##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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) (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 [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ] 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. 18,875,875 shares of Common Stock outstanding as of April 28, 2004.




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX Page No.PART I. Financial InformationItem 1. Financial Statements.Condensed Consolidated Balance Sheets March 31, 2004 (Unaudited) and December 31, 2003
    
    
    
    
    
    
    2Condensed Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2004 and 2003
    
    
    
    
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2004 and 2003
    
    
    
    
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2004 and 2003
    
    
    
    
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    
    
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    
    
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    
    
    
    
    23Item 4. Controls and Procedures.
    
    
    
    
    
    
    24PART II. Other InformationItem 1. Legal Proceedings.
    
    
    
    
    
    
    24Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
    
    
    
    
    
    
    24Item 3. Defaults Upon Senior Securities.
    
    
    
    
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    
    
    
    

    24Item 5. Other Information.
    
    
    
    
    
    
    24Item 6. Exhibits and Reports on Form 8-K.
    
    
    
    
    
    
    25Signatures
    
    
    
    
    
    
    26Exhibit Index
    
    
    
    
    
    
    27
  1




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##### 



Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets
 (Unaudited)March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,655
    
    
    $
    16,957Accounts receivable and unbilled revenue, net
    
    
    20,538
    
    
    
    22,301Other
    
    
    6,369
    
    
    
    5,372Total current assets
    
    
    45,562
    
    
    
    44,630Investment securities
    
    
    7,198
    
    
    
    7,120Other investments
    
    
    1,526
    
    
    
    1,353Investments in unconsolidated companies
    
    
    13,772
    
    
    
    13,652Property and equipment, net
    
    
    204,141
    
    
    
    208,370Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,201
    
    
    
    35,201Other assets
    
    
    1,633
    
    
    
    1,436Total assets
    
    $
    318,939
    
    
    $
    321,668LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,250
    
    
    $
    Accounts payable
    
    
    7,306
    
    
    
    6,414Customer deposits and advance billings
    
    
    2,687
    
    
    
    2,665Other accrued liabilities
    
    
    12,509
    
    
    
    17,314Liabilities of discontinued operations
    
    
    936
    
    
    
    1,072Total current liabilities
    
    
    24,688
    
    
    
    27,465Long-term debt
    
    
    76,250
    
    
    
    80,000Deferred credits and other liabilities:Deferred income taxes
    
    
    24,073
    
    
    
    22,618Post-retirement benefits other than pension
    
    
    11,179
    
    
    
    11,246Other
    
    
    2,868
    
    
    
    2,809Total deferred credits and other liabilities
    
    
    38,120
    
    
    
    36,673Total liabilities
    
    
    139,058
    
    
    
    144,138Stockholders equity:Preferred stock not subject to mandatory redemption:5% series, $100 par value; 3,356 shares outstanding at
March 31, 2004 and December 31, 2003
    
    
    336
    
    
    
    3364.5% series, $100 par value; 614 shares outstanding at
March 31, 2004 and December 31, 2003
    
    
    61
    
    
    
    61Common stock, 18,875,735 and 18,769,187 shares outstanding at
March 31, 2004 and December 31, 2003, respectively
    
    
    42,129
    
    
    
    40,800Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    (895
    )
    
    
    (264
    )Other accumulated comprehensive income (loss)
    
    
    (56
    )
    
    
    558Retained earnings
    
    
    138,008
    
    
    
    135,741Total stockholders equity
    
    
    179,881
    
    
    
    177,530Total liabilities and stockholders equity
    
    $
    318,939
    
    
    $
    321,668
 See accompanying notes to condensed consolidated financial statements (unaudited). 2




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Income (Unaudited)
 Three Months Ended March 31,2004
    
    2003Operating revenue
    
    $
    40,519
    
    
    $
    38,696Operating expense
    
    
    34,708
    
    
    
    34,364Operating income
    
    
    5,811
    
    
    
    4,332Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,391
    
    
    
    1,049Interest, dividend income and gain (loss) on sales of investments
    
    
    236
    
    
    
    506Other expenses, principally interest
    
    
    (1,540
    )
    
    
    (1,640
    )Total other income (expense)
    
    
    87
    
    
    
    (85
    )Income before income taxes
    
    
    5,898
    
    
    
    4,247Income taxes
    
    
    2,406
    
    
    
    1,766Net income
    
    
    3,492
    
    
    
    2,481Dividends on preferred stock
    
    
    5
    
    
    
    5Earnings for common stock
    
    $
    3,487
    
    
    $
    2,476Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.13Diluted
    
    
    0.18
    
    
    
    0.13Basic weighted average shares outstanding
    
    
    18,834
    
    
    
    18,716Diluted weighted average shares outstanding
    
    
    18,953
    
    
    
    18,726
 See accompanying notes to condensed consolidated financial statements (unaudited). 3




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated
Statements of Comprehensive Income (Unaudited)
 Three Months Ended March 31,2004
    
    2003Net income
    
    $
    3,492
    
    
    $
    2,481Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on available-for-sale
securities
    
    
    (687
    )
    
    
    7Unrealized holding gains on interest rate swaps
    
    
    64
    
    
    
    43Reclassification adjustment for losses (gains) realized
in net income
    
    
    9
    
    
    
    (4
    )Comprehensive income
    
    $
    2,878
    
    
    $
    2,527
 See accompanying notes to condensed consolidated financial statements (unaudited). 4




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Three Months Ended March 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    3,492
    
    
    $
    2,481Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    8,143
    
    
    
    7,788Amortization of restricted stock
    
    
    202
    
    
    
    203Post-retirement benefits
    
    
    (67
    )
    
    
    152Loss on sale of investment securities
    
    
    14
    
    
    
    17Undistributed income of unconsolidated companies
    
    
    (1,391
    )
    
    
    (1,049
    )Undistributed patronage dividends
    
    
    (98
    )
    
    
    (238
    )Deferred income taxes and tax credits
    
    
    1,772
    
    
    
    710Changes in operating assets and liabilities
    
    
    (2,686
    )
    
    
    (75
    )Net cash provided by operating activities
    
    
    9,381
    
    
    
    9,989Cash flows from investing activities:Capital expenditures
    
    
    (3,913
    )
    
    
    (6,158
    )Purchases of investments
    
    
    (125
    )
    
    
    (50
    )Proceeds from sale of investment securities
    
    
    168
    
    
    
    10Partnership capital distribution
    
    
    
    
    
    
    1,197Net cash used in investing activities
    
    
    (3,870
    )
    
    
    (5,001
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (2,500
    )
    
    
    Dividends paid
    
    
    (1,228
    )
    
    
    (1,220
    )Proceeds from common stock issuances
    
    
    51
    
    
    
    49Net cash used in financing activities
    
    
    (3,677
    )
    
    
    (1,171
    )Net cash used in discontinued operations
    
    
    (136
    )
    
    
    (508
    )Net increase in cash and cash equivalents
    
    
    1,698
    
    
    
    3,309Cash and cash equivalents at beginning of period
    
    
    16,957
    
    
    
    7,652Cash and cash equivalents at end of period
    
    $
    18,655
    
    
    $
    10,961
 See accompanying notes to condensed consolidated financial statements (unaudited). 5




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  1.
    
