##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (MARK ONE) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
 EXCHANGE ACT OF
1934
 For the transition period from  to Commission file number 0-19179 CT COMMUNICATIONS, INC.  NORTH CAROLINA
(State or other jurisdiction of
incorporation or organization)
    
    56-1837282
(I.R.S. Employer
Identification No.)1000 Progress Place NE
P.O. Box 227, Concord, NC
(Address of principal executive offices)
    
    28026-0227
(Zip Code)
 (704) 722-2500
(Registrants telephone number, including area code) (Former name, former address and former fiscal year,
if changed since last report) 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. 19,003,407 shares of Common Stock outstanding as of May 2, 2005.




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX Page No.PART I. Financial InformationItem 1. Financial Statements.Condensed Consolidated Balance Sheets March 31, 2005 (Unaudited) and December 31, 2004
    
    
    2Condensed Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    26Item 4. Controls and Procedures.
    
    
    26PART II. Other InformationItem 1.Legal Proceedings.
    
    
    28Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    28Item 3.Defaults Upon Senior Securities.
    
    
    28Item 4.Submission of Matters to a Vote of Security Holders.
    
    
    28Item 5.Other Information.
    
    
    28Item 6. Exhibits.
    
    
    28Signatures
    
    
    29Exhibit Index
    
    
    30
  1




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##### 



Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets
  (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,739
    
    
    $
    28,358Accounts receivable and unbilled revenue, net
    
    
    16,460
    
    
    
    17,371Other
    
    
    7,966
    
    
    
    6,244Total current assets
    
    
    40,165
    
    
    
    51,973Investment securities
    
    
    4,590
    
    
    
    5,190Other investments
    
    
    1,514
    
    
    
    1,500Investments in unconsolidated companies
    
    
    17,239
    
    
    
    16,002Property and equipment, net
    
    
    206,964
    
    
    
    207,072Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,401
    
    
    
    35,401Other assets
    
    
    3,827
    
    
    
    3,588Total assets
    
    $
    319,606
    
    
    $
    330,632LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    20,000
    
    
    $
    5,000Accounts payable
    
    
    6,897
    
    
    
    6,822Customer deposits and advance billings
    
    
    3,152
    
    
    
    3,307Other accrued liabilities
    
    
    11,727
    
    
    
    18,475Liabilities of discontinued operations
    
    
    483
    
    
    
    604Total current liabilities
    
    
    42,259
    
    
    
    34,208Long-term debt
    
    
    43,750
    
    
    
    65,000Deferred credits and other liabilities:Deferred income taxes
    
    
    28,468
    
    
    
    28,739Post-retirement benefits other than pension
    
    
    11,077
    
    
    
    11,044Other
    
    
    3,527
    
    
    
    3,413Total deferred credits and other liabilities
    
    
    43,072
    
    
    
    43,196Total liabilities
    
    
    129,081
    
    
    
    142,404Stockholders equity:Preferred stock not subject to mandatory redemption:5% series, $100 par value; 3,356 shares outstanding at
March 31, 2005 and December 31, 2004
    
    
    336
    
    
    
    3364.5% series, $100 par value; 614 shares outstanding at
March 31, 2005 and December 31, 2004
    
    
    61
    
    
    
    61Common stock, 19,002,987 and 18,883,825 shares outstanding at
March 31, 2005 and December 31, 2004, respectively
    
    
    43,583
    
    
    
    42,222Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    (961
    )
    
    
    (268
    )Accumulated other comprehensive income
    
    
    178
    
    
    
    215Retained earnings
    
    
    147,030
    
    
    
    145,364Total stockholders equity
    
    
    190,525
    
    
    
    188,228Total liabilities and stockholders equity
    
    $
    319,606
    
    
    $
    330,632
 See accompanying notes to condensed consolidated financial statements (unaudited). 2




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Income (Unaudited)
  Three Months Ended March 31,2005
    
    
    2004Operating revenue:Telephone
    
    $
    30,105
    
    
    $
    30,682Wireless and internet
    
    
    11,292
    
    
    
    9,882Total operating revenue
    
    
    41,397
    
    
    
    40,564Operating expense:Telephone cost of service (1)
    
    
    9,041
    
    
    
    8,558Wireless and internet cost of service (2)
    
    
    5,248
    
    
    
    4,847Selling, general and administrative (3)
    
    
    14,142
    
    
    
    12,803Depreciation
    
    
    7,866
    
    
    
    7,425Total operating expense
    
    
    36,297
    
    
    
    33,633Operating income
    
    
    5,100
    
    
    
    6,931Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,243
    
    
    
    1,391Interest, dividend income and gain on sales of investments
    
    
    148
    
    
    
    255Impairment of investments
    
    
    (418
    )
    
    
    (19
    )Interest expense
    
    
    (1,136
    )
    
    
    (1,348
    )Other expense
    
    
    (39
    )
    
    
    (84
    )Total other income (expense)
    
    
    (202
    )
    
    
    195Income before income taxes
    
    
    4,898
    
    
    
    7,126Income taxes
    
    
    1,909
    
    
    
    2,887Net income
    
    
    2,989
    
    
    
    4,239Dividends on preferred stock
    
    
    5
    
    
    
    5Earnings for common stock
    
    $
    2,984
    
    
    $
    4,234Earnings per common share:Basic
    
    $
    0.16
    
    
    $
    0.22Diluted
    
    
    0.16
    
    
    
    0.22Basic weighted average shares outstanding
    
    
    18,802
    
    
    
    18,834Diluted weighted average shares outstanding
    
    
    18,980
    
    
    
    18,953
   (1)
    
    Excludes depreciation expense of $5.8 million and $5.3 million
for the three months ended March 31, 2005 and March 31, 2004, respectively.(2)
    
    Excludes depreciation expense of $1.0 million and $0.8 million
for the three months ended March 31, 2005 and March 31, 2004, respectively.(3)
    
    Excludes depreciation expense of $1.1 million and $1.3 million
for the three months ended March 31, 2005 and March 31, 2004, respectively. See accompanying notes to condensed consolidated financial statements (unaudited). 3




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Comprehensive Income (Unaudited)
  Three Months Ended March 31,2005
    
    
    2004Net income
    
    $
    2,989
    
    
    $
    4,239Other comprehensive income (loss), net of tax:Unrealized holding losses on available-for-sale
securities
    
    
    (86
    )
    
    
    (293
    )Reclassification adjustment for losses realized
in net income
    
    
    49
    
    
    
    9Comprehensive income
    
    $
    2,952
    
    
    $
    3,955
 See accompanying notes to condensed consolidated financial statements (unaudited). 4




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
  Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    2,989
    
    
    $
    4,239Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    7,866
    
    
    
    7,425Amortization of restricted stock
    
    
    141
    
    
    
    202Post-retirement benefits
    
    
    33
    
    
    
    (67
    )Impairment of investments
    
    
    418
    
    
    
    19Loss (gain) on sale of investment securities
    
    
    77
    
    
    
    (5
    )Undistributed income of unconsolidated companies
    
    
    (1,243
    )
    
    
    (1,391
    )Undistributed patronage dividends
    
    
    (83
    )
    
    
    (111
    )Deferred income taxes and tax credits
    
    
    (279
    )
    
    
    1,159Changes in operating assets and liabilities
    
    
    (7,255
    )
    
    
    (2,102
    )Net cash provided by operating activities
    
    
    2,664
    
    
    
    9,368Cash flows from investing activities:Capital expenditures
    
    
    (7,758
    )
    
    
    (3,913
    )Purchases of investments
    
    
    (91
    )
    
    
    (125
    )Proceeds from sale of investment securities
    
    
    144
    
    
    
    168Partnership capital distribution
    
    
    69
    
    
    
    13Net cash used in investing activities
    
    
    (7,636
    )
    
    
    (3,857
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (6,250
    )
    
    
    (2,500
    )Dividends paid
    
    
    (1,324
    )
    
    
    (1,228
    )Proceeds from common stock issuances
    
    
    48
    
    
    
    51Net cash used in financing activities
    
    
    (7,526
    )
    
    
    (3,677
    )Net cash used in discontinued operations
    
    
    (121
    )
    
    
    (136
    )Net increase (decrease) in cash and cash equivalents
    
    
    (12,619
    )
    
    
    1,698Cash and cash equivalents at beginning of period
    
    
    28,358
    
    
    
    16,957Cash and cash equivalents at end of period
    
    $
    15,739
    
    
    $
    18,655
 See accompanying notes to condensed consolidated financial statements (unaudited). 5




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  1.
    In the opinion of management of CT Communications, Inc. (the Company), the
accompanying unaudited financial statements contain all adjustments consisting of only
normal recurring accruals necessary to present fairly the Companys financial position
as of March 31, 2005 and December 31, 2004 and the results of its operations and cash
flows for the three months ended March 31, 2005 and March 31, 2004. These unaudited
financial statements do not include all disclosures associated with the Companys
annual financial statements and should be read along with the Companys Annual Report
on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2004.  2.
    In certain instances, amounts previously reported in the 2004 consolidated financial
statements have been reclassified to conform to the presentation of the 2005
consolidated financial statements. Such reclassifications have no effect on net income
or retained earnings as previously reported.  3.
    The results of operations for the three months ended March 31, 2005 and 2004 are not
necessarily indicative of the results to be expected for the full year.  4.
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Land, buildings and general equipment
    
