##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q/A (Amendment No. 1)
 (MARK ONE) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____ to ____ Commission file number 0-19179 CT COMMUNICATIONS, INC.  NORTH CAROLINA
    
    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. 18,877,221 shares of Common Stock outstanding as of July 29, 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 June 30, 2004 (Unaudited) (Restated) and December 31, 2003
    
    
    4Condensed
Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 2004(Restated) and 2003(Restated)
    
    
    5Condensed
Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2004(Restated) and 2003(Restated)
    
    
    6Condensed
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 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.
    
    
    39Item 4.     Controls and Procedures.
    
    
    40PART II. Other InformationItem 1.     Legal Proceedings.
    
    
    42Item 2.     Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
    
    
    42Item 3.     Defaults Upon Senior Securities.
    
    
    42Item 4.     Submission of Matters to a Vote of Security Holders.
    
    
    42Item 5.     Other Information.
    
    
    43Item 6.     Exhibits and Reports on Form 8-K.
    
    
    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 June 30, 2004 is to restate our interim
consolidated financial statements for the quarters ended June 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. The
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 August 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;
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 cumulative effect of the correction
of this error at June 30, 2004 resulted in a reduction of accounts receivable, income taxes payable
and retained earnings of $1.5 million, $0.5 million and $1.2 million, respectively, and a $0.2
million increase in customer deposits and advance billings. The correction of this error for the
three and six months ended June 30, 2004 resulted in a $0.1 million and $0.1 million increase in
revenue, respectively, and for the three and six months ended June 30, 2003 resulted in a $13,000
and $47,000 increase 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 $3.3 million at June 30, 2004. These
errors resulted in an overstatement of depreciation expense of $0.1 million and $0.8 million for
the three and six months ended June 30, 2004, respectively, and an overstatement of depreciation
expense of $0.4 million and $1.1 million for the three and six months ended June 30, 2003,
respectively. The correction of these errors increased net income for the three and six months
ended June 30, 2004 by $27,000 and $0.5 million, respectively, and increased net income $0.2
million and $0.7 million for the three and six months ended June 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 June 30, 2004 and a
decrease in operating expense of $0.3 million for the six months ended June 30, 2004. For the
three and six months ended June 30, 2003, the correction of this error resulted in a decrease in
operating expense of $50,000 and $0.1 million, respectively. The after tax impact of these
adjustments resulted in a decrease to net income of $38,000 for the three months ended June 30,
2004 and an increase to net income of $0.2 million for the six months ended June 30, 2004. The
after tax impact of these adjustments for the three and six months ended June 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 $0.2
million and $0.3 million for the three and six months ended June 30, 2004, respectively, and a
decrease in interest expense of $0.1 million and $0.1 million for the three and six months ended
June 30, 2003, respectively. The after tax impact of the correction of this error resulted in an
increase to net income of $0.1 million and $0.2 million for the three and six months ended June 30,
2004, respectively, and an increase to net income of $36,000 and $0.1 million for the three and six
months ended June 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 six months ended June 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 $44,000, respectively,
and an increase in rent expense for the three and six months ended June 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 six months ended June 30, 2003 and a decrease in equity in income of
affiliates of $0.2 million for the three and six months ended June 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 June 30, 2004. The aggregate impact of the correction of all the errors discussed above resulted in an increase in
net income of $0.1 million and $0.8 million for the three and six months ended June 30, 2004 and an
increase in net income of $0.2 million and $0.6 million for the three and six months ended June 30,
2003. The Company has reflected the results of the restatement for the fiscal years ended December 31,
2004 and December 31, 2003 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 September 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) (Unaudited)(Restated)June 30,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,797
    
    
    $
    16,957Accounts receivable and unbilled revenue, net
    
    
    18,058
    
    
    
    19,533Other
    
    
    5,196
    
    
    
    5,372Total current assets
    
    
    48,051
    
    
    
    41,862Investment securities
    
    
    5,822
    
    
    
    7,518Other investments
    
    
    1,315
    
    
    
    1,078Investments in unconsolidated companies
    
    
    14,853
    
    
    
    13,034Property and equipment, net
    
    
    206,437
    
    
    
    211,521Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,201
    
    
    
    35,201Other assets
    
    
    2,763
    
    
    
    2,565Total assets
    
    $
    324,348
    
    
    $
    322,685LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    2,500
    
    
    $
    Accounts payable
    
    
    8,025
    
    
    