    In the opinion of management of CT Communications, Inc. (the
Company), the accompanying unaudited financial statements contain
all adjustments consisting of only normal recurring accruals
necessary to present fairly the Companys financial position as of
March 31, 2004 and December 31, 2003 and the results of its
operations and cash flows for the three months ended March 31, 2004
and March 31, 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 three months ended March 31, 2004
and 2003 are not necessarily indicative of the results to be
expected for the full year.4.
    
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Land, buildings and general equipment
    
    $
    90,240
    
    
    $
    89,929Central office equipment
    
    
    166,238
    
    
    
    164,452Poles, wires, cables and conduit
    
    
    145,635
    
    
    
    144,775Construction in progress
    
    
    5,181
    
    
    
    4,576407,294
    
    
    
    403,732Accumulated depreciation
    
    
    (203,153
    )
    
    
    (195,362
    )Property and equipment, net
    
    $
    204,141
    
    
    $
    208,370
  5.
    
    DISCONTINUED OPERATIONSOn December 9, 2002, the Company discontinued its wireless broadband
commercial trial operations in Fayetteville, North Carolina. These
operations were provided by Wavetel, L.L.C. (Wavetel), a subsidiary
of the Company. The Company ceased Wavetels operations due to
significant operating losses, the limited coverage area provided by
the technology available at the time and the inability to obtain
outside investment. Complete disposal of the business through sale
and disposal of assets was completed by June 30, 2003. As a result,
Wavetels operations have been reflected as discontinued operations
and as assets and liabilities held for sale in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. In
the second quarter of 2003, the Company re-evaluated the potential
future liabilities related to the discontinued Wavetel operations and
determined that the potential liabilities exceeded the remaining
restructuring reserve. Therefore, the Company recorded an additional
loss from discontinued operations, before income taxes, of $0.7
million in the second quarter of 2003. The additional loss relates
to the Companys inability to sublease certain facilities that were
previously used in Wavetels operations. The adjustment is an
estimate based on the current market condition and could be revised
on a quarterly basis as new information becomes available. As of
March 31, 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 March 31, 2004 and December 31, 2003 consist of the
following (in thousands): 6




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31,
    
    December 31,2004
    
    2003Liabilities of discontinued operations:Other liabilities, primarily lease obligations
    
    $
    936
    
    
    $
    1,072Total liabilities of discontinued operations
    
    $
    936
    
    
    $
    1,072
  A summary of restructuring liability activity related to the
discontinued operations for the three months ended March 31, 2004 is
as follows (in thousands): Balance at December 31, 2003
    
    $
    1,072Lease termination costs
    
    
    (136
    )Balance at March 31, 2004
    
    $
    936
  6.
    
    COMMON STOCKThe following is a summary of Common Stock transactions during the
three months ended March 31, 2004 (in thousands): Shares
    
    AmountOutstanding at December 31, 2003
    
    
    18,769
    
    
    $
    40,800Purchase/forfeitures of Common Stock
    
    
    (24
    )
    
    
    (285
    )Issuance of Common Stock
    
    
    131
    
    
    
    1,614Outstanding at March 31, 2004
    
    
    18,876
    
    
    $
    42,129
 Basic
    
    DilutedWeighted average shares outstanding for the
three months ended March 31, 2004
    
    
    18,834
    
    
    
    18,953Weighted average shares outstanding for the
three months ended March 31, 2003
    
    
    18,716
    
    
    
    18,726
  Outstanding options to purchase approximately 571,000 shares of
Common Stock for the three months ended March 31, 2004 and
approximately 654,000 shares of Common Stock for the three months
ended March 31, 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
March 31, 2004 and March 31, 2003, the Company had total options
outstanding of 1,387,000 and 904,000, 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 28,
2005. There were no shares repurchased by the Company during the
three months ended March 31, 2004. 7




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  7.
    
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and
fair value for the Companys investments at March 31, 2004 and
December 31, 2003 were as follows (in thousands): Gross
    
    GrossUnrealized
    
    UnrealizedEquity Securities
    
    Amortized
    
    Holding
    
    HoldingAvailable-for-Sale
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueMarch 31, 2004
    
    $
    6,884
    
    
    $
    892
    
    
    $
    (578
    )
    
    $
    7,198December 31, 2003
    
    $
    5,739
    
    
    $
    1,476
    
    
    $
    (95
    )
    
    $
    7,120
  8.
    
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consist of the following (in
thousands): March 31,
    
    December 31,2004
    
    2003Equity Method:Palmetto MobileNet, L.P.
    
    $
    10,131
    
    
    $
    8,738Other
    
    
    105
    
    
    
    100Cost Method:Magnolia Holding Company
    
    
    1,681
    
    
    
    2,958ITC
Financial Services, LLC
    
    
    840
    
    
    
    840Other
    
    
    1,015
    
    
    
    1,016Total
    
    $
    13,772
    
    
    $
    13,652
  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 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 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 for certain transaction fees. As of March
31, 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 cash operating requirements. 8




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  9.
    