    $
    91,459
    
    
    $
    91,705Central office equipment
    
    
    179,435
    
    
    
    177,455Poles, wires, cables and conduit
    
    
    155,819
    
    
    
    155,049Construction in progress
    
    
    10,471
    
    
    
    5,559437,184
    
    
    
    429,768Accumulated depreciation
    
    
    (230,220
    )
    
    
    (222,696
    )Property and equipment, net
    
    $
    206,964
    
    
    $
    207,072
  5.
    DISCONTINUED OPERATIONSOn December 9, 2002, the Company discontinued its wireless broadband commercial trial
operations in Fayetteville, North Carolina. These operations were provided by Wavetel,
L.L.C. (Wavetel), a subsidiary of the Company. The Company ceased Wavetels
operations due to significant operating losses, the limited coverage area provided by
the technology available at the time and the inability to obtain outside investment.
Complete disposal of the business through sale and disposal of assets was completed by
June 30, 2003. As a result, Wavetels operations have been reflected as discontinued
operations and as assets and liabilities held for sale in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. In the second quarter of 2003, the Company
re-evaluated the potential future liabilities related to the discontinued Wavetel
operations and determined that the potential liabilities exceeded the remaining
restructuring reserve. Therefore, the Company recorded an additional loss from
discontinued operations, before income taxes, of $0.7 million in the second quarter of
2003. The additional loss relates to the Companys inability to sublease certain
facilities that were previously used in Wavetels operations. The adjustment is an
estimate based on the current market condition and could be revised on a quarterly
basis as new information becomes available. As of March 31, 2005, the Company believes
that the reserve is adequate. The Company had no outstanding indebtedness directly
related to the Wavetel operations; therefore, no interest expense was allocated to
discontinued operations.In connection with the discontinuance of operations, the Company recognized a loss of
$4.4 million in 2002 to write down the related carrying amounts of assets to their fair
values less cost to sell in accordance with SFAS No. 144 and recorded related
liabilities for estimated severance costs, lease termination costs and other exit costs
in accordance with Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring). The liabilities of the
discontinued operations at March 31, 2005 and December 31, 2004 consist of the
following (in thousands): 6




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004Liabilities of discontinued operations:Other liabilities, primarily lease obligations
    
    $
    483
    
    
    $
    604Total liabilities of discontinued operations
    
    $
    483
    
    
    $
    604
  A summary of restructuring liability activity related to the discontinued operations
for the three months ended March 31, 2005 is as follows (in thousands): Balance at December 31, 2004
    
    $
    604Lease termination costs
    
    
    (121
    )Balance at March 31, 2005
    
    $
    483
  6.
    COMMON STOCK  The following is a summary of Common Stock transactions during the three months ended
March 31, 2005 (in thousands): Shares
    
    
    AmountOutstanding at December 31, 2004
    
    
    18,884
    
    
    $
    42,222Purchase/forfeitures of Common
Stock
    
    
    (34
    )
    
    
    (393
    )Issuance of Common Stock
    
    
    153
    
    
    
    1,754Outstanding at March 31, 2005
    
    
    19,003
    
    
    $
    43,583
  Purchase/forfeitures of Common Stock shown above consists primarily of restricted
shares forfeited by employees of the Company for payment of income taxes related to
those restricted shares. The holders of the restricted shares may elect to forfeit
the number of shares with a value equivalent to the amount of income taxes owed and
the Company pays the related income taxes on the holders
behalf. During the three months ended March 31, 2005, the Company
issued common stock, the majority of which is restricted, under its various
compensation plans. The restricted stock issuances are non-cash and result in an increase in
unearned compensation on the Condensed Consolidated Balance Sheets.The following table provides a reconciliation of the denominator used in computing
basic earnings per share to the denominator used in computing diluted earnings per
share for the three months ended March 31, 2005 and 2004: March 31,
    
    
    March 31,2005
    
    
    2004Basic weighted average shares outstanding
    
    
    18,802
    
    
    
    18,834Effect of dilutive stock options and non-vested
restricted stock
    
    
    178
    
    
    
    119Total weighted average diluted shares outstanding
    
    
    18,980
    
    
    
    18,953
  Outstanding options to purchase approximately 1,067,000 shares of Common Stock for the
three months ended March 31, 2005 and approximately 571,000 shares of Common Stock for
the three months ended March 31, 2004 were not included in the computation of diluted
earnings per share and diluted weighted shares outstanding because the exercise price
of these options was greater than the average market price of the Common Stock during
the respective periods. At March 31, 2005 and March 31, 2004, the Company had total
options outstanding of approximately 1,836,000 and 1,387,000, respectively. 7




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  On April 28, 2005, the Board of Directors approved the continuation of the Companys
existing stock repurchase program. Under this program, the Company is authorized,
subject to certain conditions, to repurchase up to 1,000,000 shares of its outstanding
Common Stock during the twelve-month period from April 28, 2005 to April 28, 2006.
There were no shares repurchased by the Company during the three months ended March
31, 2005.7.
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and fair value for the
Companys investments at March 31, 2005 and December 31, 2004 were as follows (in
thousands): Gross
    
    
    GrossUnrealized
    
    
    UnrealizedEquity Securities
    
    Amortized
    
    
    Holding
    
    
    HoldingAvailable-for-Sale
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2005
    
    $
    4,312
    
    
    $
    330
    
    
    $
    (52
    )
    
    $
    4,590December 31, 2004
    
    $
    4,855
    
    
    $
    384
    
    
    $
    (49
    )
    
    $
    5,190
  During the first quarter of 2005, the Company recognized an impairment loss of $0.4
million on two investment securities due to a decline in fair value of the securities
that, in the opinion of management, were considered to be other than temporary. This
impairment loss is included in the caption Impairment of investments on the
Condensed Consolidated Statements of Income.Certain investments of the Company are and have been in continuous unrealized loss
positions. The gross unrealized losses and fair value and length of time the
securities have been in the continuous unrealized loss position at March 31, 2005 is
as follows (in thousands): Less than 12 months
    
    
    12 months or more
    
    
    TotalDescription of
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedSecurities
    
    Value
    
    
    Losses
    
    

    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCommon stock
    
    $
    392
    
    
    $
    14
    
    
    $
    775
    
    
    $
    38
    
    
    $
    1,167
    
    
    $
    52Total temporarily
impaired securities
    
    $
    392
    
    
    $
    14
    
    
    $
    775
    
    
    $
    38
    
    
    $
    1,167
    
    
    $
    52
  The fair value and unrealized losses noted above that are greater than 12 months
relate to three different investments. The Company will continue to evaluate these
investments on a quarterly basis to determine if the unrealized loss is
other-than-temporarily impaired, at which time the impairment loss would be realized.8.
    OTHER INVESTMENTSOther investments consist primarily of the Companys investment in CoBank, ACB
(CoBank). The Company receives patronage dividends from its investment in CoBank
which is organized as a cooperative for federal income tax purposes. Patronage
dividends represent cash distributions of CoBanks earnings and notices of allocations
of CoBanks earnings to the Company. Non-cash allocations of earnings are included in
the Companys carrying value of the investment and are recognized as other income in
the period earned. 8




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  9.
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Equity Method:Palmetto MobileNet, L.P.
    
    $
    12,173
    
    
    $
    10,933Other
    
    
    43
    
    
    
    40Cost Method:Magnolia Holding Company
    
    
    1,680
    
    
    
    1,680PRE Holdings, Inc.
(formerly ITC
Financial Services,
LLC)
    
    
    2,100
    
    
    
    2,100Other
    
    
    1,243
    
    
    
    1,249Total
    
    $
    17,239
    
    
    $
    16,002
  During 2003, the Company sold its 4.4% equity interest in ITC Holding Company which
resulted in a gain to the Company of $15.2 million. As part of the purchase
agreement, certain funds are being held in escrow until certain contingencies are
resolved. The Companys portion of the escrowed funds is $1.2 million and will not be
recorded in the Companys financial statements until the contingencies are resolved
and the escrowed funds become issuable.In December 2003, the Company committed to purchase a 4.0% ownership interest in ITC
Financial Services, LLC (ITC Financial) for $2.1 million. ITC Financial was formed
to develop a prepaid debit card business that uses a nationwide network of automated
terminals that re-charge the debit card for certain transaction fees. In December
2003, the Company invested $0.8 million of its total $2.1 million commitment. In
December 2004, the Company invested an additional $1.3 million, which fulfilled its
total investment commitment to ITC Financial. Also in December 2004, ITC Financial
merged with PRE Solutions to form PRE Holdings, Inc. The Companys ownership interest
in the newly formed company is 1.55%.The Company recognized income of $1.2 million and $1.4 million for the three months
ended March 31, 2005 and 2004, respectively, as its share of earnings from
unconsolidated companies accounted for under the equity method. Substantially all of
the income was attributable to the Companys 22.4% interest in Palmetto MobileNet,
L.P. Palmetto MobileNet, L.P. is a partnership that holds a 50% interest in 10
cellular rural service areas (RSAs) in North and South Carolina. Summarized
unaudited interim results of operations for Palmetto MobileNet, L.P. for the three
months ended March 31, 2005 and 2004 are as follows (in thousands): Three months endedMarch 31,2005
    