    6,250Customer deposits and advance billings
    
    
    2,765
    
    
    
    2,840Other accrued liabilities
    
    
    14,760
    
    
    
    17,589Liabilities of discontinued operations
    
    
    798
    
    
    
    1,072Total current liabilities
    
    
    28,848
    
    
    
    27,751Long-term debt
    
    
    72,500
    
    
    
    80,000Deferred credits and other liabilities:Deferred income taxes
    
    
    25,462
    
    
    
    23,171Post-retirement benefits other than pension
    
    
    11,092
    
    
    
    11,246Other
    
    
    2,943
    
    
    
    3,123Total deferred credits and other liabilities
    
    
    39,497
    
    
    
    37,540Total liabilities
    
    
    140,845
    
    
    
    145,291Stockholders equity:Preferred stock not subject to mandatory redemption:5% series, $100 par value; 3,356 shares outstanding at
June 30, 2004 and December 31, 2003
    
    
    336
    
    
    
    3364.5% series, $100 par value; 614 shares outstanding at
June 30, 2004 and December 31, 2003
    
    
    61
    
    
    
    61Common stock, 18,877,190 and 18,769,187 shares outstanding at
June 30, 2004 and December 31, 2003, respectively
    
    
    42,146
    
    
    
    40,800Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    (657
    )
    
    
    (264
    )Other accumulated comprehensive income (loss)
    
    
    (304
    )
    
    
    492Retained earnings
    
    
    141,623
    
    
    
    135,671Total stockholders equity
    
    
    183,503
    
    
    
    177,394Total liabilities and stockholders equity
    
    $
    324,348
    
    
    $
    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 June 30,
    
    
    Six Months Ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Operating revenue:Telephone
    
    $
    29,742
    
    
    $
    30,523
    
    
    $
    60,424
    
    
    $
    59,872Wireless and internet
    
    
    11,007
    
    
    
    9,443
    
    
    
    20,889
    
    
    
    18,873Total operating revenue
    
    
    40,749
    
    
    
    39,966
    
    
    
    81,313
    
    
    
    78,745Operating expense:Telephone cost of service (excluding depreciation)
    
    
    8,732
    
    
    
    8,916
    
    
    
    17,290
    
    
    
    17,461Wireless and internet cost of service (excluding
depreciation)
    
    
    4,737
    
    
    
    4,448
    
    
    
    9,584
    
    
    
    8,987Selling, general and administrative
    
    
    13,677
    
    
    
    13,872
    
    
    
    26,480
    
    
    
    27,595Depreciation
    
    
    7,423
    
    
    
    7,292
    
    
    
    14,848
    
    
    
    14,183Total operating expense
    
    
    34,569
    
    
    
    34,528
    
    
    
    68,202
    
    
    
    68,226Operating income
    
    
    6,180
    
    
    
    5,438
    
    
    
    13,111
    
    
    
    10,519Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,338
    
    
    
    1,398
    
    
    
    2,729
    
    
    
    2,447Interest, dividend income and gain (loss) on sales of
Investments
    
    
    495
    
    
    
    14,747
    
    
    
    750
    
    
    
    15,020Impairment of investments
    
    
    (21
    )
    
    
    (1,273
    )
    
    
    (40
    )
    
    
    (1,284
    )Other expenses, principally interest
    
    
    (1,020
    )
    
    
    (2,180
    )
    
    
    (2,452
    )
    
    
    (3,750
    )Total other income (expense)
    
    
    792
    
    
    
    12,692
    
    
    
    987
    
    
    
    12,433Income from continuing operations before income
Taxes
    
    
    6,972
    
    
    
    18,130
    
    
    
    14,098
    
    
    
    22,952Income taxes
    
    
    2,807
    
    
    
    7,134
    
    
    
    5,694
    
    
    
    9,124Income from continuing operations
    
    
    4,165
    
    
    
    10,996
    
    
    
    8,404
    
    
    
    13,828Discontinued operations:Loss from operations of discontinued business, net of
income tax benefits of $276 for the three and six
months ended June 30, 2003
    
    
    
    
    
    
    (424
    )
    
    
    
    
    
    
    (424
    )Net income
    
    
    4,165
    
    
    
    10,572
    
    
    
    8,404
    
    
    
    13,404Dividends on preferred stock
    
    
    5
    
    
    
