##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q/A
 (Amendment
No. 1)
 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____ to ____ Commission file number 0-19179 CT COMMUNICATIONS, INC.  NORTH CAROLINA
    
    56-1837282(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1000 Progress Place NEP.O. Box 227, Concord, NC
    
    28026-0227(Address of principal executive offices)
    
    (Zip Code)
 (704) 722-2500
(Registrants telephone number, including area code) Not Applicable
(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. 18,879,041 shares of Common Stock outstanding as of October 28, 2004.




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX Page No.Explanatory Note
    
    
    2PART I. Financial InformationItem 1. Financial Statements.Condensed
Consolidated Balance Sheets
September 30, 2004 (Unaudited) (Restated) and December 31, 2003
    
    
    4Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2004 (Restated) and 2003 (Restated)
    
    
    5Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three and Nine Months Ended September 30, 2004 (Restated) and 2003(Restated)
    
    
    6Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2004 (Restated) and 2003 (Restated)
    
    
    7Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    40Item 4. Controls and Procedures.
    
    
    40PART II. Other InformationItem 1. Legal Proceedings.
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    42Item 3. Defaults Upon Senior Securities.
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    42Item 5. Other Information.
    
    
    42Item 6. Exhibits.
    
    
    43Signatures
    
    
    44Exhibit Index
    
    
    45
 1




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EXPLANATORY NOTE The
purpose of this Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of CT
Communications, Inc. (the Company) for the quarter ended September 30, 2004 is to restate our
interim consolidated financial statements for the quarters ended September 30, 2004 and 2003 and
related disclosures as discussed in Note 4 of the Notes to Condensed Consolidated Financial
Statements. The Company has not attempted in this amendment to modify or update other disclosures presented in
the original report on Form 10-Q except as required to reflect the effects of the restatement.
This Form 10-Q/A also does not reflect events occurring after the filing of the Form 10-Q or modify
or update those disclosures, including the exhibits to the Form 10-Q, affected by subsequent
events. Information not affected by the restatement is unchanged and reflects the disclosures made
at the time of the original filing of the Form 10-Q on November 4, 2004. Accordingly, this Form
10-Q/A should be read in conjunction with our filings made with the Securities and Exchange
Commission (SEC) subsequent to the filing of the original Form 10-Q, including any amendments to
those filings. The following items have been amended as a result of the restatement: o Part I  -  Item 1  -  Financial Statements;
o Part I  -  Item 2  -  Managements Discussion and Analysis of Financial Condition and Results of Operations;
o Part I  -  Item 3  -  Quantitative and Qualitative Disclosures About Market Risk;
o Part I  -  Item 4  -  Controls and Procedures; and
o Part II -  Item 6  -  Exhibits and Reports on Form 8 - K(Exhibit 11) In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new
certifications from our Chief Executive Officer and Chief Financial Officer are being filed with
this Form 10-Q/A. The Company identified certain errors related to its accounting for telephone system sales that
occurred in 1999 through the first three quarters of 2004, which resulted in the overstatement of
revenue for the periods 1999 through 2002 and the understatement of revenue for 2003 and the first
three quarters of 2004. The error also resulted in the overstatement of accounts receivable for
the periods 1999 through the first three quarters of 2004. The correction of this error at
September 30, 2004 resulted in a reduction of accounts receivable, income taxes payable and
retained earnings of $1.3 million, $0.4 million and $1.1 million, respectively, and a $0.2 million
increase in customer deposits and advanced billings. The correction of this error for the three
and nine months ended September 30, 2004 resulted in an increase in revenue of $0.2 million and
$0.3 million, respectively, and for the three and nine months ended September 30, 2003 resulted in
a $0.1 million and $37,000 decrease in revenue, respectively. The Company discovered certain errors relating to the Companys reporting of depreciation expense
in 2002, 2003 and the first three quarters of 2004. These depreciation errors were caused by
calculation errors in the Companys fixed asset system. The cumulative effect of these errors
resulted in an increase in property and equipment, net of $2.7 million at September 30, 2004.
These errors resulted in an overstatement (understatement) of depreciation expense of $(0.5)
million and $0.3 million for the three and nine months ended September 30, 2004, respectively, and
an overstatement of depreciation expense of $0.5 million and $1.6 million for the three and nine
months ended September 30, 2003, respectively. The correction of these errors increased
(decreased) net income for the three and nine months ended September 30, 2004 by $(0.3) million and
$0.2 million, respectively, and increased net income $0.3 million and $1.0 million for the three
and nine months ended September 30, 2003, respectively. The Company identified an error in the accounting for a capital lease agreement that also impacted
certain accrual accounts. The Company discovered that it had not properly recorded the asset
associated with a capital lease and that certain accruals were erroneously adjusted in recording
the liability associated with the capital lease. The correction of this error resulted in an
increase in operating expense of $0.1 million for the three months ended September 30, 2004 and a
decrease in operating expense of $0.2 million for the nine months ended September 30, 2004. For
the three and nine months ended September 30, 2003, the correction of this error resulted in a
decrease in operating expense of $0.1 million and $0.2 million, respectively. The after tax impact
of these adjustments resulted in a decrease to net income of $38,000 for the three months ended
September 30, 2004 and an increase to net income of $0.1 million for the nine months ended
September 30, 2004. The after tax impact of these adjustments for the three and nine months ended
September 30, 2003, resulted in a decrease to net income of $38,000 and $0.1 million, respectively. 2




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The Company received a distribution notice in 2004 relating to an equity security held by a member
of the Companys equity portfolio, and recorded the distribution when the notice was received. The
Company subsequently learned that the distribution was actually completed in the fourth quarter of
2003, and has adjusted this investment at December 31, 2003 through a $0.7 million reduction of
investment securities and a $0.4 million reduction in accumulated other comprehensive income, net
of tax effect of $0.3 million. During the course of preparing its year-end financial statements for 2004, an error was identified
in the Companys accounting related to three interest rate swap agreements entered into during 1999
and 2001. The Company was incorrectly applying hedge accounting and was recording the adjustment
to fair value of its interest rate swaps through accumulated other comprehensive income instead of
interest expense. The correction of this error resulted in a decrease in interest expense of
$20,000 and $0.3 million for the three and nine months ended September 30, 2004, respectively, and
a decrease in interest expense of $0.2 million and $0.4 million for the three and nine months ended
September 30, 2003, respectively. The after tax impact of the correction of this error resulted in
an increase to net income of $13,000 and $0.2 million for the three and nine months ended September
30, 2004, respectively, and an increase to net income of $0.1 million and $0.2 million for the
three and nine months ended September 30, 2003, respectively. The Company reviewed its accounting with respect to leasing transactions and has concluded there
was an error in the determination of lease expense for certain leases related primarily to wireless
cell tower sites. The Company had not properly reflected rent escalation provisions contained in
its leases on a straight-line basis as required by SFAS No. 13, Accounting for Leases. To
correct this error, the Company has considered the escalation provisions of the leases and has
considered renewal periods when there is reasonable assurance that one or more of the renewal
options would be exercised. The result of the Companys assessment was to increase the lease term
as defined in SFAS No. 13 for most of its operating leases. The impact of this error for the three
and nine months ended September 30, 2004 was an increase in rent expense (which is included in
operating expense on the Condensed Consolidated Statements of Income) of $22,000 and $66,000,
respectively, and an increase in rent expense for the three and nine months ended September 30,
2003 of $28,000 and $0.1 million, respectively. The Company also restated certain previously recorded, out-of-period items to include them in the
periods in which they actually occurred in order to more accurately present the financial
statements for those prior periods. These adjustments include a decrease in dividend income of
$0.2 million for the nine months ended September 30, 2003 and a decrease in equity in income of
affiliates of $0.2 million for the nine months ended September 30, 2004. In addition, the Company
also reclassified to other assets $1.1 million of certain items previously recorded as accounts
receivable on the consolidated balance sheet at September 30, 2004. The aggregate impact of the correction of all the errors discussed above resulted in an increase
(decrease) in net income of ($0.2) million and $0.6 million for the three and nine months ended
September 30, 2004 and an increase in net income of $0.4 million and $0.9 million for the three and
nine months ended September 30, 2003. The Company has reflected the results of the restatement for the fiscal year ended December 31,
2004 in its Annual Report on Form 10-K for such year, filed with the SEC on March 31, 2005 and has
restated its interim financial statements in this Form 10-Q/A and in amendments to its Quarterly
Reports on Form 10-Q/A for the quarterly periods ended March 31, 2004 and June 30, 2004. See Note 4 of the Notes to Condensed Consolidated Financial Statements for additional information. 3




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Part I. FINANCIAL INFORMATION Item 1. Financial Statements. CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data) (Restated)(Unaudited)September 30,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,742
    
    
    $
    16,957Accounts receivable and unbilled revenue, net
    
    
    17,674
    
    
    
    19,533Other
    
    
    4,636
    
    
    
    5,372Total current assets
    
    
    47,052
    
    
    
    41,862Investment securities
    
    
    6,542
    
    
    
    7,518Other investments
    
    
    1,347
    
    
    
    1,078Investments in unconsolidated companies
    
    
    15,641
    
    
    
    13,034Property and equipment, net
    
    
    205,718
    
    
    
    211,521Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,201
    
    
    
    35,201Other assets
    
    
    2,952
    
    
    
    2,565Total assets
    
    $
    324,359
    
    
    $
    322,685LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    3,750
    
    
    $
    Accounts payable
    
    
    7,146
    
    
    
    6,250Customer deposits and advance billings
    
    
    2,659
    
    
    
    2,840Other accrued liabilities
    
    
    19,093
    
    
    
    17,589Liabilities of discontinued operations
    
    
    682
    
    
    
    1,072Total current liabilities
    
    
    33,330
    
    
    
    27,751Long-term debt
    
    
    66,250
    
    
    
    80,000Deferred credits and other liabilities:Deferred income taxes
    
    
    25,374
    
    
    
    23,171Post-retirement benefits other than pension
    
    
    11,087
    
    
    
    11,246Other
    
    
    2,932
    
    
    
    3,123Total deferred credits and other liabilities
    
    
    39,393
    
    
    
    37,540Total liabilities
    
    
    138,973
    
    
    
    145,291Stockholders equity:Preferred stock not subject to mandatory redemption:5% series, $100 par value; 3,356 shares outstanding at
September 30, 2004 and December 31, 2003
    
    
    336
    
    
    
    3364.5% series, $100 par value; 614 shares outstanding at
September 30, 2004 and December 31, 2003
    
    
    61
    
    
    
    61Common stock, 18,879,041 and 18,769,187 shares outstanding at
September 30, 2004 and December 31, 2003, respectively
    
    
    42,165
    
    
    
    40,800Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    (425
    )
    
    
    (264
    )Other accumulated comprehensive income
    
    
    317
    
    
    
    492Retained earnings
    
    
    142,634
    
    
    
    135,671Total stockholders equity
    
    
    185,386
    
    
    
    177,394Total liabilities and stockholders equity
    
    $
    324,359
    
    
    $
    322,685
 See accompanying notes to condensed consolidated financial statements (unaudited). 4




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data) Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Operating revenue:Telephone
    
    $
    29,985
    
    
    $
    30,499
    
    
    $
    90,409
    
    
    $
    90,371Wireless and internet
    
    
    10,863
    
    
    
    10,020
    
    
    
    31,752
    
    
    
    28,893Total operating revenue
    
    
    40,848
    
    
    
    40,519
    
    
    
    122,161
    
    
    
    119,264Operating expense:Telephone cost of service (excluding depreciation)
    
    
    9,415
    
    
    
    9,280
    
    
    
    26,705
    
    
    
    26,741Wireless and internet cost of service (excluding depreciation)
    
    
    4,418
    
    
    
    4,996
    
    
    
    14,002
    
    
    
    13,983Selling, general and administrative (excluding depreciation)
    
    
    14,235
    
    
    
    14,167
    
    
    
    40,715
    
    
    
    41,762Depreciation
    
    
    8,250
    
    
    
    7,334
    
    
    
    23,098
    
    
    
    21,517Total operating expense
    
    
    36,318
    
    
    
    35,777
    
    
    
    104,520
    
    
    
    104,003Operating income
    
    
    4,530
    
    
    
    4,742
    
    
    
    17,641
    
    
    
    15,261Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,820
    
    
    
    1,787
    
    
    
    4,549
    
    
    
    4,235Interest, dividend income and gain (loss) on sales of
investments
    
    
    184
    
    
    
    858
    
    
    
    934
    
    
    
    15,878Impairment of investments
    
    
    (1,454
    )
    
    
    (460
    )
    
    
    (1,494
    )
    
    
    (1,744
    )Other expenses, principally interest
    
    
    (1,205
    )
    
    
    (1,458
    )
    
    
    (3,657
    )
    
    
    (5,209
    )Total other income (expense)
    
    
    (655
    )
    
    
    727
    
    
    
    332
    
    
    
    13,160Income from continuing operations before income
taxes
    
    
    3,875
    
    
    
    5,469
    
    
    
    17,973
    
    
    
    28,421Income taxes
    
    
    1,631
    
    
    
    1,955
    
    
    
    7,324
    
    
    
    11,079Income from continuing operations
    
    
    2,244
    
    
    
    3,514
    
    
    
    10,649
    
    
    
    17,342Discontinued operations:Loss from operations of discontinued business, net of
income tax benefits of $276 for the nine months ended
September 30, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (424
    )Net income
    