    LONG-TERM DEBTLong-term debt consists of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Line of credit with interest at LIBOR
plus 1.25% (2.44% at March 31, 2004
and December 31, 2003)
    
    $
    27,500
    
    
    $
    30,000Term loan with interest at 7.32%
    
    
    50,000
    
    
    
    50,00077,500
    
    
    
    80,000Less: Current portion of long-term debt
    
    
    1,250
    
    
    
    Total long-term debt
    
    $
    76,250
    
    
    $
    80,000
  The Company has a $90.0 million revolving five year line of credit
with interest at three month LIBOR plus a spread based on various
financial ratios, that is currently 1.25%. The interest rate on
March 31, 2004 was 2.44%. The credit facility provides for
quarterly payments of interest until maturity on March 31, 2006. As
of March 31, 2004, $27.5 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 March 31, 2004. The term loan
requires quarterly payments of interest until maturity on December
31, 2014. Payments of principal are due beginning March 31, 2005
and quarterly thereafter through December 31, 2014, in equal
quarterly amounts of $1.25 million. The Company also has an
additional line of credit for $10.0 million at one month LIBOR plus
1.25%. As of March 31, 2004 and December 31, 2003, the Company had
no amounts outstanding under this credit line.  The Company has two interest rate swap transactions to fix $5.0
million and $5.0 million of the amounts outstanding under the $90.0
million revolving line of credit at rates of 3.81% and 4.53%,
respectively. The fair value of the swaps as of March 31, 2004 was
$(0.1) million and $(0.3) million, respectively. The swaps mature
on November 3, 2004 and November 3, 2006, respectively.  10.
    
    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 March 31, 2004, and was unchanged for the quarter
then ended.  Other intangible assets consist primarily of wireless licenses.
Wireless licenses have terms of 10 years, but are renewable through
a routine process involving a nominal fee. The Company has
determined that no legal, regulatory, contractual, competitive,
economic or other factors currently exist that limit the useful life
of its wireless licenses. Therefore, the Company does not amortize
wireless licenses based on the determination that these assets have
indefinite lives. In accordance with SFAS No. 142, the Company
periodically reviews its determination of indefinite useful lives
for wireless licenses and will test those licenses for impairment at
least annually.  11.
    
    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 intends to vigorously appeal these assessments.
The Company 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. 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  12.
    
    RECENT ACCOUNTING PRONOUNCEMENTS  In March 2004, the EITF of the Financial Accounting Standards Board
(FASB) reached a consensus on EITF 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. The EITF
required additional disclosures for investments accounted for under
SFAS No. 115 and No. 124 effective for fiscal years ended after
December 15, 2003. The remaining consensus is applicable to all
reporting periods beginning after June 15, 2004. The Company will
adopt this consensus in the third quarter of 2004 and will apply the
provisions of this statement on a prospective basis. The impact to
the Companys overall financial position or results of operations is
not expected to be material.  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 Benefit 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 132 in December
2003.  13.
    
    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 plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure
requirements of SFAS No. 123 and SFAS No. 148.  The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plans and its stock
purchase plan. Had compensation cost for the Companys stock-based
compensation plans been determined consistent with SFAS No. 123, the
Companys net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands except per
share data): 10




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended March 31,2004
    
    2003Net income, as reported
    
    $
    3,492
    
    
    $
    2,481Additional stock-based compensation
expense that would have been included
in net income if the fair value method had
been applied, net of income tax
    
    
    272
    
    
    
    205Pro forma net income
    
    $
    3,220
    
    
    $
    2,276Basic earnings per common shareAs reported
    
    $
    0.19
    
    
    $
    0.13Pro forma
    
    
    0.17
    
    
    
    0.12Diluted earnings per common shareAs reported
    
    $
    0.18
    
    
    $
    0.13Pro forma
    
    
    0.17
    
    
    
    0.12
  14.
    
    PENSION AND POST-RETIREMENT PLANSComponents of net period benefit costs for the three months ended
March 31 (in thousands): Pension Benefits
    
    Post-Retirement Benefits2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    503
    
    
    $
    463
    
    
    $
    15
    
    
    $
    13Interest cost
    
    
    655
    
    
    
    626
    
    
    
    126
    
    
    
    128Expected return on plan assets
    
    
    (842
    )
    
    

    (664
    )
    
    
    
    
    
    
    Transition obligation
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    153Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    (84
    )
    
    
    (84
    )Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    
    (56
    )Net periodic benefit cost
    
    $
    317
    
    
    $
    426
    
    
    $
    166
    
    
    $
    154
  The Company previously disclosed in its financial statements for the
year ended December 31, 2003 that it does not expect to contribute
to the pension plan in 2004.  15.
    
    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. Quarterly information for
the Palmetto reporting segment is not shown separately below due to
the lack of availability of timely financial information. Palmetto
is not a public company and therefore, is not subject to the same
reporting deadlines as the Company. The Company will continue to
include the financial information for Palmetto on an annual basis as
presented in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. 11




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  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 provide
services primarily within North Carolina. Selected data by business
segment as of and for the three months ended March 31, 2004 and
2003, is as follows (in thousands):Three months ended March 31, 2004 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    23,654
    
    
    $
    7,122
    
    
    $
    5,038
    
    
    $
    1,945
    
    
    $
    2,760
    
    
    $
    
    
    
    $
    40,519External
expense
    
    
    11,225
    
    
    
    6,265
    
    
    
    4,357
    
    
    
    2,244
    
    
    
    2,257
    
    
    
    217
    
    
    
    26,565Depreciation
    
    
    5,346
    
    
    
    481
    
    
    
    641
    
    
    
    711
    
    
    
    593
    
    
    
    371
    
    
    
    8,143Operating
income (loss)
    
    $
    7,083
    
    
    $
    376
    
    
    $
    40
    
    
    $
    (1,010
    )
    
    $
    (90
    )
    
    $
    (588
    )
    
    $
    5,811Segment assets
    
    $
    165,983

    
    
    $
    31,057
    
    
    $
    16,587
    
    
    $
    24,509
    
    
    $
    14,170
    
    
    $
    66,633
    
    
    $
    318,939
  Three months ended March 31, 2003 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    23,532
    
    
    $
    6,873
    
    
    $
    4,471
    
    
    $
    1,312
    
    
    $
    2,508
    
    
    $
    
    
    
    $
    38,696External
expense
    
    
    10,970
    
    
    
    5,675
    
    
    
    4,768
    
    
    
    1,928
    
    
    
    2,396
    
    
    
    839
    
    
    
    26,576Depreciation
    
    
    5,407
    
    
    
    363
    
    
    
    662
    
    
    