    
    2004Equity in earnings of RSA partnership interests
    
    $
    5,623
    
    
    $
    6,156Other expenses
    
    
    83
    
    
    
    36Net income
    
    $
    5,540
    
    
    $
    6,120
 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  10.
    LONG-TERM DEBTLong-term debt consists of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Line of credit with interest at LIBOR
plus 1.25% (4.06% at March 31, 2005
and December 31, 2004)
    
    $
    15,000
    
    
    $
    20,000Term loan with interest at 7.32%
    
    
    48,750
    
    
    
    50,00063,750
    
    
    
    70,000Less: Current portion of long-term debt
    
    
    20,000
    
    
    
    5,000Total long-term debt
    
    $
    43,750
    
    
    $
    65,000
  At March 31, 2005, the Company has a $70.0 million revolving five year line of credit
with interest at three month LIBOR plus a spread based on various financial ratios,
that is currently 1.25%. The interest rate on March 31, 2005 was 4.06%. The credit
facility provides for quarterly payments of interest until maturity on March 31, 2006.
As of March 31, 2005, $15.0 million was outstanding under the revolving credit
facility. The Company also has a 7.32% fixed rate $50.0 million term loan that
matures on December 31, 2014. At March 31, 2005, $48.8 million was outstanding. The
term loan requires quarterly payments of interest until maturity on December 31, 2014.
Payments of principal became due beginning March 31, 2005 and will be due quarterly
through December 31, 2014, in equal amounts of $1.25 million.At March 31, 2005, the Company had one interest rate swap agreement to fix $5.0
million of the amount outstanding under the $70.0 million revolving line of credit at
a rate of 4.53%. The fair value of the swap agreement as of March 31, 2005 was $(0.1)
million. The swap agreement matures on November 3, 2006.11.
    GOODWILLOn January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. In accordance with SFAS No. 142, the Company discontinued goodwill
amortization and tested goodwill for impairment as of January 1, 2002, determining
that the recognition of an impairment loss was not necessary. The Company will
continue to test goodwill for impairment at least annually. Goodwill was $9.9 million
as of March 31, 2005, and was unchanged for the quarter then ended.Other intangible assets consist primarily of wireless licenses. Wireless licenses
have terms of 10 years, but are renewable through a routine process involving a
nominal fee. The Company has determined that no legal, regulatory, contractual,

competitive, economic or other factors currently exist that limit the useful life of
its wireless licenses. Therefore, the Company does not amortize wireless licenses
based on the determination that these assets have indefinite lives. In accordance
with SFAS No. 142, the Company periodically reviews its determination of indefinite
useful lives for wireless licenses and will test those licenses for impairment at
least annually.12.
    RECENT ACCOUNTING PRONOUNCEMENTSIn March 2004, the EITF of the Financial Accounting Standards Board (FASB) reached a
consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The consensus addresses how to determine the
meaning of other-than-temporary impairment and its application to investments
classified as either available-for-sale or held-to-maturity under Statement No. 115
(including individual securities and investments in mutual funds), and investments
accounted for under the cost method or the equity method. EITF Issue No. 03-1
requires additional disclosures for investments accounted for under SFAS No. 115 and
SFAS No. 124 effective for fiscal years ended after December 15, 2003. In September
2004, FASB Staff Position EITF Issue No. 03-1-1 was issued which delayed the effective
date for the measurement and recognition 10




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  guidance contained in paragraphs 10-20 of
Issue No. 03-1. The adoption of this consensus is not expected to have a material
impact on the Companys current policies.In December 2004, the FASB issued Statement on Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment, revising FASB Statement 123, Accounting for
Stock-Based Compensation and superseding APB opinion No. 25, Accounting for Stock
Issued to Employees. This statement requires a public entity to measure the cost of
services provided by employees and directors received in exchange for an award of
equity instruments, including stock options, at a grant-date fair value. The fair
value cost is then recognized over the period that services are provided.In April 2005, the staff of the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (SAB 107) to provide additional guidance regarding the
application of FAS 123 (Revised 2004). SAB 107 permits registrants to choose an
appropriate valuation technique or model to estimate the fair value of share options,
assuming consistent application, and provides guidance for the development of
assumptions used in the valuation process. Additionally, SAB 107 discusses disclosures
to be made under Managements Discussion and Analysis of Financial Condition and
Results of Operations in registrants periodic reports. Based upon SEC rules issued
in April 2005, FAS 123 (Revised 2004) is effective for fiscal years that begin after
June 15, 2005 and will be adopted by the Company in the first quarter of 2006.13.
    STOCK OPTIONSThe Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25 issued in March 2000 to account for its fixed plan stock options.
Under this method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.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 (in thousands except per share data): Three Months Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    2,989
    
    
    $
    4,239Additional stock-based compensation
expense that would have been included
in net income if the fair value method had
been applied, net of income tax
    
    
    276
    
    
    
    272Pro forma net income
    
    $
    2,713
    
    
    $
    3,967Basic earnings per common shareAs reported
    
    $
    0.16
    
    
    $
    0.22Pro forma
    
    
    0.14
    
    
    
    0.21Diluted earnings per common shareAs reported
    
    $
    0.16
    
    
    $
    0.22Pro forma
    
    
    0.14
    
    
    
    0.21
 11




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  14.
    PENSION AND POST-RETIREMENT PLANSComponents of net period benefit costs for the three months ended March 31 (in
thousands): Pension Benefits
    
    
    Post-Retirement Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    561
    
    
    $
    503
    
    
    $
    19
    
    
    $
    15Interest cost
    
    
    681
    
    
    
    655
    
    
    
    125
    
    
    
    126Expected return on plan assets
    
    
    (900
    )
    
    

    (842
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    69Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (44
    )Net periodic benefit cost
    
    $
    343
    
    
    $
    317
    
    
    $
    119
    
    
    $
    166
  The Company previously disclosed in its financial statements for the year ended
December 31, 2004 that it does not expect to contribute to the pension plan in 2005.In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act) was signed into law. The Act introduced a prescription drug benefit
under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement
health care plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D. In May 2004, the FASB issued Staff Position 106-2, providing final
guidance on accounting for the Act. This change is not expected to have a material
impact on the Companys financial results.15.
    SEGMENT INFORMATIONThe Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory
environment, services offered and/or customers served. The segments and a description
of their businesses are as follows: the incumbent local exchange carrier (ILEC),
which provides local telephone services; the wireless group (Wireless), which
provides wireless phone services; the competitive local exchange carrier (CLEC),
which provides competitive local telephone services to customers outside the ILECs
operating area; the Greenfield business (Greenfield), which provides full
telecommunications services to developments outside the ILECs operating area;
Internet and data services (IDS), which provides dial-up and high-speed internet
access and other data related services; and Palmetto MobileNet, L.P. (Palmetto),
which is a limited partnership with interests in wireless operations in North Carolina
and South Carolina in which the Company has an equity interest through the Companys
subsidiary, CT Cellular, Inc. All other business units, investments and operations of
the Company that do not meet reporting guidelines and thresholds are reported under
Other.Accounting policies of the segments are the same as those described in the summary of
significant accounting policies included in the Companys Annual Report on Form 10-K/A
(Amendment No. 1) for the year ended December 31, 2004. The Company evaluates
performance based on operating income. Intersegment transactions have been eliminated
for purposes of calculating operating income. All segments reported below, except
Palmetto, provide services primarily within North Carolina. Palmetto provides
services in North and South Carolina. Selected data by business segment as of and for
the three months ended March 31, 2005 and 2004, is as follows (in thousands): 12




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended March 31, 2005 ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    22,679
    
    
    $
    8,492
    
    
    $
    5,135
    
    
    $
    2,291
    
    
    $
    2,800
    
    
    $
    
    
    
    $
    41,397External
expense
    
    
    12,152
    
    
    
    7,183
    
    
    
    4,622
    
    
    
    2,153
    
    
    
    2,124
    
    
    
    197
    
    
    
    28,431Depreciation
    
    
    5,109
    
    
    
    504
    
    
    
    629
    
    
    
    810
    
    
    
    479
    
    
    
    335
    
    
    
    7,866Operating
income (loss)
    
    $
    5,418
    
    
    $
    805
    
    
    $
    (116
    )
    
    $
    (672
    )
    
    $
    197
    
    
    $
    (532
    )
    
    $
    5,100Segment assets
    
    $
    165,520
    
    
    $
    33,821
    
    
    $
    14,018
    
    
    $
    27,300
    
    
    $
    13,725
    
    
    $
    65,222
    
    
    $
    319,606
 Three months ended March 31, 2004 ILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    23,699
    
    
    $
    7,122
    
    
    $
    5,038
    
    
    $
    1,945
    
    
    $
    2,760
    
    
    $
    
    
    