    
    2,244
    
    
    
    3,514
    
    
    
    10,649
    
    
    
    16,918Dividends on preferred stock
    
    
    5
    
    
    
    5
    
    
    
    15
    
    
    
    15Net income for common stock
    
    $
    2,239
    
    
    $
    3,509
    
    
    $
    10,634
    
    
    $
    16,903Basic Earnings per share:Continuing operations
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    0.92Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.12
    
    
    
    0.19
    
    
    
    0.56
    
    
    
    0.90Diluted Earnings per share:Continuing operations
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    0.92Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.12
    
    
    
    0.19
    
    
    
    0.56
    
    
    
    0.90Basic weighted average shares outstanding
    
    
    18,877
    
    
    
    18,765
    
    
    
    18,862
    
    
    
    18,740Diluted weighted average shares outstanding
    
    
    19,054
    
    
    
    18,853
    
    
    
    19,010
    
    
    
    18,791
 See accompanying notes to condensed consolidated financial statements (unaudited). 5




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands) Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net income
    
    $
    2,244
    
    
    $
    3,514
    
    
    $
    10,649
    
    
    $
    16,918Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on
available-for-sale
securities
    
    
    (176
    )
    
    
    94
    
    
    
    (783
    )
    
    
    470Reclassification adjustment for losses (gains)
realized
in net income
    
    
    797
    
    
    
    (4
    )
    
    
    608
    
    
    
    4Comprehensive income
    
    $
    2,865
    
    
    $
    3,604
    
    
    $
    10,474
    
    
    $
    17,392
 See accompanying notes to condensed consolidated financial statements (unaudited). 6




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands) Nine Months Ended September 30,2004
    
    
    2003(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income
    
    $
    10,649
    
    
    $
    16,918Adjustments to reconcile net income to net cash provided
by operating activities:Loss from discontinued operations, net of tax
    
    
    
    
    
    
    424Depreciation
    
    
    23,098
    
    
    
    21,517Amortization of restricted stock
    
    
    640
    
    
    
    589Post-retirement benefits
    
    
    (158
    )
    
    
    424(Gain) loss on sale of investment securities
    
    
    (300
    )
    
    
    7Gain on sale of investments in unconsolidated companies
    
    
    
    
    
    
    (15,063
    )Impairment of investments
    
    
    1,494
    
    
    
    1,744Undistributed income of unconsolidated companies
    
    
    (4,548
    )
    
    
    (4,235
    )Undistributed patronage dividends
    
    
    (269
    )
    
    
    (298
    )Deferred income taxes and tax credits
    
    
    2,503
    
    
    
    7,086Changes in operating assets and liabilities
    
    
    4,394
    
    
    
    7,809Net cash provided by operating activities
    
    
    37,503
    
    
    
    36,922Cash flows from investing activities:Capital expenditures
    
    
    (17,294
    )
    
    
    (16,923
    )Purchases of investments
    
    
    (1,397
    )
    
    
    (3,312
    )Proceeds from sale of investment in unconsolidated companies
    
    
    
    
    
    
    17,052Proceeds from sale of investment securities
    
    
    1,067
    
    
    
    208Capital distribution from unconsolidated companies
    
    
    1,834
    
    
    
    3,438Net cash provided by (used in) investing activities

    
    
    (15,790
    )
    
    
    463Cash flows from financing activities:Repayment of long-term debt
    
    
    (10,000
    )
    
    
    (24,000
    )Dividends paid
    
    
    (3,692
    )
    
    
    (3,665
    )Proceeds from common stock issuances
    
    
    154
    
    
    
    383Net cash used in financing activities
    
    
    (13,538
    )
    
    
    (27,282
    )Net cash used in discontinued operations
    
    
    (390
    )
    
    
    (930
    )Net increase in cash and cash equivalents
    
    
    7,785
    
    
    
    9,173Cash and cash equivalents at beginning of period
    
    
    16,957
    
    
    
    7,652Cash and cash equivalents at end of period
    
    $
    24,742
    
    
    $
    16,825Supplemental disclosure of non-cash investing and financing activities:Cancellation of note payable and reduction in other intangibles in
connection with disposition of wireless spectrum
    
    
    
    
    
    $
    (17,697
    )
 See accompanying notes to condensed consolidated financial statements (unaudited). 7




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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 September 30, 2004 and December 31, 2003, the results of its operations for the
three and nine months ended September 30, 2004 and September 30, 2003 and its cash
flows for the nine months ended September 30, 2004 and September 30, 2003. These
unaudited financial statements do not include all disclosures associated with the
Companys annual financial statements and should be read along with the Companys
Annual Report on Form 10-K for the year ended December 31, 2003.2.
    In certain instances, amounts previously reported in the 2003 consolidated financial
statements have been reclassified to conform to the presentation of the 2004
consolidated financial statements. Such reclassifications have no effect on net income
or retained earnings as previously reported.3.
    The results of operations for the nine months ended September 30, 2004 and 2003 are
not necessarily indicative of the results to be expected for the full year.4.
    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTSThe Company identified certain errors related to its accounting for telephone system
sales that occurred in 1999 through the first three quarters of 2004, which resulted in
the overstatement of revenue for the periods 1999 through 2002 and the understatement
of revenue for 2003 and the first three quarters of 2004. The error also resulted in
the overstatement of accounts receivable for the periods 1999 through the first three
quarters of 2004. The correction of this error at September 30, 2004 resulted in a
reduction of accounts receivable, income taxes payable and retained earnings of $1.3
million, $0.4 million and $1.1 million, respectively, and a $0.2 million increase in
customer deposits and advanced billings. The correction of this error for the three
and nine months ended September 30, 2004 resulted in an increase in revenue of $0.2
million and $0.3 million, respectively, and for the three and nine months ended
September 30, 2003 resulted in a $0.1 million and $37,000 decrease in revenue,
respectively.The Company discovered certain errors relating to the Companys reporting of
depreciation expense in 2002, 2003 and the first three quarters of 2004. These
depreciation errors were caused by calculation errors in the Companys fixed asset
system. The cumulative effect of these errors resulted in an increase in property and
equipment of $2.7 million at September 30, 2004. These errors resulted in an
overstatement (understatement) of depreciation expense of $ (0.5) million and $ 0.3
million for the three and nine months ended September 30, 2004, respectively, and an
overstatement of depreciation expense of $0.5 million and $1.6 million for the three
and nine months ended September 30, 2003, respectively. The correction of these errors
increased (decreased) net income for the three and nine months ended September 30,
2004 by $(0.3) million and $0.2 million, respectively, and increased net income $0.3
million and $1.0 million for the three and nine months ended September 30, 2003,
respectively.The Company identified an error in the accounting for a capital lease agreement that
also impacted certain accrual accounts. The Company discovered that it had not properly
recorded the asset associated with a capital lease and that certain accruals were
erroneously adjusted in recording the liability associated with the capital lease. The
correction of this error resulted in an increase in operating expense of $0.1 million
for the three months ended September 30, 2004 and a decrease in operating expense of
$0.2 million for the nine months ended September 30, 2004. For the three and nine
months ended September 30, 2003, the correction of this error resulted in a decrease in
operating expense of $0.1 million and $0.2 million, respectively. The after tax impact
of these adjustments resulted in a decrease to net income of $38,000 for the three
months ended September 30, 2004 and an increase to net income of $0.1 million for the
nine months ended September 30, 2004. The after tax impact of these adjustments for
the three and nine months ended September 30, 2003, resulted in a decrease to net
income of $38,000 and $0.1 million, respectively.The Company received a distribution notice in 2004 relating to an equity security held
by a member of the Companys equity portfolio, and recorded the distribution when the
notice was received. The Company subsequently learned that the distribution was
actually completed in the fourth quarter of 2003, and has adjusted this investment at
December 31, 2003 through a $0.7 million reduction of investment securities and a $0.4
million reduction in accumulated other comprehensive income, net of tax effect of $0.3
million. 8




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  During the course of preparing its year-end financial statements for 2004, an error was
identified in the Companys accounting related to three interest rate swap agreements
entered into during 1999 and 2001. The Company was incorrectly applying hedge
accounting and was recording the adjustment to fair value of its interest rate swaps
through accumulated other comprehensive income instead of interest expense. The
correction of this error resulted in a decrease in interest expense of $20,000 and $0.3
million for the three and nine months ended September 30, 2004, respectively, and a
decrease in interest expense of $0.2 million and $0.4 million for the three and nine
months ended September 30, 2003, respectively. The after tax impact of the correction
of this error resulted in an increase to net income of $13,000 and $0.2 million for the
three and nine months ended September 30, 2004, respectively, and an increase to net
income of $0.1 million and $0.2 million for the three and nine months ended September
30, 2003, respectively.The Company reviewed its accounting with respect to leasing transactions and has
concluded there was an error in the determination of lease expense for certain leases
related primarily to wireless cell tower sites. The Company had not properly reflected
rent escalation provisions contained in its leases on a straight-line basis as required
by SFAS No. 13, Accounting for Leases. To correct this error, the Company has
considered the escalation provisions of the leases and has considered renewal periods
when there is reasonable assurance that one or more of the renewal options would be
exercised. The result of the Companys assessment was to increase the lease term as
defined in SFAS No. 13 for most of its operating leases. The impact of this error for
the three and nine months ended September 30, 2004 was an increase in rent expense
(which is included in operating expense on the Condensed Consolidated Statement of
Income) of $22,000 and $66,000, respectively, and an increase in rent expense for the
three and nine months ended September 30, 2003 of $28,000 and $0.1 million,
respectively.The Company also restated certain previously recorded, out-of-period items to include
them in the periods in which they actually occurred in order to more accurately present
the financial statements for those prior periods. These adjustments include a decrease
in dividend income of $0.2 million for the nine months ended September 30, 2003 and a
decrease in equity in income of affiliates of $0.2 million for the nine months ended
September 30, 2004. In addition, the Company also reclassified to other assets $1.1
million of certain items previously recorded as accounts receivable on the consolidated
balance sheet at September 30, 2004.The aggregate impact of the correction of all the errors discussed above resulted in an
increase (decrease) in net income of ($0.2) million and $0.6 million for the three and
nine months ended September 30, 2004 and an increase in net income of $0.4 million and
$0.9 million for the three and nine months ended September 30, 2003.The cumulative impacts of these restatements on the financial statements are summarized
below (in thousands, except per share amounts): 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)    Effect on selected Condensed Consolidated Balance Sheet data as of September 30, 2004: Selected Condensed Consolidated Balance Sheet Data
September 30, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedBalance SheetAccounts receivable
    
    $
    20,116
    
    
    $
    (2,442
    )
    
    $
    17,674Total current assets
    
    
    49,494
    
    
    
    (2,442
    )
    
    
    47,052Property and equipment, net
    
    
    202,430
    
    
    
    3,288
    
    
    
    205,718Other assets
    
    
    1,823
    
    
    
    1,129
    
    
    
    2,952Total assets
    
    
    322,384
    
    
    
    1,975
    
    
    
    324,359Customer deposits and
advance billings
    
    
    2,476
    
    
    
    183
    
    
    
    2,659Other accrued liabilities
    
    
    19,097
    
    
    
    (4
    )
    
    
    19,093Total current liabilities
    
    
    33,151
    
    
    
    179
    
    
    
    33,330Deferred income taxes
    
    
    24,599
    
    
    
    775
    
    
    
    25,374Other liabilities
    
    
    2,552
    
    
    
    380
    
    
    
    2,932Total deferred credits and
other liabilities
    
    
    38,238
    
    
    
    1,155
    
    
    
    39,393Total liabilities
    
    
    137,639
    
    
    
    1,334
    
    
    
    138,973Other accumulated
comprehensive income
(loss)
    
    
    182
    
    
    
    135
    
    
    
    317Retained earnings
    
    
    142,128
    
    
    
    506
    
    
    
    142,634Total stockholders equity
    
    
    184,745
    
    
    
    641
    
    
    
    185,386Total liabilities and
stockholders equity
    
    
    322,384
    
    
    
    1,975
    
    
    
    324,359
 10




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Effect on selected Condensed Consolidated Income Statement data for the three and nine
months ended September 30, 2004: Selected Condensed Consolidated Income Statement Data
Three and Nine Months ended September 30, 2004
(in thousands, except per share data) Three months ended September 30, 2004
    
    
    Nine Months ended September 30, 2004As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedTelephone revenue
    
    $
    29,796
    
    
    $
    189
    
    
    $
    29,985
    
    
    $
    90,091
    
    
    $
    318
    
    
    $
    90,409Total operating revenue
    
    
    40,659
    
    
    
    189
    
    
    
    40,848
    
    
    
    121,843
    
    
    
    318
    
    
    
    122,161Telephone cost of service
    
    
    9,409
    
    
    
    6
    
    
    
    9,415
    
    

    
    26,743
    
    
    
    (38
    )
    
    
    26,705Wireless and internet
cost of service
    
    
    4,397
    
    
    
    21
    
    
    
    4,418
    
    
    
    13,835
    
    
    
    167
    
    
    
    14,002Selling, general and
administrative
    
    
    14,240
    
    
    
    (5
    )
    
    
    14,235
    
    
    
    41,157
    
    
    
    (442
    )
    
    
    40,715Depreciation
    
    
    7,687
    
    
    
    563
    
    
    
    8,250
    
    
    
    23,235
    
    
    
    (137
    )
    