    554
    
    
    
    471
    
    
    
    331
    
    
    
    7,788Operating
income (loss)
    
    $
    7,155
    
    
    $
    835
    
    
    $
    (959
    )
    
    $
    (1,170
    )
    
    $
    (359
    )
    
    $
    (1,170
    )
    
    $
    4,332Segment assets
    
    $
    171,305
    
    
    $
    30,722
    
    
    $
    12,809
    
    
    $
    23,011
    
    
    $
    15,043
    
    
    $
    84,801
    
    
    $
    337,691
  Reconciliation to income from continuing operations before income
taxes (in thousands): Three months ended March 31,2004
    
    2003Segment operating income
    
    $
    5,811
    
    
    $
    4,332Total other income (expense)
    
    
    87
    
    
    
    (85
    )Income from continuing operations
before income taxes
    
    $
    5,898
    
    
    $
    4,247
 12




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.  IntroductionCT Communications, Inc. and its subsidiaries provide a broad range of
telecommunications and related services to residential and business
customers located primarily in North Carolina. Our 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 our 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 in its current markets by
cross-selling bundled products and packages and growing its customer base
through its CLEC, Greenfield, IDS, and Digital Wireless businesses. The
Company will also consider strategic acquisitions and investments as
opportunities arise.For the three months ended March 31, 2004, net income for the Company was
$3.5 million compared to $2.5 million for the three months ended March
31, 2003. Diluted earnings per share were $0.18 and $0.13 for the three
months ended March 31, 2004 and 2003, respectively.Revenue increased across all operating segments during the quarter ended
March 31, 2004 and the Companys competitive businesses showed improved
operating margins. The Companys ILEC experienced a loss of access lines
as its customers can select from several alternative service providers.
The competitive CLEC and Greenfield wireline businesses continued to
experience strong demand for their products and services that resulted in
11.4% and 50.6% access line growth, respectively, for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003.
The replacement of higher margin ILEC lines with lower margin CLEC and
Greenfield lines will continue to pressure operating margins downward.
However, the Company is continuously evaluating opportunities for process
improvements and efficiency gains to offset the transition to
competitive, lower margin accounts. Operating margins in the CLEC and
Greenfield businesses should continue to be positively impacted as we
leverage existing transport infrastructure to support new customers.Industry and Operating TrendsTelecommunications continues to evolve into a highly competitive
industry. Industry participants are faced with the challenge of adapting
their organizations, services, processes and systems to this environment.
Our ILEC is facing more competitive pressure than at any other time in
its history. Wireless providers and CLECs have targeted our customers
and will continue to promote low cost, flexible communications
alternatives. The more recent introduction of cable telephony and Voice
over Internet Protocol (VoIP) services will become more significant
threats to our voice business in the coming years. These technologies are
capable of delivering a quality, competitive voice service to our ILEC
customers. These voice providers are not subject to certain regulatory
constraints that have shaped our business model and that will become more
significant impediments to our ability to successfully compete in the
coming years.In particular, our ILEC must provide certain basic services to all
customers in our regulated service area, regardless of the cost to
provide that service. We are the beneficiaries of certain cost
reimbursements that are intended to offset certain costs to provide
service. These reimbursements are increasingly at risk, yet our service
obligations remain unchanged. The future risk and uncertainty of
regulatory service requirements and the recovery of expense subsidies
will impact our ability to maintain existing margins and profitability. 13




---



##### 



As discussed above, VoIP and cable telephony are becoming more available
to customers and could result in lower revenues throughout our
businesses. Time Warner currently offers cable television and high-speed
Internet service and is expected to offer cable telephony in our ILEC
service area, which 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 our ILEC business as well as our long distance
revenue. Some customers are choosing to substitute their landline
service with wireless service. We believe this has contributed to the
access line decrease in the ILEC over the past several years.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.In recent quarters we experienced a decline in the recovery of wireless
interconnection access fee revenue. We expect continued pressure from
other telecommunications providers to lower or eliminate our recovery of
fees for terminating their traffic on our network.In our wireless business, increasing competition, market saturation and
an uncertain economy have caused and will likely continue to cause the
wireless industrys subscriber growth rate to moderate in comparison to
historical growth rates. While the wireless telecommunications industry
does continue to grow, a high degree of competition exists among
carriers. This competition will continue to put pressure upon pricing and
margins as carriers compete for potential customers. Future carrier
revenue growth is highly dependent upon the number of net customer
additions a carrier can achieve and the average revenue per user derived
from its customers.Regulatory requirements have grown in certain areas of our business and
have added complexity and expense to our business model. In November
2003, we were required to provide number portability to 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 our cost to provide basic service. As
federal and state agencies continue their pursuit of opening all
telecommunications services to competition, additional expenses are
likely to be incurred by the established local exchange carriers to
facilitate more open networks.Results of OperationsThe Company has six reportable segments, each of which is a strategic
business that is managed separately due to certain fundamental
differences such as regulatory environment, services offered and/or
customers served. The identified reportable segments are: ILEC, CLEC,
Greenfield, Digital Wireless, IDS and Palmetto. All other businesses
that do not meet reporting guidelines and thresholds are reported under
Other Business Units. Quarterly information for the Palmetto reporting
segment is not shown separately below due to the lack of availability of
timely financial information. Palmetto is not a public company and
therefore, is not subject to the same reporting deadlines as the Company.The following discussion reviews the results of our consolidated
operations and specific results within each reportable segment. 14




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##### 



Consolidated Operating Results(in thousands, except lines and
subscribers) Three months ended March 31,2004
    
    2003Total operating revenue
    
    $
    40,519
    
    
    $
    38,696Total operating expense
    
    
    34,708
    
    
    
    34,364Operating income
    
    $
    5,811
    
    
    $
    4,332Depreciation
    
    $
    8,143
    
    
    $
    7,788Capital expenditures
    
    
    3,913
    
    
    
    6,158Total assets
    
    
    318,939
    
    
    
    337,691Ending wired access lines
    
    
    156,410
    
    
    
    152,398Ending wireless subscribers
    
    
    39,250
    
    