    $
    40,564External
expense
    
    
    10,741
    
    
    
    6,306
    
    
    
    4,389
    
    
    
    2,219
    
    
    
    2,336
    
    
    
    217
    
    
    
    26,208Depreciation
    
    
    4,714
    
    
    
    469
    
    
    
    635
    
    
    
    720
    
    
    
    516
    
    
    
    371
    
    
    
    7,425Operating
income (loss)
    
    $
    8,244
    
    
    $
    347
    
    
    $
    14
    
    
    $
    (994
    )
    
    $
    (92
    )
    
    $
    (588
    )
    
    $
    6,931Segment assets
    
    $
    167,557
    
    
    $
    30,788
    
    
    $
    16,407
    
    
    $
    24,739
    
    
    $
    15,103
    
    
    $
    66,802
    
    
    $
    321,396
  The Companys Palmetto segment is not consolidated and is accounted for under the
equity method. The Companys net investment in Palmetto of $12.2 million and $10.1
million as of March 31, 2005 and 2004, respectively, is included as part of the assets
of the Companys Other segment. The Company records its share of earnings from
Palmetto as equity in income of unconsolidated companies on the Condensed Consolidated
Statements of Income. For summarized results of operations for Palmetto see Note 9.Reconciliation to income before income taxes (in thousands): Three months endedMarch 31,2005
    
    
    2004Segment operating income
    
    $
    5,100
    
    
    $
    6,931Total other income (expense)
    
    
    (202
    )
    
    
    195Income before income taxes
    
    $
    4,898
    
    
    $
    7,126
 13




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##### 



Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations.  IntroductionCT Communications, Inc. and its subsidiaries provide a broad range of telecommunications and
related services to residential and business customers located primarily in North Carolina.
The Companys primary services include local and long distance telephone service, Internet
and data services and wireless products and services.The Company has worked to expand its core businesses through the development of integrated
product and service offerings, investment in growth initiatives that exceed certain return
thresholds and targeted marketing efforts to efficiently identify and obtain customers. In
addition, the Company has made certain strategic investments that complement its business
units. During 2001, the Company expanded its wireless business through the partitioning of
its area of the Cingular digital networks.The Company believes that it is positioning itself to achieve its strategic objectives by
devoting substantial effort to developing business plans, enhancing its management team and
board of directors, and designing and developing its business support and operating systems.
On September 1, 2004, the Company announced a plan to significantly enhance its broadband
capabilities in its ILEC territory. The initiative involves an estimated $9.0 million
capital investment that, upon completion, is expected to allow the Company to offer
broadband service speeds of up to 10 megabits per second throughout much of its ILEC
territory, a significant improvement over current DSL and cable modem speeds. The Company
introduced higher-speed broadband services in selected areas of its network in 2004, with
the initiative planned for completion in late 2005.The Company also continues to focus on maximizing the ILEC business in its current markets
by cross-selling bundled products and packages and growing its customer base through its
CLEC, Greenfield, Internet and data services, and wireless businesses. The Company will also
consider strategic acquisitions and investments as opportunities arise.For the three months ended March 31, 2005, net income for the Company was $3.0 million
compared to $4.2 million for the three months ended March 31, 2004. Diluted earnings per
share were $0.16 and $0.22 for the three months ended March 31, 2005 and 2004, respectively.Industry and Operating TrendsThe telecommunications industry is highly competitive and characterized by increasing price
competition, technological development and regulatory uncertainty. Industry participants
are faced with the challenge of adapting their organizations, services, processes and
systems to this environment.The Companys ILEC is facing more competitive pressure than any other time in its history.
Wireless providers and CLECs have targeted the Companys customers and will continue to
promote low cost, flexible communications alternatives. Cable telephony and Voice over
Internet Protocol (VoIP) services will likely become more significant threats to the
Companys voice business in the coming years. Service providers utilizing these
technologies are capable of delivering a competitive voice service to the Companys ILEC
customers. These service providers are not subject to certain regulatory constraints that
have shaped the Companys business model and that will become more significant impediments
to its ability to successfully compete in the coming years.The ILEC must provide basic telephone service as well as most tariffed services to all
customers in its regulated service area, regardless of the cost to provide those services.
Although the Company does benefit from certain universal service fund (USF) payments
intended to offset certain costs to provide service, such reimbursements are increasingly at
risk and being reduced while the service obligations remain unchanged.VoIP and cable telephony are becoming more available to customers and could result in lower
revenues throughout the Companys businesses. Time Warner currently offers cable television
and high-speed Internet service in much of the Companys service territory and cable
telephony service in many of the 14




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##### 



Companys Greenfield and CLEC areas. Time Warner is expected to offer cable telephony in
the ILEC service area in 2005. Cable telephony in the ILEC service area could result in a
loss of access lines, a reduction in ILEC revenue including long distance and access revenue
and a reduction in Internet revenue. In addition, wireless substitution is also a trend that
is impacting the ILEC business as well as the Companys long distance revenue. Some
customers are choosing to substitute their landline service with wireless service. The
Company believes this has contributed to the access line decrease in the ILEC over the past
several years.Access line losses over the past several years have been impacted by the adoption of DSL and
high-speed Internet services by customers that had traditionally subscribed to dial-up
Internet service. As customers switch to DSL or high-speed Internet service, they no longer
need a second landline for use with their dial-up Internet service. If such landline is
replaced with a Company DSL line, then the Company can offset, at least partially, the lost
landline revenue through its DSL service to the customer.In the Companys Wireless business, increasing competition, market saturation and an
uncertain economy have caused and will likely continue to cause the wireless industrys
subscriber growth rate to moderate in comparison to historical growth rates. While the
wireless telecommunications industry does continue to grow, a high degree of competition
exists among carriers. This competition will continue to put pressure upon pricing and
margins as carriers compete for potential customers. Future carrier revenue growth is highly
dependent upon the number of net customer additions a carrier can achieve and the average
revenue per user derived from its customers.Regulatory requirements have grown in certain areas of the Companys business and have added
complexity and expense to its business model. The Companys telecommunications services are
regulated by the Federal Communications Commission (FCC) at the federal level, and the
North Carolina Utilities Commission (NCUC) at the state level. The FCC has the task of
evaluating USF to ensure that its funding is adequate and disbursements are proper. The
Companys ILEC currently receives interstate common line support from the USF. The FCC, and
possibly Congress, are expected to devote resources to the consideration of USF reform
during 2005.The FCC is also considering the appropriate regulatory treatment of VoIP services. Although
several state commissions have attempted to assert jurisdiction over VoIP services, federal
courts in New York and Minnesota have rejected those efforts as preempted by federal law.
On November 12, 2004, the FCC ruled that Internet-based service provided by Vonage Holdings
Corporation (Vonage) should be subject to federal rather than state jurisdiction. Several
state commissions have appealed the FCCs Vonage decision.On February 12, 2004, the FCC announced a rulemaking to examine whether certain regulatory
requirements, such as 911 services, universal service, disability access and access charges,
should be applicable to VoIP services. On March 10, 2004, the FCC released a notice of
proposed rulemaking seeking comment on the appropriate regulatory treatment of IP-enabled
communications services. To date, the FCC has not imposed on VoIP providers these
requirements, which are applicable to other providers.Certain service providers have sought to avoid payment of access charges to ILECs and CLECs
through the use of VoIP technology. At least three companies, AT&T Corp. (AT&T),
Pulver.com, and Level 3 Communications, Inc. (Level 3), filed petitions with the FCC
seeking a ruling allowing them to avoid payment of access charges for VoIP traffic. On
February 12, 2004, the FCC, in ruling on Pulver.coms petition, held that strictly
computer-to-computer VoIP service that does not utilize the public switched telephone
network is not a regulated telecommunications service. On April 21, 2004, the FCC denied a
waiver petition filed by AT&T requesting that its IP telephony service be exempt from access
charges. The FCC ruled that AT&Ts IP telephony service, which converted voice calls to IP
format for some portion of the routing over the public switched telephone network prior to
converting the calls back to their original format, is a regulated telecommunications
service subject to interstate access charges. Level 3 withdrew their petition requesting
the FCC to forbear from imposing interstate or intrastate access charges on Internet-based
calls that originate or terminate on the public switched telephone network.The Companys ILEC, CLEC and Greenfield businesses receive intercarrier compensation for
the use of their facilities for origination and termination of interexchange and local calls
from other 15