    
    23,098Total operating expense
    
    
    35,733
    
    
    
    585
    
    
    
    36,318
    
    
    
    104,970
    
    
    
    (450
    )
    
    
    104,520Operating income
    
    
    4,926
    
    
    
    (396
    )
    
    
    4,530
    
    
    
    16,873
    
    
    
    768
    
    
    
    17,641Equity in income of
unconsolidated
companies, net
    
    
    1,820
    
    
    
    
    
    
    
    1,820
    
    
    
    4,714
    
    
    
    (165
    )
    
    
    4,549Other expenses,
principally interest
    
    
    (1,225
    )
    
    
    20
    
    
    
    (1,205
    )
    
    
    (3,984
    )
    
    
    327
    
    
    
    (3,657
    )Total other income
(expense)
    
    
    (675
    )
    
    
    20
    
    
    
    (655
    )
    
    
    170
    
    
    
    162
    
    
    
    332Income from continuing
operations before income
taxes
    
    
    4,251
    
    
    
    (376
    )
    
    
    3,875
    
    
    
    17,043
    
    
    
    930
    
    
    
    17,973Income taxes
    
    
    1,780
    
    
    
    (149
    )
    
    
    1,631
    
    
    
    6,971
    
    
    
    353
    
    
    
    7,324Income from continuing
operations
    
    
    2,471
    
    
    
    (227
    )
    
    
    2,244
    
    
    
    10,072
    
    
    
    577
    
    
    
    10,649Net income
    
    
    2,471
    
    
    
    (227
    )
    
    
    2,244
    
    
    
    10,072
    
    
    
    577
    
    
    
    10,649Net income for common
stock
    
    
    2,466
    
    
    
    (227
    )
    
    
    2,239
    
    
    
    10,057
    
    
    
    577
    
    
    
    10,634Basic earnings per share:Continuing operations
    
    $
    0.13
    
    
    $
    (0.01
    )
    
    $
    0.12
    
    
    $
    0.53
    
    
    $
    0.03
    
    
    $
    0.56Net income for common
stock
    
    
    0.13
    
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    0.53
    
    
    
    0.03
    
    
    
    0.56Diluted earnings per
share:Continuing operations
    
    
    0.13
    
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    0.53
    
    
    
    0.03
    
    
    
    0.56Net income for common
stock
    
    
    0.13
    
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    0.53
    
    
    
    0.03
    
    
    
    0.56
 11




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Effect on selected Condensed Consolidated Income Statement data for the three and nine
months ended September 30, 2003: Selected Condensed Consolidated Income Statement Data
Three and Nine Months ended September 30, 2003
(in thousands, except per share data) Three months ended September 30, 2003
    
    
    Nine Months ended September 30, 2003As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedTelephone revenue
    
    $
    30,583
    
    
    $
    (84
    )
    
    $
    30,499
    
    
    $
    90,408
    
    
    $
    (37
    )
    
    $
    90,371Wireless and internet
revenue
    
    
    10,020
    
    
    
    
    
    
    
    10,020
    
    
    
    28,844
    
    
    
    49
    
    
    
    28,893Total operating revenue
    
    
    40,603
    
    
    
    (84
    )
    
    
    40,519
    
    
    
    119,252
    
    
    
    12
    
    
    
    119,264Wireless and internet
cost of service
    
    
    4,968
    
    
    
    28
    
    
    
    4,996
    
    
    
    13,899
    
    
    
    84
    
    
    
    13,983Selling, general and
administrative
    
    
    14,369
    
    
    
    (202
    )
    
    
    14,167
    
    
    
    41,762
    
    
    
    
    
    
    
    41,762Depreciation
    
    
    7,605
    
    
    
    (271
    )
    
    
    7,334
    
    
    
    22,991
    
    
    
    (1,474
    )
    
    
    21,517Total operating expense
    
    
    36,222
    
    
    
    (445
    )
    
    
    35,777
    
    
    
    105,393
    
    
    
    (1,390
    )
    
    
    104,003Operating income
    
    
    4,381
    
    
    
    361
    
    
    
    4,742
    
    
    
    13,859
    
    
    
    1,402
    
    
    
    15,261Interest, dividend
income and gain on sale
of investments
    
    
    858
    
    
    
    
    
    
    
    858
    
    
    
    16,122
    
    
    
    (244
    )
    
    
    15,878Other expenses,
principally interest
    
    
    (1,682
    )
    
    
    224
    
    
    
    (1,458
    )
    
    
    (5,558
    )
    
    
    (351
    )
    
    
    (5,209
    )Total other income
(expense)
    
    
    503
    
    
    
    224
    
    
    
    727
    
    
    
    13,055
    
    
    
    105
    
    
    
    13,160Income from continuing
operations before income
taxes
    
    
    4,884
    
    
    
    585
    
    
    
    5,469
    
    
    
    26,914
    
    
    
    1,507
    
    
    
    28,421Income taxes
    
    
    1,735
    
    
    
    220
    
    
    
    1,955
    
    
    
    10,501
    
    
    
    578
    
    
    
    11,079Income from continuing
operations
    
    
    3,149
    
    
    
    365
    
    
    
    3,514
    
    
    
    16,413
    
    
    
    929
    
    
    
    17,342Net income
    
    
    3,149
    
    
    
    365
    
    
    
    3,514
    
    
    
    15,989
    
    
    
    929
    
    
    
    16,918Net income for common
stock
    
    
    3,144
    
    
    
    365
    
    
    
    3,509
    
    
    
    15,974
    
    
    
    929
    
    
    
    16,903Basic earnings per share:Continuing operations
    
    $
    0.17
    
    
    $
    0.02
    
    
    $
    0.19
    
    
    $
    0.88
    
    
    $
    0.05
    
    
    $
    0.92Net income for common
stock
    
    
    0.17
    
    
    
    0.02
    
    
    
    0.19
    
    
    
    0.85
    
    
    
    0.05
    
    
    
    0.90Diluted earnings per
share:Continuing operations
    
    
    0.17
    
    
    
    0.02
    
    
    
    0.19
    
    
    
    0.87
    
    
    
    0.05
    
    
    
    0.92Net income for common
stock
    
    
    0.17
    
    
    
    0.02
    
    
    
    0.19
    
    
    
    0.85
    
    
    
    0.05
    
    
    
    0.90
 12




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Selected Condensed Consolidated Statements of Comprehensive Income (Loss) data for the
nine months ended September 30, 2004 and September 30, 2003: Selected Condensed Consolidated Statement of Comprehensive Income (Loss)
Three and Nine Months ended September 30, 2004
(in thousands) Three months ended September 30, 2004
    
    
    Nine Months ended September 30, 2004As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    2,471
    
    
    $
    (227
    )
    
    $
    2,244
    
    
    $
    10,072
    
    
    $
    577
    
    
    $
    10,649Unrealized holding
gains (losses) on
available-for-sale
securities
    
    
    (176
    )
    
    
    
    
    
    
    (176
    )
    
    
    (1,177
    )
    
    
    394
    
    
    
    (783
    )Unrealized holding
gains on interest
rate swaps
    
    
    12
    
    
    
    (12
    )
    
    
    
    
    
    
    193
    
    
    
    (193
    )
    
    
    Comprehensive income
    
    
    3,104
    
    
    
    (239
    )
    
    
    2,865
    
    
    
    9,696
    
    
    
    778
    
    
    
    10,474
 Selected Condensed Consolidated Statement of Comprehensive Income (Loss)
Three and Nine Months ended September 30, 2003
(in thousands) Three months ended September 30, 2003
    
    
    Nine Months ended September 30, 2003As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    3,149
    
    
    $
    365
    
    
    $
    3,514
    
    
    $
    15,989
    
    
    $
    929
    
    
    $
    16,918Unrealized holding
gains on interest
rate swaps
    
    
    136
    
    
    
    (136
    )
    
    
    
    
    
    
    212
    
    
    
    (212
    )
    
    
    Comprehensive income
    
    
    3,375
    
    
    
    229
    
    
    
    3,604
    
    
    
    16,675
    
    
    
    717
    
    
    
    17,392
 13




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Effect on selected Condensed Consolidated Statements of Cash Flows data for the nine
months ended September 30, 2004 and September 30,2003: Selected Condensed Consolidated Statement of Cash Flows Data
Nine Months ended September 30, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    10,072
    
    
    $
    577
    
    
    $
    10,649Depreciation
    
    
    23,235
    
    
    
    (137
    )
    
    
    23,098Undistributed
income of
unconsolidated
companies
    
    
    (4,714
    )
    
    
    166
    
    
    
    (4,548
    )Deferred income
taxes and tax
credits
    
    
    2,079
    
    
    
    424
    
    
    
    2,503Changes in
operating assets
and liabilities
    
    
    5,424
    
    
    
    (1,030
    )
    
    
    4,394
 Selected Condensed Consolidated Statement of Cash Flows Data
Nine Months ended September 30, 2003
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    15,989
    
    
    $
    929
    
    
    $
    16,918Depreciation
    
    
    22,991
    
    
    
    (1,474
    )
    
    
    21,517Undistributed
patronage dividends
    
    
    (483
    )
    
    
    185
    
    
    
    (298
    )Deferred income
taxes and tax
credits
    
    
    6,730
    
    
    
    356
    
    
    
    7,086Changes in
operating assets
and liabilities
    
    
    7,805
    
    
    
    4
    
    
    
    7,809
  5.
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands): (Restated)September 30,
    
    
    December 31,2004
    
    
    2003Land, buildings and general equipment
    
    $
    91,998
    
    
    $
    90,915Central office equipment
    
    
    170,968
    
    
    
    164,210Poles, wires, cables and conduit
    
    
    152,405
    
    
    
    143,805Construction in progress
    
    
    5,675
    
    
    
    5,438421,046
    
    
    
    404,368Accumulated depreciation
    
    
    (215,328
    )
    
    
    (192,847
    )Property and equipment, net
    
    $
    205,718
    
    
    $
    211,521
 14




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  6.
    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 September 30, 2004, 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 September 30, 2004 and December 31, 2003 consist of the
following (in thousands): September 30,
    
    
    December 31,2004
    
    
    2003Liabilities of discontinued operations:Other liabilities, primarily lease obligations
    
    $
    682
    
    
    $
    1,072Total liabilities of discontinued operations
    
    $
    682
    
    
    $
    1,072
  A summary of restructuring liability activity related to the discontinued operations
for the nine months ended September 30, 2004 is as follows (in thousands): Balance at December 31, 2003
    
    $
    1,072Lease termination costs
    
    
    (390
    )Balance at September 30, 2004
    
    $
    682
 15




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  7.
    COMMON STOCKThe following is a summary of Common Stock transactions during the nine months ended
September 30, 2004 (in thousands): Shares
    
    
    AmountOutstanding at December 31, 2003
    
    
    18,769
    
    
    $
    40,800Purchases/(forfeitures) of Common
Stock
    
    
    (29
    )
    
    
    (353
    )Issuance of Common Stock
    
    
    139
    
    
    
    1,718Outstanding at September 30, 2004
    
    
    18,879
    
    
    $
    42,165
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Weighted average shares
outstanding:Basic
    
    
    18,877
    
    
    
    18,765
    
    
    
    18,862
    
    
    
    18,740Diluted
    
    
    19,054
    
    
    
    18,853
    
    
    
    19,010
    
    
    
    18,791
  Outstanding options to purchase approximately 543,000 and 490,000 shares of Common
Stock for the three and nine months ended September 30, 2004 and approximately 582,000
shares of Common Stock for the three and nine months ended September 30, 2003 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 September 30, 2004
and September 30, 2003, the Company had total options outstanding of 1,325,000 and
849,000, respectively.On April 22, 2004, 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, 2004 to April 27, 2005.
There were no shares repurchased by the Company during the nine months ended September
30, 2004.8.
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and fair value for the
Companys investments at September 30, 2004 and December 31, 2003 were as follows (in
thousands): Gross
    
    
    GrossUnrealized
    
    
    UnrealizedEquity Securities
    
    Amortized
    
    
    Holding
    
    
    HoldingAvailable-for-Sale
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2004
    
    $
    6,048
    
    
    $
    561
    
    
    $
    (67
    )
    
    $
    6,542December 31, 2003
    
    $
    6,798
    
    
    $
    815
    
    
    $
    (95
    )
    
    $
    7,518
  During the third quarter of 2004, the Company recognized an impairment loss of $1.2
million on an equity security investment due to a decline in fair value of the equity
security that, in the opinion of management, was considered to be other than
temporary. This impairment loss is included in the caption Impairment of
investments on the Condensed Consolidated Statements of Income. 16




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Certain investments of the Company are and have been in continuous unrealized loss
positions. The gross unrealized losses and fair value and length of time the
securities have been in the continuous unrealized loss position at September 30, 2004
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
    
    $
    1,321
    
    
    $
    12
    
    
    $
    749
    
    
    $
    55
    
    
    $
    2,070
    
    
    $
    67Total temporarily
impaired securities
    
    $
    1,321
    
    
    $
    12
    
    
    $
    749
    
    
    $
    55
    
    
    $
    2,070
    
    
    $
    67
  The fair value and unrealized losses noted above that are greater than 12 months
relate to three different investments, the largest of which is a mutual fund
investment that is expected to recover as the economy improves and has been increasing
in value. 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.9.
    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.10.
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consist of the following (in thousands): September 30,
    
    
    December 31,2004
    
    
    2003Equity Method:Palmetto MobileNet, L.P.
    