    
    33,984
  Operating revenue increased $1.8 million or 4.7% for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003.
The increase is attributable to a $0.6 million increase in CLEC revenue
driven primarily by an 11.4% increase in access lines, a $0.6 million
increase in Greenfield revenue driven by a 50.6% increase in Greenfield
access lines, a $0.3 million increase in IDS revenue, a $0.2 million
increase in wireless revenue driven by a 15.5% increase in customers and
a $0.1 million increase in ILEC revenue. Overall, total operating
revenue increased in all operating segments for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003.  We have diversified operating revenue in the Company significantly over
the past several years through the growth in our competitive businesses.
For the three months ended March 31, ILEC revenue represented 58.4% of
total revenue in 2004 compared to 60.8% in 2003, while Digital Wireless
revenue represented 17.6% of total revenue in 2004 compared to 17.8% in
2003, the combined CLEC and Greenfield businesses have grown to 17.2% of
total revenue in 2004 up from 14.9% in 2003 and Internet revenue
represented 6.8% in 2004 compared to 6.5% in 2003.  For the three months ended March 31, 2004, operating expense increased
$0.3 million or 1.0% as compared to the three months ended March 31,
2003. This increase is primarily the result of increases in depreciation
expense of $0.4 million.  Our operating margin increased to 14.3% for the three months ended March
31, 2004 from 11.2% for the three months ended March 31, 2003. This
increase in operating margin is primarily due to improving operating
margins in our competitive businesses and the Companys efforts to
stabilize operating margins in the ILEC. Operating margin in the ILEC
declined slightly for the three months ended March 31, 2004 to 29.9%
compared to 30.4% for the three months ended March 31, 2003.  The Company has licenses and other rights to certain wireless spectrum,
including Multichannel Multipoint Distribution Service (MMDS) and
Instructional Television Fixed Service (ITFS). In April 2003, the
Federal Communications Commission (FCC) initiated a proposed rulemaking
to comprehensively examine its rules regarding MMDS and ITFS spectrum.
This proceeding is still pending before the FCC.  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
intends to vigorously appeal these assessments. The Company believes
that 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.   15




---



##### 



ILEC(in thousands, except lines) Three months ended March 31,2004
    
    2003Total operating revenue
    
    $
    23,654
    
    
    $
    23,532Total operating expense
    
    
    16,571
    
    
    
    16,377Operating income
    
    $
    7,083
    
    
    $
    7,155Depreciation
    
    $
    5,346
    
    
    $
    5,407Capital expenditures
    
    
    1,988
    
    
    
    3,308Total assets
    
    
    165,983
    
    
    
    171,305Ending business access lines
    
    
    29,130
    
    
    
    29,750Ending residential access lines
    
    
    86,191
    
    
    
    88,259Ending total access lines
    
    
    115,321
    
    
    
    118,009Ending long distance lines
    
    
    84,811
    
    
    
    84,233
  Operating revenue for the ILEC increased $0.1 million or 0.5% for three
months ended March 31, 2004 compared to the three months ended March 31,
2003. The increase in revenue consists of a $0.1 million increase in
subscriber line charge revenue and an increase in revenue related to our
bundled product offerings. These increases were partially offset by a
$0.2 million decrease in long distance revenue and a decrease in local
revenue due to the decrease in access lines. During the first quarter of
2004, the Company recognized revenue of approximately $0.3 million
related to the collection of previously disputed access charges. Without
this non-recurring revenue stream, access and interconnection revenue
would have declined approximately $0.4 million in the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. Access
lines at March 31, 2004 declined 2.3% from March 31, 2003. We believe
the decrease in access lines is due in part to an increase in broadband
Internet adoption that has led customers to cancel second lines
previously used for dial-up Internet service as well as increased
competition from wireless and other competitive providers.  Wireless interconnection revenue is likely to decline going forward as
the Company has been required to develop direct billing relationships
with wireless carriers for termination of wireless traffic on our
network. This decline is due to migration of this traffic to direct
billing arrangements subject to negotiated interconnection rates that are
lower than rates previously realized for termination of this traffic.
However, this rate decline will be somewhat offset as wireless traffic
terminated on our network increases.  Operating expense in the ILEC increased $0.2 million or 1.2% for the
three months ended March 31, 2004 compared to the three months ended
March 31, 2003. The primary drivers of this increase were increases in
access and interconnection expense and increased general and
administrative expense, partially offset by lower sales commission
expense. Operating expense increased at a faster rate than operating
revenue resulting in a decline in operating margin from 30.4% for the
three months ended March 31, 2003 to 29.9% for the three months ended
March 31, 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 March 31, 2004 were 8.4%
of ILEC operating revenue compared to 14.1% of operating revenue for the
three months ended March 31, 2003.  For the three months ended March 31, 2004, ILEC access lines subscribing
to our long distance service increased slightly despite a 2.3% access
line loss. At March 31, 2004, 73.5% of ILEC access lines subscribed to
our long distance service, up from 71.4% at March 31, 2003. Despite the
increase in ILEC customers subscribing to our long distance service, long
distance revenue has declined. Long distance minutes of use increased
significantly in the three months ended March 31, 2004 compared to the
three months ended March 31, 2003. However, increased competition has
forced rates per minute down and as a result, long distance revenue has
declined despite an increase in minutes-of-use; this trend is expected to
continue. 16




---



##### 



Certain of the Companys interstate network access revenue is based on
tariffed access charges prescribed by the FCC. The remainder of such
interstate revenue is derived from revenue pooling arrangements with
other local exchange carriers (LECs) 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.  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 our estimates. Management
periodically reviews these estimates and makes adjustments as applicable.  Certain interstate rates charged by the Company are regulated by the FCC
and are subject to potential over-earnings claims if the Companys
interstate rates result in earnings over the FCCs prescribed rate of
return. The Company maintains a reserve related to over-earnings based
on managements estimate of potential liability for the Company.
Management periodically assesses the Companys potential liability and
makes adjustments as applicable. Changes in managements estimate could
result from changes in current and future legislation, regulatory filings
and FCC rulings, as well as any other factors that may impact
managements estimate.  The FCC required wireline companies in the top 100 metropolitan
statistical areas (MSAs) to begin intermodal porting (from wireline to
wireless) beginning November 24, 2003. In areas of the country below the
top 100 MSAs, wireline to wireless porting is scheduled to begin May 24,
2004. Local number portability (LNP) could result in increased
customer churn over time, but has not yet had any significant impact on
our business.  In North Carolina, legislation was enacted in 2003 that deregulated
intraLATA long distance service, interLATA long distance service and long
distance operator services and provided other regulatory flexibility.
This legislation has provided our ILEC greater flexibility in offering
service bundles and promotions. On January 2, 2004, the North Carolina
Utilities Commission (NCUC) released an order that detailed its
findings regarding the legislation and adopting implementation
requirements. The Company is now in the process of analyzing and
implementing the requirements of the NCUC order.  CLEC(in thousands, except lines) Three months ended March 31,2004
    