---



##### 



telecommunications providers, including long distance companies, wireless carriers, and
other local exchange carriers, through access and reciprocal compensation charges
established in accordance with state and federal laws. The FCC has had an open docket on
intercarrier compensation since 2001. On February 10, 2005, the FCC announced adoption of a
Further Notice of Proposed Rule Making for Intercarrier Compensation Reform and subsequently
issued a press release. The text of the FCCs notice was released on March 3, 2005.Since September 1997, the ILECs rates for local exchange services have been established
under a price regulation plan approved by the NCUC. Under the price regulation plan, the
Companys charges are no longer subject to rate-base, rate-of-return regulation. Instead,
rates for most of the Companys local exchange services may be adjusted by the Company,
provided that such rate adjustments would not result in projected revenue changes that would
exceed changes in inflation reduced by a 2% assumed productivity offset. The price
regulation plan also allows flexibility for adjustments based on certain external events
outside of the Companys control, such as jurisdictional cost shifts or legislative
mandates. In previous years, the Company has rebalanced certain rates under the price
regulation plan. The price rebalancing arrangement allows the Company to continue adjusting
revenues to keep them in line with related costs. The primary result has been an increase
in the monthly basic service charges paid by residential customers, a decrease in access
charges paid by interexchange carriers and a decrease in rates paid by end users for an
expanded local calling scope. In December 2004, the Company filed a petition with the NCUC
in which it requested, among other things, deregulation of certain competitive services,
additional pricing flexibility for regulated services, elimination of the productivity
offset and an initial, limited increase in local calling rates in exchange for providing the
customers with a larger local calling scope. The Company expects that the NCUC will
conduct hearings on the Companys request during 2005.The Companys CLEC relies in part on unbundled network elements obtained from the applicable
incumbent local exchange carrier. The FCC has recently relieved some of the unbundling
obligations on incumbent local exchange carriers that required those carriers to make some
of such elements available at cost-based rates. The FCCs order will result in increases in
the cost of some of the unbundled network elements currently leased by the Company from
incumbent local exchange carriers, including high capacity transport elements and unbundled
network element platform (UNE-P). The Company has identified, and is continuing to
evaluate, opportunities to use alternative transport elements to minimize cost increases
relating to the Companys use of high capacity transport elements. The Company also
currently has approximately 4,000 UNE-P lines, and has executed, or is in the process of
negotiating, commercial agreements with the incumbent local exchange carriers from which the
Company historically leased UNE-P that will continue to permit the Company to maintain and
lease additional UNE-P lines at higher rates. In addition, we continue to pursue
opportunities to expand our network facilities to bring currently leased elements on to the
Companys network in order to lower expenses and improve service levels. The Company is
also targeting new CLEC customers that can be served primarily through the use of the
Companys own network or co-located facilities.The Company has licenses and other rights (including lease agreements) to certain wireless
spectrum, including Broadband Radio Service (BRS) and Educational Broadband Service
(EBS). In April 2003, the FCC initiated a proposed rulemaking to comprehensively examine
its rules regarding BRS and EBS spectrum. On July 29, 2004, the FCC issued a Report and
Order and Further Notice of Proposed Rulemaking, setting forth new rules for BRS and EBS. In
its order, the FCC created a new plan for this band, eliminating the use of interleaved
channels by BRS and EBS licenses and creating distinct band segments for high power
operations and low power operations. The FCCs order also implemented geographic area
licensing for all licenses in the band and adopted a three-year transitional mechanism for
licensees to move to new spectrum assignments. The FCCs transition mechanism contemplates
that a proponent licensee (presumably a commercial operator) will initiate a transition for
an entire Major Economic Area (MEA), and will bear the costs of the transition for EBS
licensees in such MEA. Such a transition in the MEA that includes the Companys license
territory would require coordination by the proponent with numerous licensees, and
significant cost support for the many EBS licensees that operate in the area.If a MEA is not transitioned within the three-year period, then the affected channels will
be re-licensed through an auction procedure. After the three-year deadline (plus an
additional 18 month grace period for 16




---



##### 



incumbents), existing licensees could lose their authorizations if a transition has not
taken place. Therefore, if the Companys licenses are not transitioned, those rights could
be forfeited. What consideration, if any, the Company would receive in such circumstances
has not been determined by the FCC. The FCC has proposed additional rules for, and solicited
comments on, the structure of the auction for unlicensed spectrum (including any bidding
credits or other consideration to be provided to incumbent licensees) and other matters
relating to the spectrum.The impact of the order on the Companys spectrum assets, and the Companys actions in
response to that Order, will be significantly impacted by the compensation allotted by the
FCC for untransitioned licenses, the actions and positions of the numerous other licensees
in the Companys MEA and the projected cost to the Company of undertaking the transition as
a proponent or as a tag along with another proponent if one arises. These factors cannot be
established at this time.The Company currently is not utilizing the licenses commercially due primarily to certain
technological constraints. The Company continues to believe these spectrum assets are
capable of delivering high-speed wireless broadband solutions for wholesale or retail
customers. As of March 31, 2005, the Company has a cost basis of approximately $15.4
million in EBS and BRS spectrum recorded as part of other intangibles on the Condensed
Consolidated Balance Sheets. The Company tested its intangibles for impairment as of
December 31, 2004, and considered the FCCs Order and other regulatory and business
developments and trends when assessing the value of its intangible assets.Results of OperationsThe Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory environment,
services offered and/or customers served. The identified reportable segments are: ILEC,
CLEC, Greenfield, Wireless, IDS and Palmetto. All other businesses that do not meet
reporting guidelines and thresholds are reported under Other Business Units. Summarized
results of operations for Palmetto are included in Note 9 of the Condensed Consolidated
Financial Statements.The following discussion reviews the results of the Companys consolidated operations and
specific results within each reportable segment.Consolidated Operating Results(in thousands, except lines and subscribers) Three Months Ended March 31,2005
    
    
    2004Total operating revenue
    
    $
    41,397
    
    
    $
    40,564Total operating expense
    
    
    36,297
    
    
    
    33,633Operating income
    
    $
    5,100
    
    
    $
    6,931Depreciation
    
    $
    7,866
    
    
    $
    7,425Capital expenditures
    
    
    7,758
    
    
    
    3,913Total assets
    
    
    319,606
    
    
    
    321,396Wired access lines
    
    
    158,133
    
    
    
    156,410Wireless subscribers
    
    
    44,091
    
    
    
    39,250
  Operating revenue increased $0.8 million or 2.1% for the three months ended March 31, 2005
compared to the three months ended March 31, 2004. The increase is attributable to a $1.4
million increase in wireless revenue driven by a 12.3% increase in customers, a $0.3 million
increase in Greenfield and a $0.1 million increase in CLEC, offset by a $1.0 million
decrease in ILEC revenue. The decrease in ILEC revenue is primarily due to lower access and
interconnection revenue, lower line related revenue and lower long
distance revenue. The ILEC continued to experience a reduction in access lines as total
ILEC access lines decreased 2.2% at March 31, 2005 compared to March 31, 2004. 17




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##### 



The Company has diversified operating revenue significantly over the past several years
through the growth in its non-ILEC businesses. For the three months ended March 31, 2005,
ILEC revenue represented 54.8% of total revenue in 2005 compared to 58.4% in 2004, while
Wireless revenue represented 20.5% of total revenue in 2005 compared to 17.6% in 2004, the
combined CLEC and Greenfield businesses have grown to 17.9% of total revenue in 2005 up from
17.2% in 2004 and Internet revenue represented 6.8% in 2005 and 2004.For the three months ended March 31, 2005, operating expense increased $2.7 million or 7.9%
compared to the three months ended March 31, 2004. The increase in operating expense was
driven primarily by higher professional fees associated with the Companys 2004 year-end
audit and Sarbanes-Oxley 404 compliance and higher expenses related to customer growth in
the Wireless business unit.Operating margin decreased to 12.3% for the three months ended March 31, 2005 from 17.1% for
the three months ended March 31, 2004. This decrease in operating margin is primarily due
to higher expenses which more than offset the 2.1% increase in operating revenue.ILEC(in thousands, except lines) Three Months Ended March 31,2005
    
    
    2004Total operating revenue
    
    $
    22,679
    
    
    $
    23,699Total operating expense
    
    
    17,261
    
    
    
    15,455Operating income
    
    $
    5,418
    
    
    $
    8,244Depreciation
    
    $
    5,109
    
    
    $
    4,714Capital expenditures
    
    
    4,459
    
    
    
    1,988Total assets
    
    
    165,520
    
    
    
    167,557Business access lines
    
    
    28,647
    
    
    
    29,130Residential access lines
    
    
    84,174
    
    
    
    86,191Total access lines
    
    
    112,821
    
    
    
    115,321Long distance lines
    
    
    84,900
    
    
    
    84,811
  Operating revenue for the ILEC decreased $1.0 million or 4.3% for the three months ended
March 31, 2005 compared to the three months ended March 31, 2004. The decrease in revenue
consists of a $0.6 million decrease in access and interconnection revenue, a $0.3 million
decrease in line related revenue and a $0.2 million decrease in long distance revenue. The
decline in access and interconnection revenue was primarily due to the collection of
previously disputed access charges during the first quarter of 2004 which increased revenue
approximately $0.3 million in 2004. Access lines at March 31, 2005 declined 2.2% from March
31, 2004. The decrease in access lines is due in part to increased competition from
wireless and other competitive providers as well as an increase in broadband Internet
adoption by customers that have cancelled second lines previously used for dial-up Internet
service.Operating expense in the ILEC increased $1.8 million or 11.7% for the three months ended
March 31, 2005 compared to the three months ended March 31, 2004. The primary drivers of
this increase were increases in professional fees of approximately $0.5 million, higher
access and interconnection expense of $0.3 million, higher
benefits expense of $0.3 million
and increases in other general and administrative expenses. Also contributing to the
increase in expense was a favorable one-time settlement of disputed access charges that
reduced expense in the first quarter of 2004 by $0.2 million.Operating expense increased at a faster rate than operating revenue resulting in a decline
in operating margin from 34.8% for the three months ended March 31, 2004 to 23.9% for the
three months ended March
31, 2005. The Company will continue to focus on gaining operational efficiencies to offset
lower revenue due to access line losses. 18