    $
    11,627
    
    
    $
    8,902Other
    
    
    99
    
    
    
    100Cost Method:Magnolia Holding Company
    
    
    1,681
    
    
    
    1,680ITC
Financial Services, LLC
    
    
    840
    
    
    
    840Other
    
    
    1,394
    
    
    
    1,512Total
    
    $
    15,641
    
    
    $
    13,034
  On May 9, 2003, West Corporation (West) purchased the stock of ITC Holding Company,
Inc. (ITC). The Company had a 4.4% equity interest in ITC. This transaction
resulted in a gain to the Company of $15.2 million in 2003. As part of the purchase
agreement between West and ITC, certain funds are being held in escrow until certain
contingencies are resolved. The Companys portion of the escrowed funds is $1.2
million. The $1.2 million will not be recorded in the Companys financial statements
until the contingencies are resolved and the escrowed funds become issuable.In May 2003, the Company purchased $3.0 million of stock in Magnolia Holding Company
(Magnolia). The primary asset of Magnolia was Knology, Inc. (Knology), a public
company that provides data and Internet 17




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  connectivity to small and mid-size businesses.
The Company holds a 4.6% equity interest in Magnolia. The Company later received a
distribution from Magnolia in the form of shares of Knology preferred stock, which
were later converted to common stock. This distribution by Magnolia reduced the value
of the Companys investment in Magnolia. The shares of Knology stock are classified
as available-for-sale investment securities.  In December 2003, the Company committed to purchase a 4.0% interest in ITC Financial
Services, LLC (ITC Financial) for up to $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 in exchange for certain transaction fees. As
of September 30, 2004, the Company had funded $0.8 million of the committed amount.
The remaining $1.3 million can be called at any time at the discretion of ITC
Financial based on its cash operating requirements.During the third quarter of 2004, the Company recognized impairment losses of $0.2
million on two cost method investments. These impairment losses are included in the
caption Impairment of investments on the Condensed Consolidated Statements of
Income.The Company recognized income of $1.8 million in the three months ended September 30,
2004 and 2003 and $4.7 million and $4.2 million in the nine months ended September 30,
2004 and 2003, 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 and nine months ended
September 30, 2004 and 2003 are as follows (in thousands): Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Equity in earnings
of RSA partnership
interests
    
    $
    7,630
    
    
    $
    8,041
    
    
    $
    21,204
    
    
    $
    22,353Other expenses
    
    
    185
    
    
    
    152
    
    
    
    415
    
    
    
    246Net income
    
    $
    7,445
    
    
    $
    7,889
    
    
    $
    20,789
    
    
    $
    22,107
  11.
    LONG-TERM DEBTLong-term debt consists of the following (in thousands): September 30,
    
    
    December 31,2004
    
    
    2003Line of credit with interest at LIBOR
plus 1.25% (3.0% at September 30, 2004
and 2.44% at December 31, 2003)
    
    $
    20,000
    
    
    $
    30,000Term loan with interest at 7.32%
    
    
    50,000
    
    
    
    50,00070,000
    
    
    
    80,000Less: Current portion of long-term debt
    
    
    3,750
    
    
    
    Total long-term debt
    
    $
    66,250
    
    
    $
    80,000
  At September 30, 2004, the Company had a $70.0 million revolving five-year line of
credit with interest at three month LIBOR plus a spread based on various financial
ratios, that is currently 1.25%. The interest rate on September 30, 2004 was 3.0%.
During the nine months ended September 30, 2004, the Company elected to repay $10.0
million in principal on this credit facility. The credit facility provides for
quarterly payments of interest until maturity on March 31, 2006. As of September 30,
2004, $20.0 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.
All $50.0 million was outstanding as of September 30, 2004. The term loan requires
quarterly payments of interest until 18




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) maturity on December 31, 2014. Payments of principal are due beginning March 31, 2005
and quarterly thereafter through December 31, 2014, in equal quarterly installments of
$1.25 million. The Company has two $5.0 million interest rate swap transactions to fix amounts
outstanding under the $70.0 million revolving line of credit at rates of 3.81% and
4.53%, respectively. The fair value of the swaps as of September 30, 2004 was
$(27,000) and $(0.2) million, respectively and are recorded in other long-term
liabilities. The swaps mature on November 3, 2004 and November 3, 2006,
respectively. 12. GOODWILL On 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 September 30, 2004, and was unchanged from December 31, 2003. 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. 13. STATE INCOME TAX ASSESSMENT In October 2003, the Company received income tax assessments from the North Carolina
Department of Revenue related to certain state tax returns filed for the years ended
December 31, 1998, 1999 and 2000. The Company is currently appealing these
assessments and believes that it has meritorious defenses to the assessments and that
the ultimate outcome is not expected to result in a material impact on the Companys
consolidated financial statements. 14. RECENT ACCOUNTING PRONOUNCEMENTS In 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 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 2003, the FASB issued a revision to SFAS No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No.
87, 88 and 106. SFAS No. 132 revises employers disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, Employers Accounting for Pension, SFAS No.
88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. This Statement retains the disclosure
requirements contained in SFAS No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosures to those in the original Statement No. 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. The Company adopted the new
disclosure requirements of SFAS No. 132 in December 2003. 19




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 15. STOCK OPTIONS The 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 stock options plans.
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
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net income, as reported
    
    $
    2,244
    
    
    $
    3,514
    
    
    $
    10,649
    
    
    $
    16,918Additional stock-based compensation
expense that would have been
included in
net income if the fair value-based
method
had been applied, net of income tax
    
    
    272
    
    
    
    209
    
    
    
    815
    
    
    
    626Pro forma net income
    
    $
    1,972
    
    
    $
    3,305
    
    
    $
    9,834
    
    
    $
    16,292Basic earnings per common shareAs reported
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    0.90Pro forma
    
    
    0.10
    
    
    
    0.18
    
    
    
    0.52
    
    
    
    0.87Diluted earnings per common shareAs reported
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    0.90Pro forma
    
    
    0.10
    
    
    
    0.18
    
    
    
    0.52
    
    
    
    0.87
 20




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 16. PENSION AND POST-RETIREMENT PLANS Components of net periodic benefit costs for the three months ended September 30 (in
thousands): Pension Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    503
    
    
    $
    463
    
    
    $
    17
    
    
    $
    13Interest cost
    
    
    655
    
    
    
    626
    
    
    
    127
    
    
    
    128Expected return on plan assets
    
    
    (842
    )
    
    
    (664
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    16
    
    
    
    69Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (56
    )Net periodic benefit cost
    
    $
    317
    
    
    $
    426
    
    
    $
    122
    
    
    $
    154
 Components of net periodic benefit costs for the nine months ended September 30 (in
thousands): Pension Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    1,509
    
    
    $
    1,389
    
    
    $
    51
    
    
    $
    39Interest cost
    
    
    1,965
    
    
    
    1,878
    
    
    
    373
    
    
    
    384Expected return on plan assets
    
    
    (2,526
    )
    
    
    (1,992
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    207Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (168
    )Net periodic benefit cost
    
    $
    951
    
    
    $
    1,278
    
    
    $
    310
    
    
    $
    462
 As previously disclosed in its financial statements for the year ended December 31,
2003, the Company does not expect to contribute to the pension plan in 2004. 21




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 17. SEGMENT INFORMATION The 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 digital wireless group (Digital
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
for the year ended December 31, 2003. 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 and nine
months ended September 30, 2004 and 2003, is as follows (in thousands): Three months ended September 30, 2004 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    23,350
    
    
    $
    8,222
    
    
    $
    4,596
    
    
    $
    2,039
    
    
    $
    2,641
    
    
    $
    
    
    
    $
    40,848External
expense
    
    
    12,631
    
    
    
    6,518
    
    
    
    4,494
    
    
    
    2,177
    
    
    
    1,925
    
    
    
    323
    
    
    
    28,068Depreciation
    
    
    4,487
    
    
    
    488
    
    
    
    629
    
    
    
    774
    
    
    
    1,538
    
    
    
    334
    
    
    
    8,250Operating
income (loss)
    
    $
    6,232
    
    
    $
    1,216
    
    
    $
    (527
    )
    
    $
    (912
    )
    
    $
    (822
    )
    
    $
    (657
    )
    
    $
    4,530Segment assets
    
    $
    170,276
    
    
    $
    33,294
    
    
    $
    14,658
    
    
    $
    25,619
    
    
    $
    14,150
    
    
    $
    66,362
    
    
    $
    324,359
 Three months ended September 30, 2003 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    24,048
    
    
    $
    7,468
    
    
    $
    4,911
    
    
    $
    1,540
    
    
    $
    2,552
    
    
    $
    
    
    
    $
    40,519External
expense
    
    
    12,217
    
    
    
    6,880
    
    
    
    4,676
    
    
    
    2,161
    
    
    
    2,448
    
    
    
    61
    
    
    
    28,443Depreciation
    
    
    4,694
    
    
    
    438
    
    
    
    839
    
    
    
    433
    
    
    
    397
    
    
    
    533
    
    
    
    7,334Operating
income (loss)
    
    $
    7,137
    
    
    $
    150
    
    
    $
    (604
    )
    
    $
    (1,054
    )
    
    $
    (293
    )
    
    $
    (594
    )
    
    $
    4,742Segment assets
    
    $
    168,802
    
    
    $
    31,120
    
    
    $
    15,923
    
    
    $
    23,871
    
    
    $
    15,795
    
    
    $
    66,870
    
    
    $
    322,381
 22




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Nine months ended September 30, 2004 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    69,955
    
    
    $
    23,591
    
    
    $
    14,585
    
    
    $
    5,869
    
    
    $
    8,161
    
    $
    
    
    
    
    $
    122,161External
expense
    
    
    34,913
    
    
    
    19,376
    
    
    
    13,365
    
    
    
    6,536
    
    
    
    6,443
    
    
    
    789
    
    
    
    81,422Depreciation
    
    
    14,159
    
    
    
    1,436
    
    
    
    1,888
    
    
    
    2,239
    
    
    
    2,337
    
    
    
    1,039
    
    
    
    23,098Operating
income (loss)
    
    $
    20,883
    
    
    $
    2,779
    
    
    $
    (668
    )
    
    $
    (2,906
    )
    
    $
    (619
    )
    
    $
    (1,828
    )
    
    $
    17,641Segment assets
    
    $
    170,276
    
    
    $
    33,294
    
    
    $
    14,658
    
    
    $
    25,619
    
    
    $
    14,150
    
    
    $
    66,362
    
    
    $
    324,359
 Nine months ended September 30, 2003 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    71,195
    
    
    $
    21,198
    
    
    $
    14,759
    
    
    $
    4,417
    
    
    $
    7,695
    
    
    $
    
    
    
    $
    119,264External
expense
    
    
    34,615
    
    
    
    18,223
    
    
    
    14,234
    
    
    
    6,162
    
    
    
    7,392
    
    
    
    1,860
    
    
    
    82,486Depreciation
    
    
    14,407
    
    
    
    1,232
    
    
    
    1,921
    
    
    
    1,826
    
    
    
    1,139
    
    
    
    992
    
    
    
    21,517Operating
income (loss)
    
    $
    22,173
    
    
    $
    1,743
    
    
    $
    (1,396
    )
    
    $
    (3,571
    )
    
    $
    (836
    )
    
    $
    (2,852
    )
    
    $
    15,261Segment assets
    
    $
    168,802
    
    
    $
    31,120
    
    
    $
    15,923
    
    
    $
    23,871
    
    
    $
    15,795
    
    
    $
    66,870
    
    
    $
    322,381
 The Companys Palmetto segment is not consolidated and is accounted for under the
equity method. The Companys net investment in Palmetto of $11.6 million and $9.5
million as of September 30, 2004 and 2003, 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. Summarized results of operations for Palmetto for the three and
nine months ended September 30, 2004 and 2003 are as follows (in thousands): Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Equity in earnings
of RSA partnership
interests
    
    $
    7,630
    
    
    $
    8,041
    
    
    $
    21,204
    
    
    $
    22,353Other expenses
    
    
    185
    
    
    
    152
    
    
    
    415
    
    
    
    246Net income
    
    $
    7,445
    
    
    $
    7,889
    
    
    $
    20,789
    
    
    $
    22,107
 Reconciliation to income from continuing operations before income taxes (in
thousands): Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Segment operating income
    
    $
    4,530
    
    
    $
    4,742
    
    
    $
    17,641
    
    
    $
    15,261Total other income (expense)
    
    
    (655
    )
    
    
    727
    
    
    
    332
    
    
    