    5
    
    
    
    10
    
    
    
    10Net income for common stock
    
    $
    4,160
    
    
    $
    10,567
    
    
    $
    8,394
    
    
    $
    13,394Basic Earnings per share:Continuing operations
    
    $
    0.22
    
    
    $
    0.59
    
    
    $
    0.45
    
    
    $
    0.74Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.22
    
    
    
    0.56
    
    
    
    0.45
    
    
    
    0.72Diluted Earnings per share:Continuing operations
    
    $
    0.22
    
    
    $
    0.59
    
    
    $
    0.44
    
    
    $
    0.74Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.22
    
    
    
    0.56
    
    
    
    0.44
    
    
    
    0.71Basic weighted average shares outstanding
    
    
    18,876
    
    
    
    18,740
    
    
    
    18,855
    
    
    
    18,728Diluted weighted average shares outstanding
    
    
    19,051
    
    
    
    18,782
    
    
    
    18,999
    
    
    
    18,748
 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 June 30,
    
    
    Six Months Ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net income
    
    $
    4,165
    
    
    $
    10,572
    
    
    $
    8,404
    
    
    $
    13,404Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on
available-for-sale
securities
    
    
    (315
    )
    
    
    377
    
    
    
    (608
    )
    
    
    376Reclassification adjustment for losses (gains)
realized
in net income
    
    
    (198
    )
    
    
    4
    
    
    
    (188
    )
    
    
    8Comprehensive income
    
    $
    3,652
    
    
    $
    10,953
    
    
    $
    7,608
    
    
    $
    13,788
 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) Six Months Ended June 30,2004
    
    
    2003(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income
    
    $
    8,404
    
    
    $
    13,404Adjustments to reconcile net income to net cash provided
by operating activities:Loss from discontinued operations
    
    
    
    
    
    
    424Depreciation
    
    
    14,848
    
    
    
    14,183Amortization of restricted stock
    
    
    423
    
    
    
    203Post-retirement benefits
    
    
    (154
    )
    
    
    283Gain on sale of investment securities
    
    
    (294
    )
    
    
    13Gain on sale of investments in unconsolidated companies
    
    
    
    
    
    
    (14,401
    )Impairment of investments
    
    
    40
    
    
    
    1,284Undistributed income of unconsolidated companies
    
    
    (2,729
    )
    
    
    (2,448
    )Undistributed patronage dividends
    
    
    (183
    )
    
    
    (206
    )Deferred income taxes and tax credits
    
    
    2,909
    
    
    
    4,412Changes in operating assets and liabilities
    
    
    353
    
    
    
    3,277Net cash provided by operating activities
    
    
    23,617
    
    
    
    20,428Cash flows from investing activities:Capital expenditures
    
    
    (9,764
    )
    
    
    (11,223
    )Purchases of investments
    
    
    (241
    )
    
    
    (3,136
    )Proceeds from sale of investment in unconsolidated companies
    
    
    
    
    
    
    16,380Proceeds from sale of investment securities
    
    
    943
    
    
    
    33Partnership capital distribution
    
    
    917
    
    
    
    1,197Net cash provided by (used in) investing activities
    
    
    (8,145
    )
    
    
    3,251Cash flows from financing activities:Repayment of long-term debt
    
    
    (5,000
    )
    
    
    (20,000
    )Dividends paid
    
    
    (2,462
    )
    
    
    (2,446
    )Proceeds from common stock issuances
    
    
    105
    
    
    
    335Net cash used in financing activities
    
    
    (7,357
    )
    
    
    (22,111
    )Net cash used in discontinued operations
    
    
    (275
    )
    
    
    (592
    )Net increase in cash and cash equivalents
    
    
    7,840
    
    
    
    976Cash and cash equivalents at beginning of period
    
    
    16,957
    
    
    