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##### 



Capital expenditures for the three months ended March 31, 2005 were 19.7% of ILEC operating
revenue compared to 8.4% of operating revenue for the three months ended March 31, 2004.
The increase in capital expenditures for the three months ended March 31, 2005 primarily
relates to the Companys previously announced plan to significantly enhance its broadband
capabilities in the ILEC territory.For the three months ended March 31, 2005, ILEC access lines subscribing to the Companys
long distance service increased slightly despite a 2.2% access line loss. At March 31,
2005, 75.3% of ILEC access lines subscribed to the Companys long distance service, up from
73.5% at March 31, 2004. Despite the increase in ILEC customers subscribing to the
Companys long distance service, long distance revenue has declined. Long distance minutes
of use increased significantly in the three months ended March 31, 2005 compared to the
three months ended March 31, 2004. The Company has promoted service plans that include
expanded calling areas, as well as unlimited long distance plans. These programs, while
competitive in the marketplace, have forced long distance rates per minute down and as a
result, long distance revenue has declined despite an increase in minutes-of-use; this trend
is expected to continue.Certain ILEC interstate network access revenue is based on tariffed access charge rates
filed with the FCC. A portion of this revenue may be subject to potential over-earnings
claims if ILEC interstate rates result in earnings over the FCCs prescribed rate of return.
The Company maintains that, aside from any other defense it may have to a refund clain,
such claims should be rejected if such revenues were earned through the application of rates
that are deemed lawful because they were in accordance with FCC-approved tariffs. The
Company maintains a reserve related to over-earnings based on managements estimate of
potential liability for the Company. Management periodically assesses the ILECs potential
liability and makes adjustments as applicable. Changes in managements estimate could
result from changes in projected over-earnings, current and future legislation, regulatory
filings or FCC rulings, as well as any other factors that may impact managements estimate.In October 2004, AT&T submitted a refund request to Concord Telephone for the period January
1, 2002 through June 30, 2002.Concord Telephones tariff for this period was briefly
suspended by the FCC as a result of an AT&T petition, and AT&T contends that the Company
lost the deemed lawful status of the rates under that tariff as a result. Concord Telephone
denied AT&Ts refund request and asserted certain defenses, and, to date, has received no
response from AT&T. The Company does not expect that refund claims for this period will
have a material impact on the Companys financial results.The ILEC derives certain of its interstate network access revenue from USF mechanisms
administered by National Exchange Carrier Association
(NECA), a quasi-governmental non-profit organization formed by the FCC in 1983
for such purpose. NECA administers the funding through revenue pooling arrangements in
which local exchange carriers participate. The Companys ILEC participates in the NECA
Common Line pool and is the recipient of Interstate Common Line Support (ICLS) funds. The
ICLS support mechanism was implemented in July 2002. As of July 2004, long-term support
became part of the ICLS support mechanism.NECAs pooling arrangements are based on nationwide average costs that are applied to
certain projected demand quantities, and therefore revenues are initially recorded based on
estimates. These estimates involve a variety of complex calculations, and the ultimate
amount realized from the pools may differ from the Companys estimates. Management
periodically reviews these estimates and makes adjustments as applicable.In North Carolina, legislation was enacted in 2003 that deregulated intraLATA long distance
service, interLATA long distance service and long distance operator services and provided
other regulatory flexibility. This legislation has provided the ILEC greater flexibility in
offering service bundles and promotions. On January 2, 2004, the NCUC released an order
that detailed its findings regarding the legislation and adopting implementation
requirements. The legislation and subsequent order have allowed the Company greater
flexibility in providing long distance services. 19




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##### 



CLEC(in thousands, except lines) Three Months Ended March 31,2005
    
    
    2004Total operating revenue
    
    $
    5,135
    
    
    $
    5,038Total operating expense
    
    
    5,251
    
    
    
    5,024Operating income (loss)
    
    $
    (116
    )
    
    $
    14Depreciation
    
    $
    629
    
    
    $
    635Capital expenditures
    
    
    223
    
    
    
    211Total assets
    
    
    14,018
    
    
    
    16,407Access lines
    
    
    31,861
    
    
    
    30,415Long distance lines
    
    
    24,443
    
    
    
    21,692
  In the second quarter of 2004, the Company changed its methodology for counting CLEC long
distance lines. The new methodology is more consistent with that used to count CLEC access
lines. The number of lines presented for March 31, 2004 has been revised to reflect this
change in methodology.CLEC operating revenue was $5.1 million for the three months ended March 31, 2005,
representing a $0.1 million or 1.9% increase over the three months ended March 31, 2004.
The $0.1 million increase consists primarily of a $0.1 million increase in recurring line
revenue. The increase in recurring line revenue is primarily attributable to a 4.8%
increase in access lines for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004. In addition, during the three months ended March 31, 2005, the
Company recovered approximately $0.5 million in access revenue claims, which offset the
effects of a decline in interstate access rates. As a result, access and interconnection
revenue was flat compared to the three months ended March 31, 2004.The FCC previously ordered the gradual reduction in switched access rates charged by
competitive local exchange carriers. Effective June 20, 2003, the FCC directed that
switched access rates charged by CLECs to long distance companies for interstate traffic be
reduced from $0.018 per minute to $0.012 per minute. Effective June 22, 2004, the final
phase of the rate reductions was implemented, which reduced the CLEC switched access rate to
that charged by incumbent local exchange carriers. The change resulted in a significant
reduction in the Companys CLEC interstate access rate, which reduced the CLECs revenue
during the first quarter of 2005 relative to the same period in 2004.CLEC operating expense increased $0.2 million or 4.5% for the three months ended March 31,
2005 compared to the three months ended March 31, 2004, respectively. The increase in
expense is primarily due to an increase in general and administrative expenses offset by a
decrease in access and interconnection expense. Operating margin decreased to (2.3)% for
the three months ended March 31, 2005 compared to 0.3% for the three months ended March 31,
2004. The decrease in operating margin was due primarily to the increase in general and
administrative expenses.The CLEC and Greenfield businesses currently use certain unbundled network elements (UNEs)
leased from the applicable incumbent local exchange carrier, such as Unbundled Network
Element Platform (UNE-P), dedicated transport and enhanced extended links (EELs), and
high capacity combinations of loops and dedicated transport. As of March 31, 2005,
approximately 25% of the Companys current CLEC access lines are EELs, and the Company
currently has approximately 4,000 UNE-P lines, which is an element that bundles UNE
switching with other UNEs such as UNE loop, so that the competitive local exchange carrier
can provide an entire local service platform. On December 15, 2004, the FCC adopted final
rules with regard to the treatment of such elements. The order is effective March 11, 2005,
and does not require incumbent local carriers to provide access after such date to entrance
facilities, UNE-P, and certain high capacity (DS1 and higher) loop and transport UNEs. The
FCC found that access to high capacity transport DS1 UNEs was still available, except
between Tier 1 wire centers, for up to 10 circuits per route. With respect to high capacity
transport DS3 UNEs, the FCC found that UNE access was still available between Tier 3 wire
centers only, for up to no more than 12 circuits per route. Dark fiber transport remains an
UNE only between Tier 3 wire centers, and dark fiber loop UNEs were eliminated. 20




---



##### 



For high capacity DS1 loops, the FCC retained UNE status for wire centers serving less than
60,000 business lines or less than four fiber-based collocators, for up to 10 loops per
building. For high capacity DS3 loops, the FCC retained UNE status for wire centers serving
less than 38,000 business lines or less than four fiber-based collocators, for no more than
one loop per building. For all UNEs eliminated by the FCCs order, the FCC provided for a
transition period of 12 months (18 months for dark fiber) during which those UNEs would
remain available at moderately increased rates.As a result of the FCCs order, the Company will experience cost increases in high capacity
transport elements and UNE-P lines currently leased by the Company from incumbent local
exchange carriers. The Company does not expect these increases will be material in 2005.
The Company has identified, and is continuing to evaluate, opportunities to use alternative
transport elements to minimize current and future cost increases relating to the Companys
use of high capacity transport elements. The Company also has executed, or is in the
process of negotiating, commercial agreements with the incumbent local exchange carriers
from which the Company historically leased UNE-P that will continue to permit the Company to
maintain and lease additional UNE-P lines at higher rates. In addition, we continue to
pursue opportunities to expand our network facilities to bring currently leased elements on
to the Companys network in order to lower expenses and improve service levels. The Company
is also targeting new CLEC customers that can be served primarily through the use of the
Companys own network or co-located facilities.Greenfield(in thousands, except lines and signed agreements) Three Months Ended March 31,2005
    