    13,160Income from continuing operations
before income taxes
    
    $
    3,875
    
    
    $
    5,469
    
    
    $
    17,973
    
    
    $
    28,421
 23




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. Restatement The Company identified certain errors related to its accounting for telephone system sales
that occurred in 1999 through the first three quarters of 2004, which resulted in the
overstatement of revenue for the periods 1999 through 2002 and the understatement of revenue
for 2003 and the first three quarters of 2004. The error also resulted in the overstatement
of accounts receivable for the periods 1999 through the first three quarters of 2004. The
correction of this error at September 30, 2004 resulted in a reduction of accounts
receivable, income taxes payable and retained earnings of $1.3 million, $0.4 million and
$1.1 million, respectively, and a $0.2 million increase in customer deposits and advanced
billings. The correction of this error for the three and nine months ended September 30,
2004 resulted in an increase in revenue of $0.2 million and $0.3 million, respectively, and
for the three and nine months ended September 30, 2003 resulted in a $0.1 million and
$37,000 decrease in revenue, respectively. The Company discovered certain errors relating to the Companys reporting of depreciation
expense in 2002, 2003 and the first three quarters of 2004. These depreciation errors were
caused by calculation errors in the Companys fixed asset system. The cumulative effect of
these errors resulted in an increase in property and equipment of $2.7 million at September
30, 2004. These errors resulted in an overstatement (understatement) of depreciation
expense of $ (0.5) million and $ 0.3 million for the three and nine months ended September
30, 2004, respectively, and an overstatement of depreciation expense of $0.5 million and
$1.6 million for the three and nine months ended September 30, 2003, respectively. The
correction of these errors increased (decreased) net income for the three and nine months
ended September 30, 2004 by $(0.3) million and $0.2 million, respectively, and increased net
income $0.3 million and $1.0 million for the three and nine months ended September 30, 2003,
respectively. The Company identified an error in the accounting for a capital lease agreement that also
impacted certain accrual accounts. The Company discovered that it had not properly recorded
the asset associated with a capital lease and that certain accruals were erroneously
adjusted in recording the liability associated with the capital lease. The correction of
this error resulted in an increase in operating expense of $0.1 million for the three months
ended September 30, 2004 and a decrease in operating expense of $0.2 million for the nine
months ended September 30, 2004. For the three and nine months ended September 30, 2003,
the correction of this error resulted in a decrease in operating expense of $0.1 million and
$0.2 million, respectively. The after tax impact of these adjustments resulted in a
decrease to net income of $38,000 for the three months ended September 30, 2004 and an
increase to net income of $0.1 million for the nine months ended September 30, 2004. The
after tax impact of these adjustments for the three and nine months ended September 30,
2003, resulted in a decrease to net income of $38,000 and $0.1 million, respectively. The Company received a distribution notice in 2004 relating to an equity security held by a
member of the Companys equity portfolio, and recorded the distribution when the notice was
received. The Company subsequently learned that the distribution was actually completed in
the fourth quarter of 2003, and has adjusted this investment at December 31, 2003 through a
$0.7 million reduction of investment securities and a $0.4 million reduction in accumulated
other comprehensive income, net of tax effect of $0.3 million. During the course of preparing its year-end financial statements for 2004, an error was
identified in the Companys accounting related to three interest rate swap agreements
entered into during 1999 and 2001. The Company was incorrectly applying hedge accounting
and was recording the adjustment to fair value of its interest rate swaps through
accumulated other comprehensive income instead of interest expense. The correction of this
error resulted in a decrease in interest expense of $20,000 and $0.3 million for the three
and nine months ended September 30, 2004, respectively, and a decrease in interest expense
of $0.2 million and $0.4 million for the three and nine months ended September 30, 2003,
respectively. The after tax impact of the correction of this error resulted in an increase
to net income of $13,000 and $0.2 million for the three and nine months ended September 30,
2004, respectively, and an increase to net income of $0.1 million and $0.2 million for the
three and nine months ended September 30, 2003, respectively. The Company reviewed its accounting with respect to leasing transactions and has concluded
there was an error in the determination of lease expense for certain leases related primarily to wireless
cell tower sites. The Company had not properly reflected rent escalation provisions
contained in its leases on a straight-line 24




---



##### 



basis as required by SFAS No. 13, Accounting for
Leases. To correct this error, the Company has considered the escalation provisions of the
leases and has considered renewal periods when there is reasonable assurance that one or
more of the renewal options would be exercised. The result of the Companys assessment was
to increase the lease term as defined in SFAS No. 13 for most of its operating leases. The
impact of this error for the three and nine months ended September 30, 2004 was an increase
in rent expense (which is included in operating expense on the Condensed Consolidated
Statement of Income) of $22,000 and $66,000, respectively, and an increase in rent expense
for the three and nine months ended September 30, 2003 of $28,000 and $0.1 million,
respectively. The Company also restated certain previously recorded, out-of-period items to include them
in the periods in which they actually occurred in order to more accurately present the
financial statements for those prior periods. These adjustments include a decrease in
dividend income of $0.2 million for the nine months ended September 30, 2003 and a decrease
in equity in income of affiliates of $0.2 million for the nine months ended September 30,
2004. In addition, the Company also reclassified to other assets $1.1 million of certain
items previously recorded as accounts receivable on the consolidated balance sheet at
September 30, 2004. The aggregate impact of the correction of all the errors discussed above resulted in an
increase (decrease) in net income of ($0.2) million and $0.6 million for the three and nine
months ended September 30, 2004 and an increase in net income of $0.4 million and $0.9
million for the three and nine months ended September 30, 2003. Introduction CT Communications, Inc. and its subsidiaries (the Company) 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 digital wireless products and services. The Company has worked to expand its core businesses through the development of integrated
product and service offerings, investment in certain growth initiatives 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 network. 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
designing and developing its business support and operating systems. The Companys primary
focus is to maximize the ILEC business by selling bundled services and enhancing its
network, and in particular its broadband network, to better position the Company for
increasing competition. With respect to its CLEC and Greenfield businesses, the Company
continues to place greater emphasis on projects that can be served by leveraging existing
network infrastructure. The Company will also consider strategic acquisitions and
investments as opportunities arise. 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
initiative is planned for completion in 2005, with the introduction of higher-speed services
in selected areas planned by the end of 2004. For the three and nine months ended September 30, 2004, net income for the Company was $2.2
million and $10.6 million, respectively, compared to $3.5 million and $16.9 million for the
three and nine months ended September 30, 2003. Net income for the nine months ended
September 30, 2003 included a $9.7
million after-tax gain on the sale of an equity investment. Diluted earnings per share were
$0.12 and $0.19 for the three months ended September 30, 2004 and 2003, respectively, and
$0.56 and $0.90 for the nine months ended September 30, 2004 and 2003, respectively. 25




---



##### 



The Company continues to be exposed to increasing competition in its ILEC territory and
regulatory developments and uncertainties that impact its CLEC and Greenfield businesses.
For the three and nine months ended September 30, 2004, the Companys ILEC continued to
experience a loss of access lines due in part to an increase in broadband Internet adoption
by customers that have cancelled second lines previously used for dial-up Internet service
as well as increased competition from wireless and other competitive providers. The
competitive CLEC and Greenfield wireline businesses continued to experience strong demand
for their products and services which resulted in 8.5% and 34.9% access line growth,
respectively, compared to September 30, 2003. The continued loss of ILEC access lines and
evolving regulatory changes that will affect certain expenses in our CLEC and Greenfield
businesses may negatively impact operating margins in future periods. Industry and Operating Trends The telecommunications industry is highly competitive and characterized by increasing price
competition, new technology developments 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 at
any other time in its history. Wireless providers and CLECs 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 become more
significant threats to the Companys voice business in coming years. These technologies are
capable of delivering a quality, competitive voice service to ILEC customers. These voice
providers are not subject to certain regulatory constraints and obligations 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.
The Company does benefit from universal service fund (USF) payments intended to offset
certain costs to provide service. These reimbursements are increasingly at risk, yet service
obligations remain unchanged. As discussed above, 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 and is expected to offer cable
telephony in our ILEC service area in late 2004 or early 2005. This 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 our long distance revenue. Some customers are
choosing to substitute their landline service with wireless service. The Company believes

the access line decrease in the ILEC over the past several years can be partially attributed
to this trend. Also impacting access line losses over the past several years is the adoption of digital
subscriber line (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.
To the extent that such landline is replaced with a Company DSL line, then the Company can
ultimately recover the lost second landline revenue through its DSL service to the customer. In recent quarters, the Company experienced a decline in wireless interconnection access fee
revenue. Wireless interconnection access revenue has declined due to requirements to
develop direct billing relationships with wireless carriers for termination of wireless
traffic on the network. These direct billing relationships are subject to negotiated
interconnection rates that are lower than rates previously realized for termination of this
traffic. However, this rate decline has been somewhat offset as wireless traffic terminated
on the Companys network increases. The Company expects continued pressure from other
telecommunications providers, and possibly regulators, to lower or eliminate the recovery of
fees for terminating such providers traffic on the Companys network. 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 26




---



##### 



grow, a high degree of competition
exists among carriers. This competition will continue to put pressure on pricing and margins
as carriers compete for customers. Regulatory requirements have grown in certain areas of our business and have added
complexity and expense to the Companys business model. In November 2003, the Company was
required to provide local number portability (LNP) to other wireless carriers. This
service allows greater customer choice in their telecommunications provider, without the
need to change established end user contact numbers. While this service certainly enhances
customer choice, it negatively impacts the cost to provide basic service. In addition,
recent regulatory decisions by the Federal Communications Commission (FCC) that reduced
the switched access rates charged to interexchange carriers by the CLEC and Greenfield
businesses, and increased rates for unbundled network elements purchased by those businesses
from incumbent local exchange carriers, have placed a higher degree of uncertainty and
margin pressure on the CLEC and Greenfield businesses. The Company has licenses and other rights (including lease agreements) to certain wireless
spectrum, including Multichannel Multipoint Distribution Service (MMDS) and Instructional
Television Fixed Service (ITFS). In April 2003, the FCC initiated a proposed rulemaking
to comprehensively examine its rules regarding MMDS and ITFS spectrum. On July 29, 2004,
the FCC issued a Report and Order and Further Notice of Proposed Rulemaking, setting forth
new rules for MMDS (now called Broadband Radio Service (BRS)) and ITFS (now called
Educational Broadband Service (EBS)) in the 2495-2690 MHz band. 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 an 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 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 FCCs order has not
yet been published in the Federal Register, and will not become effective until after such
publication, or possibly later, if the order is subject to reconsideration. The Company is
currently evaluating whether to participate in a motion to the FCC for reconsideration of
the order. As of September 30, 2004, the Company has a cost basis of approximately $15.2 million in
MMDS and ITFS spectrum recorded as part of other intangibles on the Condensed Consolidated
Balance Sheets. The Company will consider the FCCs Order and other regulatory and business
developments and trends when assessing the value of its intangible assets. The Company
tests intangibles for impairment at least annually. Results of Operations The 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, Digital 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 Notes 10 and 17 of the Condensed
Consolidated Financial Statements. The following discussion reviews the consolidated results of operations and specific results
within each consolidated reportable segment. 27




---



##### 



Consolidated Operating Results(in thousands, except lines and subscribers) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    40,848
    
    
    $
    40,519
    
    
    $
    122,161
    
    
    $
    119,264Total operating expense
    
    
    36,318
    
    
    
    35,777
    
    
    
    104,520
    
    
    
    104,003Operating income
    
    $
    4,530
    
    
    $
    4,742
    
    
    $
    17,641
    
    
    $
    15,261Depreciation
    
    $
    8,250
    
    
    $
    7,334
    
    
    $
    23,098
    
    
    $
    21,517Capital expenditures
    
    
    7,530
    
    
    
    5,700
    
    
    
    17,294
    
    
    
    16,923Total assets
    
    
    
    
    
    
    
    
    
    
    324,359
    
    
    
    322,381Ending wired access lines
    
    
    
    
    
    
    
    
    
    
    157,206
    
    
    
    154,079Ending wireless
subscribers
    
    
    
    
    
    
    
    
    
    
    41,229
    
    
    
    36,778
 Three months ended September 30 Operating revenue increased $0.3 million or 0.8% for the three months ended September 30,
2004 compared to the three months ended September 30, 2003. The increase is attributable to
a $0.8 million increase in Wireless revenue driven by a 12.1% increase in customers, a $0.5
million increase in Greenfield revenue driven primarily by a 34.9% increase in access lines
and a $0.1 million increase in IDS revenue. These increases were partially offset by a $0.7
million decrease in ILEC revenue driven primarily by a decrease in phone system sales and a
decrease in access lines, and a $0.3 million decrease in CLEC revenue due to a decrease in
access revenue primarily related to a significant reduction in interstate access rates
effective in June 2004. For the three months ended September 30, 2004, operating expense increased $0.5 million or
1.5% compared to the three months ended September 30, 2003, primarily due to an increase in
depreciation expense. As a result, operating margin decreased to 11.1% for the three months
ended September 30, 2004 from 11.7% for the three months ended September 30, 2003. Nine months ended September 30 Operating revenue increased $2.9 million or 2.4% for the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003. The increase is attributable to
a $2.4 million increase in Wireless revenue driven by a 12.1% increase in customers, a $1.4
million increase in Greenfield revenue driven primarily by a 34.9% increase in access lines
and a $0.5 million increase in IDS revenue. These increases were somewhat offset by a $1.2
million decrease in ILEC revenue driven primarily by a decrease in access lines and lower
wireless interconnection rates and a $0.2 million decrease in CLEC revenue primarily related
to a significant reduction in interstate access rates effective in June 2004. The Company has diversified operating revenue over the past several years through the growth
in its CLEC, Greenfield and Wireless businesses. For the nine months ended September 30,
the ILEC represented 57.3% of total revenue in 2004 compared to 59.7% in 2003, while Digital
Wireless represented 19.3% of total revenue in 2004 compared to 17.8% in 2003. The combined
CLEC and Greenfield businesses have grown to 16.7% of total revenue in 2004 up from 16.1% in
2003 and Internet represented 6.7% in 2004 compared to 6.5% in 2003. For the nine months ended September 30, 2004, operating expense increased $0.5 million
compared to the nine months ended September 30, 2003. This increase was primarily the
result of higher expenses in the Greenfield and Wireless businesses. Operating margins
increased to 14.4% for the nine months ended September 30, 2004 from 12.8% for the nine
months ended September 30, 2003. This increase in operating margin is primarily due to
improving operating margins in the CLEC, Greenfield and Wireless businesses 28