    2003Total operating revenue
    
    $
    5,038
    
    
    $
    4,471Total operating expense
    
    
    4,998
    
    
    
    5,430Operating income (loss)
    
    $
    40
    
    
    $
    (959
    )Depreciation
    
    $
    641
    
    
    $
    662Capital expenditures
    
    
    211
    
    
    
    256Total assets
    
    
    16,587
    
    
    
    12,809Ending access lines
    
    
    30,415
    
    
    
    27,300Ending long distance lines
    
    
    15,832
    
    
    
    14,485
  CLEC operating revenue was $5.0 million for the three months ended March
31, 2004, representing a $0.6 million or 12.7% increase over the three
months ended March 31, 2003. The $0.6 million increase consists
primarily of a $0.2 million increase in recurring line revenue and a $0.3
million increase in access revenue. The increase in recurring line
revenue is primarily attributable to an 11.4% increase in access lines
for the three months ended March 31, 2004 compared to the three months
ended March 31, 2003. The $0.3 million increase in access revenue was
due primarily to the collection of approximately $0.2 million in
previously disputed access fees and an increase in minutes of use. 17




---



##### 



In 2001, the FCC adopted rules that set interstate switched access
charges at declining rates. Effective June 20, 2003, the FCC directed
that switched access rates charged by CLECs to long distance companies
for interstate traffic be reduced from $0.018 per minute to $0.012 per
minute. The next rate reduction is scheduled to be effective June 20,
2004, at which time the rate will be reduced from $0.012 to the rate of
the competing ILEC. Although the switched access rates will decline,
there is an expected certainty of payment by interexchange carriers;
however, certain interexchange carriers, such as AT&T, have been
deploying VoIP technology in an effort to avoid payment of access
charges. This issue is currently before the FCC. 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 by the FCC in 2004.  CLEC operating expense was $5.0 million and $5.4 million for the three
months ended March 31, 2004 and the three months ended March 31, 2003,
respectively. Operating expense decreased slightly despite revenue
growth of 12.7%. As a result, operating margin increased to 0.8% for the
three months ended March 31, 2004 compared to (21.4%) for the three
months ended March 31, 2003. The improvement in operating margin was due
primarily to the increase in access lines, a $0.4 million reduction in
personnel expenses and the collection of $0.2 million of previously
disputed access fee revenue. We expect margins to continue to be
positively impacted as we leverage existing transport infrastructure with
new customers.  We did not enter any new markets in the first quarter of 2004 or 2003,
electing instead to focus on market penetration in our current markets
and leverage existing transport infrastructure where possible. Our CLEC
focuses on the metropolitan areas and communities immediately surrounding
our ILEC territory.  In August 2003, the FCC released its Triennial Review Order 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. 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 is currently scheduled to become effective on
June 15, 2004. The Company is currently evaluating this decision and its
impact on its operations.  While the Company believes that the impact to its ILEC from these
regulatory developments will be minimal, its CLEC relies significantly on
network elements, including UNE-P and dedicated transport, supplied by
the applicable incumbent local carrier. As a result, if access to
network elements, including UNE-P or dedicated transport, is ultimately
restricted or made more expensive, then the Companys CLEC operations
will likely be adversely impacted.   18




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##### 



Greenfield(in thousands, except lines and signed agreements) Three months ended March 31,2004
    
    2003Total operating revenue
    
    $
    1,945
    
    
    $
    1,312Total operating expense
    
    
    2,955
    
    
    
    2,482Operating income (loss)
    
    $
    (1,010
    )
    
    $
    (1,170
    )Depreciation
    
    $
    711
    
    
    $
    554Capital expenditures
    
    
    742
    
    
    
    1,146Total assets
    
    
    24,509
    
    
    
    23,011Ending access lines
    
    
    10,674
    
    
    
    7,089Ending long distance lines
    
    
    5,130
    
    
    
    2,878Total signed provider agreements
    
    
    97
    
    
    
    77
  Greenfield revenue increased $0.6 million for the three months ended
March 31, 2004 to $1.9 million compared to $1.3 million for the three
months ended March 31, 2003. This revenue increase is primarily
attributable to a 50.6% increase in access lines related to the filling
of 97 developments covered by signed telecommunications provider
agreements. In addition, access revenue increased approximately $0.2
million primarily due to the collection of $0.2 million in previously
disputed access fees in 2004. Our Greenfield business added three
provider agreements in the first quarter of 2004, bringing the total
number of signed agreements to 97. These agreements currently represent
a potential 48,000 access lines once these developments have been
completely built out. The expected residential/business line mix of
these 97 projects is expected to be 90% residential and 10% business.  Operating expense increased 19.1% for the three months ended March 31,
2004 to $3.0 million, related primarily to the 50.6% increase in access
lines and a $0.2 million increase in depreciation expense. The increase
in access lines and related minutes-of-use on the Companys network has
resulted in a $0.2 million increase in combined access and transport
expenses. The increase in depreciation expense is associated with the
up-front capital expenditures required in most of the developments.
Capital expenditures for the three months ended March 31, 2004 decreased
$0.4 million compared to the three months ended March 31, 2003, as the
Company continues its strategy of targeting new developments with the
most efficient capital deployments.  At March 31, 2004, 48.1% of Greenfield access lines also subscribed to
our long distance service, up from 40.6% at March 31, 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 our 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 we have seen our long distance
penetration rates increase.  In June 2003, the NCUC initiated a general inquiry involving all
certificated telecommunications providers regarding preferred provider
contracts. The Company has telecommunications provider contracts through
its Greenfield operations. The NCUC is examining all telecommunications
preferred provider contracts filed by CLECs and ILECs with the NCUC and
hearings were held in late January 2004. Proposed orders are to be filed
by interested parties by May 7, 2004. It is not known when the NCUC will
issue a decision. At this time, the impact of this inquiry on the
Companys Greenfield operations cannot be determined.  The Greenfield segment is also subject to the switched access rates
reduction affecting the Companys CLEC. The impact on Greenfield is
expected to be minimal and should be offset by increased levels of
traffic as the Company continues to build out its projects.   19