    
    2004Total operating revenue
    
    $
    2,291
    
    
    $
    1,945Total operating expense
    
    
    2,963
    
    
    
    2,939Operating income (loss)
    
    $
    (672
    )
    
    $
    (994
    )Depreciation
    
    $
    810
    
    
    $
    720Capital expenditures
    
    
    1,348
    
    
    
    742Total assets
    
    
    27,300
    
    
    
    24,739Access lines
    
    
    13,451
    
    
    
    10,674Long distance lines
    
    
    7,326
    
    
    
    5,130Signed provider agreements
    
    
    110
    
    
    
    97
  Greenfield revenue increased $0.3 million for the three months ended March 31, 2005 to $2.3
million compared to $1.9 million for the three months ended March 31, 2004. This revenue
increase is primarily attributable to a 26.0% increase in access lines related to the build
out of 110 developments covered by signed telecommunications provider agreements. Line
related revenue increased $0.3 million as a result of the increase in lines. In addition,
long distance revenue increased approximately $0.1 million primarily due to a 42.8% increase
in long distance lines. The Greenfield business added five provider agreements in the first
quarter of 2005, bringing the total number of signed agreements to 110. These agreements
currently represent a potential 49,000 access lines once these developments have been
completely built out. The expected residential/business line mix of these 110 projects is
expected to be approximately 90% residential and 10% business.Operating expense increased 0.8% for the three months ended March 31, 2005 to $3.0 million
related primarily to the 26.0% increase in access lines and a $0.1 million increase in
depreciation expense. Capital expenditures for the three months ended March 31, 2005
increased $0.6 million compared to the three months ended March 31, 2004.At March 31, 2005, 54.5% of Greenfield access lines also subscribed to the Companys long
distance service, up from 48.1% at March 31, 2004. This increase is mainly due to the fact
that many of the early Greenfield access lines were business lines located in mall projects.
Business customers historically do not elect the Companys long distance service as
frequently as residential customers since many retail businesses have national long distance
contracts. As the residential percentage of Greenfield access lines increases the Company
has seen its long distance penetration rates increase. 21




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##### 



In June 2003, the NCUC initiated a general inquiry involving all certificated
telecommunications providers regarding preferred provider contracts. The Company has
preferred provider telecommunications contracts with developers through its Greenfield
operations. In its inquiry, the NCUC examined all telecommunications preferred provider
contracts filed by CLECs and ILECs with the NCUC and held hearings on the legality of such
arrangements in late January 2004. On October 29, 2004, the NCUC issued an order ruling on
a variety of different matters with respect to such contracts. The ruling confirmed the
invalidity of exclusive access provisions, which the Company does not impose in its
contracts, but upheld exclusive marketing arrangements. The NCUC initially required
providers in preferred provider relationships to provide unbundled subloops to competitors
seeking access to customers, and to offer its services on a resale basis to such
competitors. However, the NCUC issued an Order on Reconsideration on April 14, 2005 that
rescinded the obligation to provide unbundled subloops in all cases, and limited such
obligations to situations where the entity with the preferred provider contract utilized
weighted commission structures in the preferred provider contract. The NCUC provided three
months for companies to amend preferred provider contracts in which the weighted commissions
were offered to provide for subloops to competitors. The NCUC has not yet issued final
rules implementing its order, and numerous parties, including the Company, have filed
motions for reconsideration. Accordingly, the Company has not fully determined the impact of
this order on its Greenfield business, but does not anticipate a material impact at this
time.The Greenfield segment is also subject to the switched access rate reductions affecting the
Companys CLEC. The impact on Greenfield is expected to be minimal and should be partially
offset by increased levels of traffic as the Company continues to build out its projects.Wireless(in thousands, except subscribers) Three Months Ended March 31,2005
    
    
    2004Total operating revenue
    
    $
    8,492
    
    
    $
    7,122Total operating expense
    
    
    7,687
    
    
    
    6,775Operating income
    
    $
    805
    
    
    $
    347Depreciation
    
    $
    504
    
    
    $
    469Capital expenditures
    
    
    1,093
    
    
    
    382Total assets
    
    
    33,821
    
    
    
    30,788Wireless subscribers
    
    
    44,091
    
    
    
    39,250
  Wireless revenue grew $1.4 million or 19.2% for the three months ended March 31, 2005
compared to the three months ended March 31, 2004. Wireless subscribers increased 12.3%
compared to the three months ended March 31, 2004. As a result of this customer growth,
recurring customer revenue increased $0.8 million for the three months ended March 31, 2005
compared to the three months ended March 31, 2004. Also contributing to the increase in
revenue was increased settlement revenue of $0.5 million related to a 24.0% increase in the
minutes of use on the Companys wireless network during the three months ended March 31,
2005 compared to the three months ended March 31, 2004.Operating expense increased 13.5% for the three months ended March 31, 2005 to $7.7 million
compared to $6.8 million for the three months ended March 31, 2004. The primary drivers of
the increase in operating expense were increases in switching and settlement expenses of
$0.3 million, compensation expense of $0.1 million and handset and accessory costs of $0.1
million. Settlement expenses increased primarily due to the increase in wireless customers
and the related increase in minutes-of-use on the Companys network.Operating margins increased to 9.5% for the three months ended March 31, 2005 compared to
4.9% for the three months ended March 31, 2004. This increase is primarily due to an
increase in settlement revenue and an increase in wireless subscribers and related revenue
partially offset by higher expenses. 22




---



##### 



Capital expenditures were $1.1 million for the three months ended March 31, 2005 primarily
related to the addition of one new cell site in the Companys territory and the addition of
capacity on selected other cell sites.Internet and Data Services (IDS)(in thousands, except lines and accounts) Three Months Ended March 31,2005
    
    
    2004Total operating revenue
    
    $
    2,800
    
    
    $
    2,760Total operating expense
    
    
    2,603
    
    
    
    2,852Operating income (loss)
    
    $
    197
    
    
    $
    (92
    )Depreciation
    
    $
    479
    
    
    $
    516Capital expenditures
    
    
    428
    
    
    
    297Total assets
    
    
    13,725
    
    
    
    15,103DSL lines
    
    
    15,523
    
    
    
    10,987Dial-up accounts
    
    
    8,494
    
    
    
    10,484High-speed accounts
    
    
    617
    
    
    
    565
  IDS operating revenue grew 1.4% for the three months ended March 31, 2005 to $2.8 million
compared to the three months ended March 31, 2004. During the three months ended March 31,
2005, the total number of DSL lines increased 41.3%, which resulted in revenue from DSL
service increasing $0.4 million. This increase is partially offset by a decrease in dial-up
and high-speed revenue of $0.2 million and a $0.2 million decrease in other revenue.IDS operating expense was $2.6 million for the three months ended March 31, 2005 as compared
to $2.9 million for the three months ended March 31, 2004. The decrease in expense is
primarily related to lower network expenses. As a result of lower operating expenses and
increased operating revenue, operating margins improved to 7.0% for the three months ended
March 31, 2005 compared to (3.3%) for the three months ended March 31, 2004. This
improvement is primarily due to the growth in DSL accounts and lower network expenses.DSL customers increased 41.3% for the three months ended March 31, 2005 to a total of
15,523. This represents a penetration rate of 12.3% of combined Greenfield and ILEC access
lines.Other(in thousands) Three Months Ended March 31,2005
    
    
    2004Total operating expense
    
    $
    532
    
    
    $
    588Operating income (loss)
    
    $
    (532
    )
    
    $
    (588
    )Depreciation
    
    $
    335
    
    
    $
    371Capital expenditures
    
    
    207
    
    
    
    293Total assets
    
    
    65,222
    
    
    
    66,802
  Operating expense for the Companys other business units decreased $0.1 million for the
three months ended March 31, 2005 to $0.5 million. This decrease was related primarily to a
decrease in depreciation expense. 23




---



##### 



Other Income  Other income (expense) for the three months ended March 31, 2005 decreased $0.4 million
compared to the three months ended March 31, 2004. This decrease relates to a $0.1 million
decrease in equity in income of unconsolidated companies and an increase of $0.4 million
for impairment of investments. The increases were partially offset by a decrease in interest
expense of $0.2 million due to the Companys lower debt level in 2005.Liquidity and Capital ResourcesCash provided by operating activities decreased $6.7 million to $2.7 million for the three
months ended March 31, 2005. The decrease primarily related to decreases in accrued
liabilities and other operating assets and liabilities.Cash used in investing activities increased to $7.6 million during the three months ended
March 31, 2005 compared with $3.9 million for the three months ended March 31, 2004.
Capital expenditures increased $3.8 million during the three months ended March 31, 2005
compared with the three months ended March 31, 2004.Net cash used in financing activities was $7.5 million during the three months ended March
31, 2005 compared with $3.7 million during the three months ended March 31, 2004. During
the three months ended March 31, 2005, the Company repaid $6.3 million in debt.At March 31, 2005, the fair market value of the Companys marketable investment securities
was $4.6 million, all of which could be pledged to secure additional borrowing, or sold, if
needed for liquidity purposes. The Company has a $70.0 million revolving five year line of
credit with interest at three month LIBOR plus a spread based on various financial ratios,
that is currently 1.25%. The interest rate on March 31, 2005 was 4.06%. The credit
facility provides for quarterly payments of interest until maturity on March 31, 2006. As
of March 31, 2005, $15.0 million was outstanding under the revolving credit facility. The
Company has classified the $15.0 million outstanding as current due to its maturity on March
31, 2006; however, the Company intends to re-finance its revolving line of credit prior to
the maturity of the current facility.The Company also has a 7.32% fixed rate $50.0 million term loan that matures on December 31,
2014. At March 31, 2005, $48.8 million was outstanding on the term loan. The term loan
requires quarterly payments of interest until maturity on December 31, 2014. Payments of
principal were due beginning on March 31, 2005 and quarterly thereafter through December 31,
2014 in equal amounts of $1.25 million. 24