---



##### 



offset by
declining operating margins in the ILEC. Operating margin in the ILEC declined for the nine
months ended September 30, 2004 to 29.9% compared to 31.1% for the nine months ended
September 30, 2003. In October 2003, the Company received income tax assessments from the North Carolina
Department of Revenue related to certain state tax returns filed for the years ended
December 31, 1998, 1999 and 2000. The Company is currently appealing these assessments and
believes it has meritorious defenses to the assessments and the ultimate outcome is not
expected to result in a material impact on the Companys consolidated financial statements. ILEC(in thousands, except lines) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    23,350
    
    
    $
    24,048
    
    
    $
    69,955
    
    
    $
    71,195Total operating expense
    
    
    17,118
    
    
    
    16,911
    
    
    
    49,072
    
    
    
    49,022Operating income
    
    $
    6,232
    
    
    $
    7,137
    
    
    $
    20,883
    
    
    $
    22,173Depreciation
    
    $
    4,487
    
    
    $
    4,694
    
    
    $
    14,159
    
    
    $
    14,407Capital expenditures
    
    
    4,221
    
    
    
    2,712
    
    
    
    9,773
    
    
    
    8,887Total assets
    
    
    
    
    
    
    
    
    
    
    170,276
    
    
    
    168,802Ending business access lines
    
    
    
    
    
    
    
    
    
    
    28,912
    
    
    
    29,263Ending residential access lines
    
    
    
    
    
    
    
    
    
    
    84,816
    
    
    
    86,951Ending total access lines
    
    
    
    
    
    
    
    
    
    
    113,728
    
    
    
    116,214Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    84,760
    
    
    
    85,045
 Three months ended September 30 Operating revenue for the ILEC decreased $0.7 million or 2.9% for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003. The decrease in
revenue is primarily the result of a decrease in phone system sales of $0.5 million, a
decrease in line related revenue of $0.5 million related to a 2.1% decrease in access lines
and a decrease in revenue related to certain regulatory settlements of $0.3 million. The
decrease in phone system sales is primarily due to a significant sale that accounted for
approximately $0.3 million in the third quarter of 2003. These decreases were partially
offset by a $0.4 million increase in access and interconnection revenue. The decrease in
access lines is due in part to an increase in broadband Internet adoption by customers that
have cancelled second lines previously used for dial-up Internet service as well as
increased competition from wireless and other competitive providers. Operating expense for the ILEC increased $0.2 million for the three months ended September
30, 2004 compared to the three months ended September 30, 2003. Expenses related to phone
system sales
decreased $0.3 million, which was partially offset by an increase in access and
interconnection expense. Operating margin decreased from 29.7% for the three months ended
September 30, 2003 to 26.7% for the three months ended September 30, 2004. The Company
will continue to focus on gaining operational efficiencies to offset lower revenue due to
access line losses. Capital expenditures for the three months ended September 30, 2004 were 18.1% of ILEC
operating revenue compared to 11.3% of operating revenue for the three months ended
September 30, 2003. This increase in capital expenditures reflects the initial expenditures
associated with the Companys $9.0 million strategic initiative to enhance the broadband
capabilities of the ILEC network. 29




---



##### 



Nine months ended September 30 Operating revenue for the ILEC decreased $1.2 million or 1.7% for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003. The decrease in
revenue is primarily the result of a decrease in phone system sales of $0.4 million, a
decrease in revenue related to certain regulatory settlements of $0.3 million, a decrease in
long distance revenue of $0.4 million and a decrease in line related revenue of $0.5 million
related to a 2.1% decrease in access lines. Access lines at September 30, 2004 declined

2.1% from September 30, 2003. The decrease in access lines is due in part to an increase in
broadband Internet adoption by customers that have cancelled second lines previously used
for dial-up Internet service as well as increased competition from wireless and other
competitive providers. Operating expense in the ILEC increased $0.1 million or 0.1% for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003. Operating expense
increased while operating revenue declined resulting in a decline in operating margin from
31.1% for the nine months ended September 30, 2003 to 29.9% for the nine months ended
September 30, 2004. The Company will continue to focus on gaining operational efficiencies
to offset lower revenue due to access line losses. Capital expenditures for the nine months ended September 30, 2004 were 14.0% of ILEC
operating revenue compared to 12.5% of operating revenue for the nine months ended September
30, 2003. For the nine months ended September 30, 2004, ILEC access lines subscribing to our long
distance service remained relatively flat despite a 2.1% access line loss. At September 30,
2004, 74.5% of ILEC access lines subscribed to the Companys long distance service, up from
73.2% at September 30, 2003. While the number of ILEC customers subscribing to long
distance service remained flat, long distance revenue declined. Long distance minutes of
use increased significantly in the nine months ended September 30, 2004 compared to the nine
months ended September 30, 2003. However, increased competition has forced lower rates per
minute 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 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 accordance with FCC rules, the ILEC filed modifications to its access tariff rates on
June 16, 2004 with a scheduled effective date of July 1, 2004. On June 23, 2004, AT&T
Corporation (AT&T) filed a petition
asking the FCC to suspend and investigate tariff filings of the ILEC and numerous other
companies. AT&T asked the FCC to suspend the ILEC tariff for the following reasons: the
ILEC has had historical over-earnings, the ILEC should be required to make a mid-course
correction in rates to address over-earnings in prior periods, the ILEC understated traffic
sensitive demand, and the ILEC filed an excessive cash working capital requirement. The
Companys response was filed with the FCC on June 30, 2004. On July 1, 2004, the FCC issued
an order suspending for one day the tariff filings of multiple carriers including the ILEC.
The FCC rejected all but one of AT&Ts arguments against the ILEC and suspended the ILECs
tariff filing for investigation of its cash working capital calculations. On July 30, 2004,
the FCC reconsidered its suspension and declined to further investigate the ILECs cash
working capital calculations. The tariff suspension could impact the deemed lawful nature
of the Companys rates from July 1, 2004 forward, which could in turn subject the Company to
refund claims from interexchange carriers in the event the ILEC earns more than the
authorized rate of return. The Company does not believe that the FCCs action with respect
to the Companys 2004 filing will result in a material impact to the Companys consolidated
financial statements or subject the Company to any material refund claims. 30




---



##### 



The remainder of the ILECs interstate network access revenue is derived from revenue
pooling arrangements with other local exchange carriers administered by the National
Exchange Carrier Association (NECA), a quasi-governmental non-profit organization formed
by the FCC in 1983 for such purpose. The Companys ILEC participates in the NECA Carrier
Common Line pool and is the recipient of long-term support. In addition, the ILEC receives
Interstate Common Line Support (ICLS) funds, which are administered by NECA. 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. The FCC required wireline companies in the top 100 metropolitan statistical areas (MSAs)
to begin intermodal porting of telephone numbers (from wireline to wireless) beginning
November 24, 2003. In areas of the country below the top 100 MSAs, wireline to wireless
porting began May 24, 2004. LNP could result in increased customer churn over time, but has
not yet had any significant impact on the Companys business. CLEC(in thousands, except lines) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    4,596
    
    
    $
    4,911
    
    
    $
    14,585
    
    
    $
    14,759Total operating expense
    
    
    5,123
    
    

    
    5,515
    
    
    
    15,253
    
    
    
    16,155Operating income (loss)
    
    $
    (527
    )
    
    $
    (604
    )
    
    $
    (668
    )
    
    $
    (1,396
    )Depreciation
    
    $
    629
    
    
    $
    839
    
    
    $
    1,888
    
    
    $
    1,921Capital expenditures
    
    
    144
    
    
    
    242
    
    
    
    540
    
    
    
    707Total assets
    
    
    
    
    
    
    
    
    
    
    14,658
    
    
    
    15,923Ending access lines
    
    
    
    
    
    
    
    
    
    
    31,194
    
    
    
    28,756Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    22,819
    
    
    
    20,598
 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 2003 has been revised to reflect this change in
methodology. Three months ended September 30 CLEC operating revenue was $4.6 million for the three months ended September 30, 2004,
representing a $0.3 million or 6.4% decrease from the three months ended September 30, 2003.
The $0.3 million decrease consists primarily of a $0.5 million decrease in access revenue
partially offset by a $0.2 million increase in line revenue. The increase in line revenue
is primarily attributable to an 8.5% increase in access lines. The $0.5 million decrease in
access revenue was due primarily to the collection of approximately $0.4 million in
previously disputed access fees in the three months ended September 30, 2003 and a reduction
in certain access rates in June 2004. In 2001, the FCC adopted rules that set interstate switched access charges at declining
rates. Effective June 22, 2004, the FCC directed that switched access rates charged by
CLECs to long distance companies for interstate traffic be reduced from $0.012 per minute to
the rate of the applicable competing ILEC. Based on this order, the Company has
significantly reduced its CLEC interstate switched access rates by more than 50%. The
Company expects these rates to stabilize in the near term, but to continue to be forced
downward over the long term. In addition, certain interexchange carriers have been
deploying VoIP 31




---



##### 



technology in an effort to avoid payment of access charges. On April 21,
2004, the FCC announced that AT&T would be responsible for payment of access charges even if
VoIP technology is used in transporting long distance calls. It is expected that this issue
will continue to receive significant attention from the FCC in the remainder of 2004 and in
2005. CLEC operating expense was $5.1 million and $5.5 million for the three months ended
September 30, 2004 and 2003, respectively. Operating margin increased to (11.5)% for the
three months ended September 30, 2004 compared to (12.3)% for the three months ended
September 30, 2003. Nine months ended September 30 CLEC operating revenue was $14.6 million for the nine months ended September 30, 2004,
representing a $0.2 million or 1.2% decrease from the nine months ended September 30, 2003.
The $0.2 million decrease consists primarily of a $1.0 million decrease in access revenue
partially offset by a $0.7 million increase in line revenue and a $0.1 million increase in
long distance revenue. The increase in line revenue is primarily attributable to an 8.5%
increase in access lines for the nine months ended September 30, 2004 compared to the nine
months ended September 30, 2003. The $1.0 million decrease in access revenue was due
primarily to the collection of approximately $0.9 million in previously disputed access fees
in 2003 and a reduction in certain access rates in June 2004. CLEC operating expense was $15.2 million and $16.1 million for the nine months ended
September 30, 2004 and 2003, respectively. The primary drivers of the $0.9 million
reduction in expenses are lower personnel and commission expenses totaling $0.7 million. As
a result of the 5.6% decrease in expense, operating margin increased to (4.6)% for the nine
months ended September 30, 2004 compared to (9.5)% for the nine months ended September 30,
2003. The improvement in operating margin was due primarily to the increase in access lines
and reduction in expenses partially offset by a decrease in access fee revenue. In August 2003, the FCC released its Triennial Review Order (TRO) addressing the
obligations of incumbent local exchange carriers to provide unbundled network elements
(UNEs) to competitive local exchange carriers. The FCCs order eliminated unbundling
requirements for broadband services provided over fiber facilities, but retained unbundled
access to mass-market narrowband loops. The FCC also held that incumbent local exchange
carriers are not required to unbundle packet switching services or, subject to state review,
local switching that serves business customers on high-capacity loops. In addition, the FCC
ordered a three-year phase out of the unbundling of the high frequency portion of the loop.
For mass market customers served by narrowband loops, the FCC set out specific criteria for
states to use in determining whether switching should continue to be made available as an
UNE. If a state found that such switching should be eliminated as an UNE, then the FCC
required a three-year transition period for Unbundled Network Element Platform (UNE-P),
which is a service 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. In March 2004, the U. S. Court of Appeals for the District of Columbia issued a decision
that upheld the FCCs elimination of unbundling requirements for broadband loops and
phase-out of unbundling requirements for the high frequency portion of the loop (D.C.
Circuit opinion). However, the court vacated and remanded a number of the FCCs
determinations, including the FCCs finding that competitive local exchange carriers were
impaired without access to certain network elements such as local switching. In addition,
the court vacated the FCCs delegation to the state commissions determinations related to
mass-market switching and dedicated transport elements. This decision became effective on
June 15, 2004. This issue has received significant attention from federal and state
regulators. The CLEC and Greenfield businesses currently use certain network elements
impacted by the D.C. Circuit opinion, such as UNE-P, dedicated transport and enhanced
extended links (EELs), and high capacity combinations of loops and dedicated transport.
As of September 30, 2004, approximately 25% of the Companys current CLEC access lines are
EELs, and the Company currently has approximately 4,000 UNE-P circuits. In response to the D.C. Circuit Opinion, on August 20, 2004 the FCC released interim rules,
which became effective on September 13, 2004, to provide a transition period for
implementation of the D.C. Circuit decision and to provide the FCC with additional time to
prepare final unbundling rules consistent with the D.C. Circuits order. The FCC has
indicated that it will develop these final rules before the end of 2004. 32