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##### 



Digital Wireless(in thousands, except subscribers) Three months ended March 31,2004
    
    2003Total operating revenue
    
    $
    7,122
    
    
    $
    6,873Total operating expense
    
    
    6,746
    
    
    
    6,038Operating income
    
    $
    376
    
    
    $
    835Depreciation
    
    $
    481
    
    
    $
    363Capital expenditures
    
    
    382
    
    
    
    59Total assets
    
    
    31,057
    
    
    
    30,722Ending post-pay subscribers
    
    
    39,250
    
    
    
    33,984
  Digital Wireless revenue grew $0.2 million or 3.6% for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003.
Post-pay wireless subscribers increased 15.5% compared to the three
months ended March 31, 2004. Despite this acceleration of customer
growth, the average revenue per subscriber decreased and therefore,
recurring revenue increased only $0.3 million for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. Also
contributing to our increase in revenue was increased settlement revenue
of $0.1 million related to a 27.9% increase in the minutes of use on our
wireless network during the three months ended March 31, 2004 compared to
the three months ended March 31, 2003.  Operating expense increased 11.7% for the three months ended March 31,
2004 to $6.7 million compared to the three months ended March 31, 2003.
The primary drivers of the increase in operating expense are increases in
settlement expenses of $0.2 million, depreciation expense of $0.1 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 decreased to 5.3% for the three months ended March 31,
2004 compared to 12.1% for the three months ended March 31, 2003. This
decrease is primarily due to a decrease in average revenue per subscriber
and an increase in settlement expenses, corporate expenses and an
increase in depreciation expense.  Capital expenditures were $0.4 million for the three months ended March
31, 2004, primarily related to the addition of one new cell site in our
territory and the addition of capacity on selected other cell sites.  In November 2003, the FCC mandated that wireless carriers implement LNP.
There are several operational issues that were recently addressed by the
FCC. It is expected 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 is scheduled to begin May 24, 2004. LNP
could result in increased customer churn over time, but has not yet had
any significant impact on our business.  Cingular recently announced its plan to merge with AT&T Wireless, which
has cellsites in our partitioned area. At this time, we are unable to
determine how this will affect the Company.  Wireless service carriers are required by FCC rules to provide enhanced
911 emergency service (E-911) in a two-phase 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 will involve triangulation to allow
PSAPs the ability to more accurately locate a calling party. Because of
our affiliation with Cingular, they have responsibility for directing the
implementation of E-911. We have been working with Cingular as well as
applicable PSAPs in the roll out of E-911. We have included
approximately $2 million in our 2004 capital budget for this deployment. 20




---



##### 



In accordance with the Companys joint operating agreement with Cingular,
the Company will be required to adopt Cingulars network specifications for the
delivery of higher speed data products and services. The investment required to
implement these products and services is expected to approximate $2.5 million.  Internet and Data Services (IDS)(in thousands, except lines and
accounts) Three months ended March 31,2004
    
    2003Total operating revenue
    
    $
    2,760
    
    
    $
    2,508Total operating expense
    
    
    2,850
    
    
    
    2,867Operating income (loss)
    
    $
    (90
    )
    
    $
    (359
    )Depreciation
    
    $
    593
    
    
    $
    471Capital expenditures
    
    
    297
    
    
    
    838Total assets
    
    
    14,170
    
    
    
    15,043Ending DSL lines
    
    
    10,987
    
    
    
    7,755Ending dial-up accounts
    
    
    10,484
    
    
    
    12,263Ending high-speed accounts
    
    
    565
    
    
    
    580
  IDS operating revenue grew 10.0% for the three months ended March 31,
2004 to $2.8 million compared to the three months ended March 31, 2003.
During the three months ended March 31, 2004, the total number of DSL
lines increased 41.7%, which resulted in revenue from DSL service
increasing $0.4 million. This increase is partially offset by decreases
in dial-up and high-speed revenue of $0.2 million combined.  IDS operating expense was $2.9 million for the three months ended March
31, 2004 and the three months ended March 31, 2003, despite a 10.0%
increase in revenue. As a result, operating margins improved to (3.3%)
for the three months ended March 31, 2004 compared to (14.3%) for the
three months ended March 31, 2003. This improvement is primarily due to
the growth in DSL accounts.  DSL customers increased 41.7% for the three months ended March 31, 2004
to a total of 10,987. This represents a penetration rate of 8.7% of
combined Greenfield and ILEC access lines.  Other(in thousands) Three months ended March 31,2004
    
    2003Total operating expense
    
    $
    588
    
    
    $
    1,170Operating income (loss)
    
    $
    (588
    )
    
    $
    (1,170
    )Depreciation
    
    $
    371
    
    
    $
    331Capital expenditures
    
    
    293
    
    
    
    551Total assets
    
    
    66,633
    
    
    
    84,801
  Operating expense for the Companys other business units decreased $0.6
million for the three months ended March 31, 2004 to $0.6 million. This
decrease was related primarily to a decrease in corporate related
expenses attributable to the other operating segments.Other IncomeOther income (expense) for the three months ended March 31, 2004
increased $0.2 million compared to the three months ended March 31, 2003.
This increase relates to a $0.3 million increase in equity in income of
unconsolidated companies and a $0.1 million decrease in interest expense,
offset by a $0.3 million decrease in gains on sale of investments. The
increase in equity income of unconsolidated companies relates to the
Companys investment in Palmetto MobileNet, L.P. Interest expense
decreased due primarily to lower debt levels in 2004. 21