---



##### 



The following table discloses aggregate information about the Companys contractual
obligations and the periods in which payments are due (in thousands): Payments Due by Year (in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    After 5Total
    
    
    one Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsContractual obligations:Revolving credit facility
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Term loan
    
    
    48,750
    
    
    
    5,000
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    18,750Variable interest payments
    
    
    609
    
    
    
    609
    
    
    
    
    
    
    
    
    
    
    
    Fixed interest payments
    
    
    17,863
    
    
    
    3,451
    
    
    
    8,098
    
    
    
    3,569
    
    
    
    2,745Operating leases
    
    
    11,718
    
    
    
    2,859
    
    
    
    5,219
    
    
    
    2,075
    
    
    
    1,565Capital leases
    
    
    908
    
    
    
    449
    
    
    
    459
    
    
    
    
    
    
    
    $
    94,848
    
    
    $
    27,368
    
    
    $
    28,776
    
    
    $
    15,644
    
    
    $
    23,060
 The Company anticipates that it has access to adequate resources to meet its currently
foreseeable obligations and capital requirements associated with continued growth in the
CLEC, Greenfield, Wireless and IDS units, as well as its operations, payments associated
with long-term debt and investments as summarized above. Cautionary Note Regarding Forward-Looking Statements This report, including the foregoing discussion, contains forward-looking statements, as
defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that are based on the beliefs of management, as well as assumptions
made by, and information currently available to, management. Management has based these
forward-looking statements on its current expectations and projections about future events
and trends affecting the financial condition and operations of the Companys business. These
forward-looking statements are subject to certain risks, uncertainties and assumptions about
us that could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that may cause actual results to differ materially from these forward-looking
statements include:  the Companys ability to respond effectively to the issues surrounding the
telecommunications industry caused by state and federal legislation and regulations,  the impact of economic conditions related to the financial performance of
customers, business partners, competitors and peers within the telecommunications industry,  the Companys ability to recover the substantial costs incurred over the
past few years in connection with the expansion into new businesses,  the Companys ability to attract and retain key personnel,  the Companys ability to retain its existing customer base against wireless
competition and cable telephony in all areas of the business including local and long
distance and Internet and data services,  the Companys ability to maintain its margins in a highly competitive industry,  the performance of the Companys investments,  the Companys ability to effectively manage rapid changes in technology and
control capital expenditures related to those technologies, and  the impact of economic and political events on the Companys business,
operating regions and customers, including terrorist attacks. 25




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##### 



In some cases, these forward-looking statements can be identified by the use of words such
as may, will, should, expect, intend, plan, anticipate, believe, estimate,
predict, project or potential or the negative of these words or other comparable
words.In making forward-looking statements, the Company claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995. The Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors discussed in documents
filed by us with the Securities and Exchange Commission, including those matters summarized
under the caption Risk Factors in the Companys Annual Report onForm 10-K/Afor the year
ended December 31, 2004. All forward-looking statements should be viewed with caution. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.  The Company has a $70.0 million revolving five year line of credit with interest at three
month LIBOR plus a spread based on various financial ratios, that is currently 1.25%. The
interest rate on March 31, 2005 was 4.06%. The credit facility provides for quarterly
payments of interest until maturity on March 31, 2006. As of March 31, 2005, $15.0 million
was outstanding under the revolving credit facility. The Company also has a 7.32% fixed
rate $50.0 million term loan that matures on December 31, 2014. At March 31, 2005, $48.8
million was outstanding.The Company has one interest rate swap agreement to fix $5.0 million of the amount
outstanding under the $70.0 million revolving line of credit at a rate of 4.53%. The fair
value of the swap as of March 31, 2005 was $(0.1) million. The interest rate swap is
intended to protect the Company against an upward movement in interest rates, but subjects
the Company to above market interest costs if interest rates decline. The swap matures on
November 3, 2006.Management believes that reasonably foreseeable movements in interest rates will not have a
material adverse effect on the Companys financial condition or operations. 
 Item 4. Controls and Procedures.  (a)
    Disclosure Controls and ProceduresThe Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed by the Company in the reports it files under the
Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC. These
disclosure controls and procedures are designed to ensure that appropriate information is
accumulated and communicated to the Companys management, including its chief executive
officer and chief financial officer, as appropriate to allow for timely decisions regarding
disclosure.As required by the SEC rules, the Companys management, under the supervision and with the
participation of the Companys chief executive officer and chief financial officer, has
evaluated the effectiveness of the Companys disclosure controls and procedures as of March
31, 2005. This evaluation included consideration of the facts and circumstances, and
subsequent remediation efforts, relating to the material weaknesses identified in the
Companys 2004 Annual Report on Form 10-K/A. The Companys management previously concluded
in such Annual Report on Form 10-K/A that as of December 31, 2004, its disclosure controls
and procedures were not effective as a result of material weaknesses in internal control
over financial reporting, further described below, that resulted in errors in accounting
that required restating the Companys consolidated financial statements for the years ended
December 31, 2003 and the quarterly periods ended March 31, June 30 and September 30, 2004.During the first quarter of 2005, the Company remediated the material weaknesses in its
internal control over financial reporting and its disclosure controls and procedures. The
Companys remediation efforts with respect to these matters are described below. 26




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In designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management necessarily
was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Also, the Company has investments in certain unconsolidated
entities, including Palmetto MobileNet, L.P. As the Company neither controls nor manages
these entities, its disclosure controls and procedures with respect to these entities are
necessarily substantially more limited than those it maintains with respect to its
consolidated subsidiaries.Based upon the foregoing evaluation, the Companys chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures were
effective at a reasonable assurance level as of March 31, 2005.(b)
    Changes in Internal Control Over Financial ReportingThe Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f)
and 15d-15(f). The Companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.In the Companys 2004 Annual Report on Form 10-K/A, the Company identified material
weaknesses (as defined by the Public Company Accounting Oversight Boards Auditing Standard
No. 2) in its internal control over financial reporting relating to its accounting for phone
system sales, calculating depreciation expense and accounting for derivative instruments
under Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. In the first quarter of 2005, the Company remediated
the material weaknesses in internal control over financial reporting by taking the following
actions:  
    The Company implemented additional procedures associated with the
Companys accounting for phone system sales, including the utilization of a subledger
that provides details of accounts receivable associated with such arrangements. The
Company believes that these changes provided and will continue to provide adequate
controls over the reporting of accounts receivable for phone system sales in the first
quarter of 2005 and future periods.
    The Company completed the installation of a new fixed asset reporting
system in the fourth quarter of 2004 and, as of January 1, 2005, implemented this new
system to track and report fixed assets and accumulated depreciation, and to calculate
depreciation expense. The Company believes these new procedures relating to fixed
assets have provided and will continue to provide adequate controls over the reporting
of fixed assets, accumulated depreciation and depreciation expense in the first quarter
of 2005 and future periods.
    The Company implemented additional procedures to ensure proper accounting for its
derivative financial instruments under SFAS No. 133, including controls over the
maintenance of documentation required at each reporting period. The Company believes
that these additional procedures provided and will continue to provide adequate
controls over the accounting for derivative instruments in the first quarter of 2005
and future periods.  Other than as described above, during the fiscal quarter ended March 31, 2005, there have
been no changes in the Companys internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, the Companys
internal control over financial reporting. 27




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings. None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission of Matters to a Vote of Security Holders. None 
 Item 5. Other Information. None 
 Item 6. Exhibits. (a) Exhibits Exhibit No.
    
    Description of Exhibit10.1
    
    CT Communications, Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Director Deferred Stock Unit Award Agreement.31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. 1350.
 28




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SIGNATURES Pursuant to the requirements 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.(Registrant)/s/ Ronald A. MarinoRonald A. MarinoVice President Finance andChief Accounting OfficerMay 6, 2005Date
 (The above signatory has dual responsibility as a duly authorized officer and chief
accounting officer of the Registrant.) 29




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EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit10.1
    
    CT Communications, Inc.
Amended and Restated 2001 Stock Incentive Plan: Form of
Director Deferred Stock Unit Award Agreement.31.1
    
    Certification of Chief
Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.31.2
    
    Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.32
    
    Certification of Chief
Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(b) under the Securities Exchange Act of 1934
and 18 U.S.C. 1350.
 30