---



##### 



The interim rules
apply to switching, dedicated transport, enterprise loops and EELs. Under the interim
rules, during the first six months after the effective date of the order, incumbent LECs are
required to provide and maintain these elements under the same terms (including pricing) as
existed before the DC Circuits opinion became effective. Therefore, the terms and
conditions, including pricing, in the Companys current interconnection agreements will
continue to govern our access to these elements and the charges for this access. This
period could be shortened if the FCC adopts final unbundling rules that become effective
within this six month period. During the succeeding six month period ending on September 13, 2005, the interim rules
mandate that existing elements will continue to be available under the terms of existing
interconnection agreements with rate increases established in accordance with the interim
rules. New elements cannot be added at the rates set pursuant to the interim rules. As a
result, absent new commission rules requiring unbundling of these elements, orders for these
elements after the initial six month period will be pursuant to negotiated terms, including
pricing, with the applicable incumbent LECs. After September 13, 2005, unless the FCC has ruled otherwise, the embedded elements subject
to the full transition period will only be available from the incumbent LECs at rates, terms
and conditions that competitive LECs negotiate with such incumbent. The Company believes that the impact to its ILEC from these regulatory developments will be
minimal. However, because the CLEC and Greenfield businesses rely significantly on network
elements, including UNE-P, EELs and dedicated transport supplied by the applicable incumbent
local carrier, higher prices for those elements will adversely impact these operations. The
Company is currently evaluating alternative network options and proposals from the
applicable incumbent carriers to assess the potential impact on the CLEC and Greenfield
businesses. Greenfield(in thousands, except lines and signed agreements) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    2,039
    
    
    $
    1,540
    
    
    $
    5,869
    
    
    $
    4,417Total operating expense
    
    
    2,951
    
    
    
    2,594
    
    
    
    8,775
    
    
    
    7,988Operating income (loss)
    
    $
    (912
    )
    
    $
    (1,054
    )
    
    $
    (2,906
    )
    
    $
    (3,571
    )Depreciation
    
    $
    774
    
    
    $
    433
    
    
    $
    2,239
    
    
    $
    1,826Capital expenditures
    
    
    1,201
    
    
    
    996
    
    
    
    3,141
    
    
    
    3,148Total assets
    
    
    
    
    
    
    
    
    
    
    25,619
    
    
    
    23,871Ending access lines
    
    
    
    
    
    
    
    
    
    
    12,284
    
    
    
    9,109Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    6,328
    
    
    
    4,154Total signed provider
agreements
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    87
 Three months ended September 30 Greenfield revenue increased $0.5 million for the three months ended September 30, 2004 to
$2.0 million compared to $1.5 million for the three months ended September 30, 2003. This
revenue increase is primarily attributable to a 34.9% increase in access lines. The
Greenfield business added five provider agreements in the third quarter of 2004, bringing
the total number of signed agreements to 104. These agreements currently represent a
potential of more than 48,000 access lines once these developments have been completely
built out. The expected residential/business line mix of these 104 projects is expected to
be 90% residential and 10% business. Operating expense increased 13.8% for the three months ended September 30, 2004 to $3.0
million, while revenue grew 32.4%. As a result, operating margin increased to (44.7)% for
the three months ended September 30, 2004 compared to (68.4)% for the three months ended
September 30, 2003. Capital 33




---



##### 



expenditures for the three months ended September 30, 2004
increased $0.2 million compared to the three months ended September 30, 2003, primarily due
to the construction of fiber facilities to bring certain competitive operations onto the
Companys network. Nine months ended September 30 Greenfield revenue increased $1.5 million for the nine months ended September 30, 2004 to
$5.9 million compared to $4.4 million for the nine months ended September 30, 2003. This
revenue increase is primarily attributable to a 34.9% increase in access lines. Operating expense increased 9.9% for the nine months ended September 30, 2004 to $8.8
million, related primarily to a $0.2 million increase in access and transport expenses
associated with the increase in access lines and an increase in other network expenses. At September 30, 2004, 51.5% of Greenfield access lines also subscribed to the Companys
long distance service, up from 45.6% at September 30, 2003. 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,
long distance penetration rates will likely increase. In June 2003, the North Carolina Utilities Commission (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 also 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. The NCUC has not yet crafted final rules implementing its order, and the
decision is subject to motions for reconsideration. Accordingly, the Company has not fully
determined the impact of this order on its Greenfield business. However, the Company does
not anticipate a material impact at this time. The Greenfield segment is also subject to the switched access rates reduction affecting the
Companys CLEC. The impact on Greenfield is not significant and should be offset by
increased levels of traffic as the Company continues to build out its projects. As
discussed above, the Companys Greenfield also relies, to a lesser extent than the CLEC, on
unbundled network elements purchased from incumbent local exchange carriers, and is
therefore impacted by the TRO, D.C. Circuit decision and the FCCs interim rules. 34




---



##### 



Digital Wireless(in thousands, except subscribers) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    8,222
    
    
    $
    7,468
    
    
    $
    23,591
    
    
    $
    21,198Total operating expense
    
    
    7,006
    
    
    
    7,318
    
    
    
    20,812
    
    
    
    19,455Operating income
    
    $
    1,216
    
    
    $
    150
    
    
    $
    2,779
    
    
    $
    1,743Depreciation
    
    $
    488
    
    
    $
    438
    
    
    $
    1,436
    
    
    $
    1,232Capital expenditures
    
    
    1,286
    
    
    
    784
    
    
    
    1,904
    
    
    
    965Total assets
    
    
    
    
    
    
    
    
    
    
    33,294
    
    
    
    31,120Ending post-pay subscribers
    
    
    
    
    
    
    
    
    
    
    41,229
    
    
    
    36,778
 Three months ended September 30 Digital Wireless revenue grew $0.8 million or 10.1% for the three months ended September 30,
2004 compared to the three months ended September 30, 2003. Post-pay wireless subscribers
increased 12.1% compared to September 30, 2003. Recurring revenue increased $0.6 million
due primarily to the increase in subscribers. Also contributing to the increase in revenue
was increased settlement and roaming revenue of $0.3 million related to a 10.1% increase in
the minutes of use on the Companys wireless network during the three months ended September
30, 2004 compared to the three months ended September 30, 2003. Operating expense decreased 4.3% for the three months ended September 30, 2004 to $7.0
million compared to the three months ended September 30, 2003. The primary drivers of the
decrease in operating expense were decreases in handset and accessory expense of $0.2
million related to lower customer additions, lower personnel expense of $0.2 and lower
marketing and sales expenses. Operating margin increased to 14.8% for the three months ended September 30, 2004 compared
to 2.0% for the three months ended September 30, 2003. This improvement in operating margin
is due primarily to the increase in settlement and roaming revenue and a decrease in
operating expenses. Capital expenditures were $1.3 million for the three months ended September 30, 2004,
primarily related to the completion of network upgrades associated with the deployment of
higher speed data services. Nine months ended September 30 Digital Wireless revenue grew $2.4 million or 11.3% for the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003. Recurring revenue increased $2.1
million primarily due to a 12.1% increase in post-pay wireless subscribers compared to the
nine months ended September 30, 2003. Also contributing to the increase in revenue was
increased settlement revenue of $0.9 million related to a 24.1% increase in the minutes of
use on the Companys wireless network during the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003. Operating expense increased 7.0% for the nine months ended September 30, 2004 to $20.8
million compared to the nine months ended September 30, 2003. The primary drivers of the
increase in operating expense were increases in settlement and switching expenses of $0.6
million, depreciation expense of $0.2 million and other corporate related expenses.
Settlement expenses increased primarily due to the increase in post-pay customers and the
related increase in minutes-of-use on our network. Operating margins increased to 11.8% for the nine months ended September 30, 2004 compared
to 8.2% for the nine months ended September 30, 2003. This increase was primarily due to an
increase in settlement and roaming revenue and an increase in subscribers. 35




---



##### 



In November 2003, the FCC mandated that wireless carriers implement LNP. This means that
customers will be able to retain their number when they change service providers. The
Company expects that wireless LNP could result in increased rates of customer churn. In
addition, the FCC also required wireline companies to begin intermodal porting (from
wireline to wireless) on the same date. In areas of the country below the top 100 MSAs,
wireless to wireless and wireline to wireless porting began on May 24, 2004. LNP could
result in increased customer churn over time, but has not yet had any significant impact on
our business. Cingular and AT&T Wireless, which had cell sites in the Companys partitioned area, recently
announced the closing of their merger. At this time, we are unable to determine how this
will affect the Company. Cingular, AT&T Wireless, and Triton PCS (Triton) signed a definitive agreement to exchange
certain assets of Triton PCS for assets of AT&T Wireless that were recently purchased by
Cingular. This agreement was contingent on the closing of the Cingular acquisition of AT&T
Wireless, which recently occurred. Additionally, Triton and Cingular will be entering into
a long-term reciprocal roaming agreement. The Company is currently discussing with Cingular
the impact, if any, of this transaction on the Companys joint operating agreement with
Cingular. The Company does not believe, at this time, that this transaction will have a
material impact on its wireless business. In essence, the Company would be replacing one
competitor in its market, AT&T Wireless, with Triton. FCC rules require the Wireless business to provide enhanced 911 emergency service (E-911)
in a two-phased approach. Phase one has been completed and involves delivery of the
callers number and the location of the cell site serving the customer to the Public Safety
Answering Point (PSAP). Phase two was completed on August 12, 2004, and involves
triangulation to allow PSAPs the ability to more accurately locate the calling party. Internet and Data Services (IDS)(in thousands, except lines and accounts) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    2,641
    
    
    $
    2,552
    
    
    $
    8,161
    
    
    $
    7,695Total operating expense
    
    
    3,463
    
    
    
    2,845
    
    
    
    8,780
    
    
    
    8,531Operating income (loss)
    
    $
    (822
    )
    
    $
    (293
    )
    
    $
    (619
    )
    
    $
    (836
    )Depreciation
    
    $
    1,538
    
    
    $
    397
    
    
    $
    2,337
    
    
    $
    1,139Capital expenditures
    
    
    408
    
    
    
    639
    
    
    
    1,084
    
    
    
    1,954Total assets
    
    
    
    
    
    
    
    
    
    
    14,150
    
    
    
    15,795Ending DSL lines
    
    
    
    
    
    
    
    
    
    
    12,477
    
    
    
    9,591Ending dial-up accounts
    
    
    
    
    
    
    
    
    
    
    9,686
    
    
    
    11,535Ending high-speed accounts
    
    
    
    
    
    
    
    
    
    
    561
    
    
    
    536
 Three months ended September 30 IDS operating revenue grew 3.5% for the three months ended September 30, 2004 to $2.6
million compared to the three months ended September 30, 2003. This increase is primarily
due to higher DSL revenue of $0.5 million related to an increase in DSL lines. This
increase was partially offset by decreases in dial-up and high-speed revenue of $0.2 million
combined. IDS operating expense increased $0.6 million compared to the three months ended September
30, 2003. The primary driver of this increase was a $1.1 million increase in depreciation
expense offset by a decrease in network expense as a result of certain network transport
efficiency initiatives. Due to the nature of the Companys fixed assets and technological
changes in the industry, the Company periodically performs an assessment of the useful lives
of its fixed assets. Due to an assessment completed in the third quarter of 36




---



##### 



2004, the Company shortened the useful lives of certain assets in the Internet business,
which resulted in the acceleration of depreciation expense for these assets. Operating margins decreased to (31.1)% for the three months ended September 30, 2004
compared to (11.5)% for the three months ended September 30, 2003. This decrease is
primarily due to an increase in depreciation expense of $1.1 million. The Company continues
to focus on opportunities to leverage existing network infrastructure to reduce transport
expenses. Nine months ended September 30 IDS operating revenue grew 6.0% for the nine months ended September 30, 2004 to $8.2 million
compared to the nine months ended September 30, 2003. This increase is primarily due to
higher DSL revenue of $1.3 million related to an increase in DSL lines. This increase was
partially offset by decreases in dial-up and high-speed revenue of $0.5 million combined. IDS operating expense increased 2.9% compared to the nine months ended September 30, 2003.
The increase is primarily due to a increase in depreciation expense offset by a decrease in
network expenses as the Company continues to focus on opportunities to leverage existing
network infrastructure to reduce transport expenses. As a result, operating margins
improved to (7.6)% for the nine months ended September 30, 2004 compared to (10.9)% for the
nine months ended September 30, 2003. DSL customers at September 30, 2004 increased 30.1% compared to September 30, 2003, to a
total of 12,477. This represents a penetration rate of 9.9% of combined Greenfield and ILEC
access lines. Other(in thousands) Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating expense
    
    $
    657
    
    
    $
    594
    
    
    $
    1,828
    
    
    $
    2,852Operating income (loss)
    
    $
    (657
    )
    
    $
    (594
    )
    
    $
    (1,828
    )
    
    $
    (2,852
    )Depreciation
    
    $
    334
    
    
    $
    533
    
    
    $
    1,039
    
    
    $
    992Capital expenditures
    
    
    270
    
    
    
    327
    
    
    
    852
    
    
    
    1,262Total assets
    
    
    
    
    
    
    
    
    
    
    66,362
    
    
    
    66,870
 Three months ended September 30 Operating expense for the Companys other business units increased $0.1 million for the
three months ended September 30, 2004 to $0.7 million. This increase was related primarily
to an increase in corporate related expenses attributable to the other operating segment.
The expenses of the other business units consist primarily of certain expenses that are not
allocated to the operating segments. Nine months ended September 30 Operating expense for the Companys other business units decreased $1.0 million for the nine
months ended September 30, 2004 to $1.8 million. This decrease was related primarily to a
decrease in corporate related expenses attributable to the other operating segment. 37