---



##### 



Liquidity and Capital ResourcesCash provided by operating activities decreased $0.6 million to $9.4
million for the three months ended March 31, 2004. The decrease
primarily related to decreases in accrued liabilities, partially offset
by an increase in deferred income taxes and net income.Cash used in investing activities decreased to $3.9 million during the
three months ended March 31, 2004 compared with $5.0 million for the
three months ended March 31, 2003. Capital expenditures decreased $2.2
million during the three months ended March 31, 2004 compared with the
three months ended March 31, 2003.Net cash used in financing activities was $3.7 million during the three
months ended March 31, 2004 compared with $1.2 million during the three
months ended March 31, 2003. During the three months ended March 31,
2004, the Company repaid $2.5 million in long-term debt.At March 31, 2004, the fair market value of the Companys marketable
investment securities was $7.2 million, all of which could be pledged to
secure additional borrowing, or sold, if needed for liquidity purposes.
The Company has a $90.0 million revolving five year line of credit with
interest at three month LIBOR plus a spread based on various financial
ratios, that is currently 1.25%. The interest rate on March 31, 2004 was
2.44%. The credit facility provides for quarterly payments of interest
until maturity on March 31, 2006. As of March 31, 2004, $27.5 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 March 31, 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 amounts of $1.25 million. The Company also has an additional
line of credit for $10.0 million at one month LIBOR plus 1.25%. As of
March 31, 2004, the Company had no amounts outstanding under this credit
line.The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due (in thousands): Payments due by yearLess than
    
    
    
    
    
    
    
    
    
    After 5Total
    
    one year
    
    1-3 years
    
    4 -5 years
    
    yearsContractual obligations:Line of credit
    
    $
    27,500
    
    
    $
    
    
    
    $
    27,500
    
    
    $
    
    
    
    $
    Term loan
    
    
    50,000
    
    
    
    1,250
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    23,750Operating leases
    
    
    9,693
    
    
    
    3,269
    
    
    
    5,182
    
    
    
    891
    
    
    
    351Capital leases
    
    
    1,702
    
    
    
    552
    
    
    
    1,150
    
    
    
    
    
    
    
    $
    88,895
    
    
    $
    5,071
    
    
    $
    48,832
    
    
    $
    10,891
    
    
    $
    24,101
  The Company anticipates that it has adequate resources to meet its
currently foreseeable obligations and capital requirements associated
with continued growth in the CLEC, Greenfield, Digital Wireless and IDS
units, as well as its operations, payments associated with long-term debt
and investments as summarized above. 22




---



##### 



Cautionary Note Regarding Forward-Looking StatementsThe foregoing discussion contains forward-looking statements, as
defined in Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, that are based on the beliefs of
management, as well as assumptions made by, and information currently
available to, management. Management has based these forward-looking
statements on its current expectations and projections about future
events and trends affecting the financial condition and operations of the
Companys business. These forward-looking statements are subject to
certain risks, uncertainties and assumptions about us that could cause
actual results to differ materially from those reflected in the
forward-looking statements.Factors that may cause actual results to differ materially from these
forward-looking statements include:  
    
    our 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,
    
    our ability to recover the substantial costs incurred over
the past few years in connection with our expansion into new
businesses,
    
    our ability to attract and retain key personnel,
    
    our ability to retain our 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,
    
    our ability to control pricing and product offerings in a highly competitive industry,
    
    the performance of our investments,
    
    our ability to effectively manage rapid changes in technology
and control capital expenditures related to those technologies, and
    
    the impact of economic and political events on the Companys
business, operating regions and customers, including terrorist
attacks.  In some cases, these forward-looking statements can be identified by the
use of words such as may, will, should, expect, intend, plan,
anticipate, believe, estimate, predict, project or potential
or the negative of these words or other comparable words.  In making forward-looking statements, the Company claims the protection
of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The Company undertakes
no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors
discussed in documents filed by us with the Securities and Exchange
Commission, including those matters summarized under the caption Risk
Factors in the Companys Annual Report onForm 10-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.  The Company has a $90.0 million revolving five year line of credit with
interest at three month LIBOR plus a spread based on various financial
ratios, that is currently 1.25%. The interest rate on March 31, 2004 was
2.44%. The credit facility provides for quarterly payments of interest
until maturity on March 31, 2006. As of March 31, 2004, $27.5 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 March 31, 2004. In
addition, the Company has another line of credit for $10.0 million at one
month LIBOR plus 1.25%. As of March 31, 2004, the Company had no amounts
outstanding under this credit line.  The Company has two interest rate swap transactions to fix $5.0 million
and $5.0 million of the amounts outstanding under the $90.0 million
revolving line of credit at rates of 3.81% and 4.53%, respectively. The
fair value the swaps as of March 31, 2004 was $(0.1) million and $(0.3)
million, respectively. The interest 23




---



##### 



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.  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 Securities Exchange Act of 1934
(Exchange Act) is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC. These
disclosure controls and procedures are designed to ensure that
appropriate information is accumulated and communicated to the Companys
management, including its chief executive officer and chief financial
officer, as appropriate to allow for timely decisions regarding
disclosure.  As required by the SEC rules, the Companys management, under the
supervision and with the participation of the Companys chief executive
officer and chief financial officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures as of March 31, 2004.
In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Also, the Company has
investments in certain unconsolidated entities, including Palmetto
MobileNet, L.P. As the Company neither controls nor manages these
entities, its disclosure controls and procedures with respect to these
entities are necessarily substantially more limited than those it
maintains with respect to its consolidated subsidiaries.  Based upon that evaluation, the Companys chief executive officer and
chief financial officer have concluded that the Companys disclosure
controls and procedures are effective 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.  During the fiscal quarter ended March 31, 2004, there have been no
changes in the Companys internal control over financial reporting that
have materially affected, or that are reasonably likely to materially
affect, the Companys internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings.  None 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.  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 24




---



##### 



Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No.
    
    Description of Exhibit10
    
    CT Communications, Inc. Amended and Restated 2001 Stock Incentive Plan11
    
    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.
 (b) Reports on Form 8-K  On February 13, 2004, the Company filed a Current Report on Form
8-K announcing that on February 13, 2004, the Company declared a
quarterly cash dividend on its common stock of $0.065 per share to
all shareholders of record at the close of business on March 1,
2004.On February 25, 2004, the Company filed a Current Report on Form
8-K announcing the Companys consolidated financial results for the
fourth quarter and year-end 2003. 25




---



##### 



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 Officer
  May 5, 2004

Date  (The above signatory has dual responsibility as a duly authorized officer
and chief accounting officer of the Registrant.) 26




---



##### 



EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit10
    
    CT Communications,
Inc. Amended and Restated 2001 Stock
Incentive Plan11
    
    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.
 27