain additional operational ,
management, and administrative services; the costs of which are
allocated to the Partnership based on various factors. Costs
incurred for such services amounted to $1,639,750, $1,493,032
and $1,436,119 in 1997, 1996 and 1995, respectively. During 1997
and 1996, the Partnership recorded cast allocation credits from
ALLTEL Mobile and a contiguous MSA related to the years 1992 through 1994.
These credits totaled $77,526 and $125,716 in 1997 and 1996,
respectively, and were recorded as a reduction of operating
expenses in the accompanying statements of operations.
The MSA also provides the Partnership with access to the MSA's
switch. The cost for this service is allocated to the Partnership
based on airtime usage and the number of ports in the switch
utilized. These costs were $664,211, $571,430 and $515,439 in 1997, 1996
and 1995, respectively. The MSA's switch is equipped with IS-4I
capabilities, the cost of which is shared with the Partnership
based on a fixed monthly charge and pre-call validation usage.
The cost to the Partnership for this additional service was
$47,533, $35,532 and $48,816 in 1997, 1996 and 1995, respectively.
The Partnership purchased cellular telephone equipment and
materials and supplies amounting to $187,132, $291,757 and $22,405 in 1997,
1996 and 1995, respectively, from ALLTEL Supply, Inc., a wholly-owned
subsidiary of ALLTEL Corporation. Additionally, ALLTEL
Information Services, Inc. ("AIS"), a wholly-owned subsidiary of
ALLTEL Corporation, provides billing and mailing services to the
Partnership. The charge to the Partnership for these services
was $1,073,736, $1,003,664 and $738,172 in 1997, 1996 and 1995,
respectively. The cost of service is based upon the number of customer bills
processed and mailed. The prices charged by ALLTEL Supply, Inc.
and AIS are comparable to prices the Partnership would be
required to pay non-affiliated suppliers for similar goods and
services.
During 1996 and 1995, the Partnership transferred certain property and
equipment to affiliates of the managing partner with a cost of
$55,753 and $951, respectively and accumulated depreciation of $7,965
and $439, respectively. In 1995, the Partnership also received
transfers of certain property from affiliates of the managing partner
with a cost of $9,711 and accumulated depreciation of $3,240.
These assets were transferred at net book value on the date of the
transaction.
The Partnership has an operating lease for tower space with AMC.
Rent expense under this lease totaled $34,162, $33,530 and $34,620
in 1997, 1996 and 1995, respectively. The Partnership also has operating
leases for building and tower space with Concord Telephone
Company, an affiliate of CT Cellular. Rent expense under these
leases totaled $29,475, $28,875 and $23,580 in 1997, 1996 and 1995,
respectively.
Future minimum payments required under these leases, which are
included in Note 3 as of December 31, 1997 are as follows:
F-45
1998 $ 29,475
1999 29,475
2000 29,475
2001 13,575
Thereafter -
---------
$102,000
========
The Partnership periodically incurs charges from ALLTEL
Corporation affiliates primarily relating to interconnect,
network, toll and lockbox clearing charges. The Partnership
incurred charges from these affiliates of $117,883, $127,726 and
$98,954 in 1997, 1996 and 1995, respectively. The prices for these
services are charged to the Partnership at tariffed rates or at cost.
The Partnership periodically incurs charges from non-ALLTEL
Corporation affiliates primarily relating to site utility,
interconnect, office rental, and site rental charges. Amounts
charged by these affiliates were $654,366, $671,943 and $497,504 in 1997,
1996 and 1995, respectively.
F-46