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##### 



Other Income Three months ended September 30 Other income (expense) for the three months ended September 30, 2004 decreased $1.4 million
compared to the three months ended September 30, 2003. This decrease relates primarily to
an increase in impairment charges on the Companys investment securities. The Company
recognized impairment charges of $1.5 million in the three months ended September 30, 2004
compared to $0.5 million in the three months ended September 30, 2003. In addition, the
Company recorded gains on sales of investments of $0.2 million during the three months ended
September 30, 2004 compared to $0.9 million during the three months ended September 30,
2003. Partially offsetting these declines was a reduction in other expenses (principally
interest) of $0.3 million. This decrease was partially due to lower debt levels in 2004
compared to 2003. Nine months ended September 30 Other income (expense) for the nine months ended September 30, 2004 decreased $12.8 million
compared to the nine months ended September 30, 2003. This decrease relates primarily to
lower gains on sale of investments of $14.9 million offset by a $0.3 million increase in
equity in income of unconsolidated companies, a $1.6 million decrease in other expenses and
a $0.3 million decrease in impairment on investments. The decrease in gains on sale of
investments was due to a $15.2 million gain recognized in 2003 related to the sale of the
Companys investment in ITC. The increase in equity in income of unconsolidated companies
relates to the Companys investment in Palmetto. Other expenses, principally interest,
decreased due primarily to lower debt levels in 2004. Liquidity and Capital Resources Cash provided by operating activities increased $0.6 million to $37.5 million for the nine
months ended September 30, 2004 compared to $36.9 million for the nine months ended
September 30, 2003. The increase was primarily due to higher operating income. Cash used in investing activities was $15.8 million during the nine months ended September
30, 2004 compared with cash provided by investing activities of $0.5 million for the nine
months ended September 30, 2003. The decrease was primarily the result of the proceeds
received by the Company in 2003 related to the sale of the Companys investment in ITC.
Capital expenditures increased $0.4 million during the nine months ended September 30, 2004
compared with the nine months ended September 30, 2003. Net cash used in financing activities was $13.5 million during the nine months ended
September 30, 2004 compared with $27.3 million during the nine months ended September 30,
2003. During the nine months ended September 30, 2004, the Company repaid $10.0 million in
long-term debt. In 2003, the Company used the proceeds from the sale of ITC and cash from
operations to repay $24.0 million in long-term debt. At September 30, 2004, the fair market value of the Companys marketable investment
securities was $6.5 million, all of which could be pledged to secure additional borrowing,
or sold, if needed for liquidity purposes. At September 30, 2004, the Company had a $70.0
million revolving five-year line of credit with interest at three month LIBOR plus a spread
that is based on various financial ratios, currently 1.25%. The interest rate on September
30, 2004 was 3.0%. During the nine months ended September 30, 2004, the Company elected to
pay down $10.0 million in principal on this credit facility. The credit facility provides
for quarterly installments of interest until maturity on March 31, 2006. As of September
30, 2004, $20.0 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. All
$50.0 million was outstanding as of September 30, 2004. The term loan requires quarterly
payments of interest until maturity on December 31, 2014. Payments of principal are due
beginning on March 31, 2005 and quarterly thereafter through December 31, 2014, in equal
quarterly installments of $1.25 million. 38




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##### 



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 yearTotal
    
    
    Less than one year
    
    
    1-3 years
    
    
    4 -5 years
    
    
    After 5 yearsContractual obligations:Revolving credit facility
    
    $
    20,000
    
    
    $
    
    
    
    $
    20,000
    
    
    $
    
    
    
    $
    Term loan
    
    
    50,000
    
    
    
    3,750
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    21,250Variable interest payments
    
    
    900
    
    
    
    600
    
    
    
    300
    
    
    
    
    
    
    
    Fixed interest payments
    
    
    19,673
    
    
    
    3,591
    
    
    
    8,647
    
    
    
    3,935
    
    
    
    3,500Operating leases (Restated)
    
    
    13,349
    
    
    
    3,185
    
    
    
    5,782
    
    
    
    2,550
    
    
    
    1,832Capital leases
    
    
    974
    
    
    
    404
    
    
    
    570
    
    
    
    
    
    
    
    $
    104,896
    
    
    $
    11,530
    
    
    $
    50,299
    
    
    $
    16,485
    
    
    $
    26,582
 The variable interest payments shown above on the revolving credit facility were determined
based on the balance outstanding and the interest rate at September 30, 2004. The Company anticipates that it has adequate resources to meet its currently foreseeable
obligations and capital requirements associated with the ILEC, CLEC, Greenfield, Digital
Wireless and IDS units, as well as its operations and payments associated with long-term
debt and investments as summarized above. Cautionary Note Regarding Forward-Looking Statements 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, as
amended (the Exchange Act) that are based on the beliefs of management, as well as
assumptions made by, and information currently available to, management. Management has
based these forward-looking statements on its current expectations and projections about
future events and trends affecting the financial condition and operations of the Companys
businesses. These forward-looking statements are subject to certain risks, uncertainties and
assumptions about the Company 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 existing customers against competition from new
technologies such as voice over internet protocol (VoIP),  
    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 control pricing and product offerings in a highly competitive industry,  
    the performance of 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, political and other events, including terrorist attacks. In some cases, these forward-looking statements can be identified by the use of words such
as may, will, should, expect, intend, plan, anticipate, believe, estimate,
predict, project or potential or the negative of these words or other comparable
words. 39




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##### 



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 the Company with the SEC, including those matters summarized under the caption
Risk Factors in the Companys Annual Report onForm 10-Kfor the year ended December 31,
2003. All forward-looking statements should be viewed with caution. Item 3. Quantitative and Qualitative Disclosures About Market Risk. At September 30, 2004, the Company had a $70.0 million revolving five-year line of credit
with interest at three month LIBOR plus a spread based on various financial ratios, that is
currently 1.25%. The interest rate on September 30, 2004 was 3.0%. The credit facility
provides for quarterly payments of interest until maturity on March 31, 2006. During the
nine months ended September 30, 2004, the Company elected to repay $10.0 million in
principal on this credit facility. As of September 30, 2004, $20.0 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. All $50.0 million was outstanding as of
September 30, 2004. The Company has two $5.0 million interest rate swap transactions to fix amounts outstanding
under the $70.0 million revolving line of credit at rates of 3.81% and 4.53%, respectively.
The fair value of the swaps as of September 30, 2004 was $(27,000) and $(0.2) million,
respectively and are recorded in other long-term liabilities. The interest rate swaps are
intended to protect the Company against an upward movement in interest rates but subject the
Company to above market interest costs if interest rates decline. The swaps mature on
November 3, 2004 and November 3, 2006, respectively. 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 Procedures The 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
Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that such information is accumulated and
communicated to management, including the Companys Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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. As a result, management
was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. At the time the Companys original Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2004 was prepared and filed, the Companys management, under the
supervision and with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of September 30, 2004.
Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer originally concluded that the Companys disclosure controls and procedures were
effective as of September 30, 2004 in timely alerting them to material information relating
to the Company, including its consolidated subsidiaries, required to be included in the
Companys Exchange Act reports. In conjunction with the Companys decision to restate its financial statements for the
period ended September 30, 2004 (as further described in Note 4 of the Notes to Condensed
Consolidated Financial Statements), the Company identified the below-described material
weaknesses in its internal control over financial reporting. As a result of such findings,
our Chief Executive Officer and Chief Financial Officer re-evaluated the Companys
disclosure controls and procedures and concluded those disclosure controls 40




---



##### 



and procedures were not effective as of September 30, 2004 because of the material
weaknesses in our internal controls over financial reporting as described below. (b) Internal Control Over Financial Reporting Beginning with the year ended December 31, 2004, Section 404 of the Sarbanes-Oxley Act of
2002 requires us to provide an annual internal controls report of management. This report
must contain (i) a statement of managements responsibility for establishing and maintaining
adequate internal controls over financial reporting for the Company, (ii) a statement
identifying the framework used by management to conduct the required evaluation of the
effectiveness of the Companys internal control over financial reporting, (iii) managements
assessment of the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, and (iv) a statement that the Companys registered public
accounting firm has issued an attestation report on managements assessment of our internal
controls over financial reporting. Section 404 of the Sarbanes-Oxley Act of 2002 also
requires that the Companys registered public accounting firm attest to and report on
managements assessment of the Companys internal controls over financial reporting. In accordance with the SECs November 30, 2004, Order Under Section 36 of the Securities
Exchange Act of 1934 Granting an Exemption from Specified Provisions of Exchange Act Rules
13a-1 and 15d-1 (Release No. 34-50754), which granted an extension to certain accelerated
filers with a public equity float of less than $700 million, the Company did not file in its
original Annual Report on Form 10-K for the year ended December 31, 2004 managements annual
report on the Companys internal control over financial reporting required by Item 308(a) of
Regulation S-K and the related attestation report of our registered public accounting firm
required by Item 308(b) of Regulation S-K. The Company expects to file these reports in an
amendment to such Annual Report on Form 10-K to be filed on or before May 2, 2005. In 2004, the Company undertook efforts to support managements evaluation of the Companys
internal control over financial reporting as of December 31, 2004. Although the Company has
not yet completed its evaluation, the following material weaknesses (as defined by the
Public Company Accounting Oversight Boards Auditing Standard No. 2) in internal control
over financial reporting as of December 31, 2004 have been identified:  
    The Company identified a deficiency related to accounting for its phone system
sales. The deficiency resulted from the lack of a subsidiary ledger for phone system
sales, which prevented the Companys finance personnel from performing, on a timely
basis, the reconciliation of accounts receivable for phone system sales to detail
records. This deficiency resulted in an adjustment to correct an overstatement of
accounts receivable and revenue for phone system sales.
    The Company identified a deficiency related to calculating depreciation expense.
The deficiency resulted from a lack of controls over the preparation and review of
electronic spreadsheets designed to ensure depreciation expense is accurately
calculated. This deficiency resulted in an adjustment to correct an overstatement of
depreciation expense.
    The Company identified a deficiency related to accounting for derivative financial
instruments under Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133). The deficiency
resulted from a lack of controls designed to ensure that the documentation required by
generally accepted accounting principles at the inception of a derivative transaction
is properly maintained for the term of the respective derivative instrument. This
deficiency resulted in adjustments that were required to properly reflect changes in
the estimated fair value of certain derivative financial instruments as a component of
earnings in the period of change in estimated fair value. The errors caused by these deficiencies resulted in a restatement of the Companys consolidated
financial statements included in this Quarterly Report on Form 10-Q/A. Although the Company has not completed its evaluation of internal control over financial
reporting, the Company expects to conclude it did not, as of December 31, 2004, maintain
effective internal control over financial reporting. Furthermore, management expects that its
independent registered public accounting firm 41




---



##### 



will conclude that the Companys internal control over financial reporting was not effective as
of December 31, 2004. There can be no assurance that, as a result of the Companys ongoing
evaluation of internal control over financial reporting, additional material weaknesses or
significant deficiencies will not be identified or that any deficiencies identified, either
alone or in combination with others, will not be considered additional material weaknesses. (c) Changes in Internal Control Over Financial Reporting During the fiscal quarter ended September 30, 2004, there were no changes in the Companys
internal control over financial reporting that materially affected, or that are reasonably
likely to materially affect, the Companys internal control over financial reporting. The Company disclosed in its Annual Report on Form 10-K for the year-ended December 31, 2004,
that, in response to the material weaknesses noted above, the Company initiated the following
corrective actions to remediate the material weaknesses described above:  
    The Company is in the process of implementing additional policies and
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 will provide adequate
controls in periods after December 31, 2004 over the reporting of accounts receivable
and revenue for phone system sales.
    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 its new policies and procedures relating to
fixed assets will provide adequate controls over the reporting of fixed assets,
accumulated depreciation and depreciation expense in periods after December 31, 2004.
    The Company is in the process of implementing additional policies and
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. 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 42




---



##### 



Item 6. Exhibits. Exhibit No.
    
    Description of Exhibit10.1*
    
    
    CT Communications, Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Non-Qualified Stock Option Agreement.10.2*
    
    
    CT Communications, Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Incentive Stock Option Agreement.10.3*
    
    
    CT Communications, Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Restricted Stock Agreement.10.4*
    
    
    CT Communications, Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Director Non-Qualified Stock Option Agreement.11
    
    
    Computation of Earnings Per Share.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.
   *
    
    Previously filed 43




---



##### 



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 OfficerApril 27, 2005Date
 (The above signatory has dual responsibility as a duly authorized officer and chief
accounting officer of the Registrant.) 44




---



##### 



EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit10.1*
    
    CT Communications, Inc.
Amended and Restated 2001 Stock Incentive Plan: Form of
Non-Qualified Stock Option Agreement.10.2*
    
    CT Communications, Inc.
Amended and Restated 2001 Stock Incentive Plan: Form of
Incentive Stock Option Agreement.10.3*
    
    CT Communications, Inc.
Amended and Restated 2001 Stock Incentive Plan: Form of
Restricted Stock Agreement.10.4*
    
    CT Communications, Inc.
Amended and Restated 2001 Stock Incentive Plan: Form of
Director Non-Qualified Stock Option Agreement.11
    
    Computation of Earnings Per
Share.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.
   *
    
    Previously filed 45