    7,652Cash and cash equivalents at end of period
    
    $
    24,797
    
    
    $
    8,628
 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 June 30, 2004
and December 31, 2003, the results of its operations for the three and six months ended June
30, 2004 and June 30, 2003 and its cash flows for the six months ended June 30, 2004 and
June 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 six months ended June 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 cumulative effect of the correction of
this error at June 30, 2004 resulted in a reduction of accounts receivable, income taxes
payable and retained earnings of $1.5 million, $0.5 million and $1.2 million, respectively,
and a $0.2 million increase in customer deposits and advance billings. The correction of
this error for the three and six months ended June 30, 2004 resulted in a $0.1 million and
$0.1 million increase in revenue, respectively, and for the three and six months ended June
30, 2003 resulted in a $13,000 and $47,000 increase 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 $3.3 million at June
30, 2004. These errors resulted in an overstatement of depreciation expense of $0.1 million
and $0.8 million for the three and six months ended June 30, 2004, respectively, and an
overstatement of depreciation expense of $0.4 million and $1.1 million for the three and six
months ended June 30, 2003, respectively. The correction of these errors increased net
income for the three and six months ended June 30, 2004 by $27,000 and $0.5 million,
respectively, and increased net income $0.2 million and $0.7 million for the three and six
months ended June 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 June 30, 2004 and a decrease in operating expense of $0.3 million for the six months
ended June 30, 2004. For the three and six months ended June 30, 2003, the correction of
this error resulted in a decrease in operating expense of $50,000 and $0.1 million,
respectively. The after tax impact of these adjustments resulted in a decrease to net
income of $38,000 for the three months ended June 30, 2004 and an increase to net income of
$0.2 million for the six months ended June 30, 2004. The after tax impact of these
adjustments for the three and six months ended June 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 $0.2 million and $0.3 million for the
three and six months ended June 30, 2004, respectively, and a decrease in 8




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) interest expense of $0.1 million and $0.1 million for the three and six months ended June
30, 2003, respectively. The after tax impact of the correction of this error resulted in an
increase to net income of $0.1 million and $0.2 million for the three and six months ended
June 30, 2004, respectively, and an increase to net income of $36,000 and $0.1 million for
the three and six months ended June 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 six months ended
June 30, 2004 was an increase in rent expense of $22,000 and $44,000, respectively, and an
increase in rent expense (which is included in operating expense on the Condensed
Consolidated Statement of Income) for the three and six months ended June 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 six months ended June 30, 2003 and a decrease in
equity in income of affiliates of $0.2 million for the three and six months ended June 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 June
30, 2004. The aggregate impact of the correction of all the errors discussed above resulted in an
increase in net income of $0.1 million and $0.8 million for the three and six months ended
June 30, 2004 and an increase in net income of $0.2 million and $0.6 million for the three
and six months ended June 30, 2003. 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The cumulative impacts of these restatements on the financial statements are summarized
below (in thousands, except per share amounts): Effect on selected Condensed Consolidated Balance Sheet data as of June 30, 2004: Selected Condensed Consolidated Balance Sheet Data
June 30, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedBalance SheetAccounts receivable
    
    $
    20,694
    
    
    $
    (2,636
    )
    
    $
    18,058Total current assets
    
    
    50,687
    
    
    
    (2,636
    )
    
    
    48,051Investment securities
    
    
    6,041
    
    
    
    (219
    )
    
    
    5,822Other investments
    
    
    1,590
    
    
    
    (275
    )
    
    
    1,315Investments in
unconsolidated companies
    
    
    14,359
    
    
    
    494
    
    
    
    14,853Property and equipment, net
    
    
    202,586
    
    
    
    3,851
    
    
    
    206,437Other assets
    
    
    1,638
    
    
    
    1,125
    
    
    
    2,763Total assets
    
    
    322,008
    
    
    
    2,340
    
    
    
    324,348Customer deposits and
advance billings
    
    
    2,591
    
    
    
    174
    
    
    
    2,765Other accrued liabilities
    
    
    14,616
    
    
    
    144
    
    
    
    14,760Total current liabilities
    
    
    28,530
    
    
    
    318
    
    
    
    28,848Deferred income taxes
    
    
    24,678
    
    
    
    784
    
    
    
    25,462Other liabilities
    
    
    2,585
    
    
    
    358
    
    
    
    2,943Total deferred credits and
other liabilities
    
    
    38,355
    
    
    
    1,142
    
    
    
    39,497Total liabilities
    
    
    139,385
    
    
    
    1,460
    
    
    
    140,845Other accumulated
comprehensive income
(loss)
    
    
    (451
    )
    
    
    147
    
    
    
    (304
    )Retained earnings
    
    
    140,890
    
    
    
    733
    
    
    
    141,623Total stockholders equity
    
    
    182,623
    
    
    
    880
    
    
    
    183,503Total liabilities and
stockholders equity
    
    
    322,008
    
    
    
    2,340
    
    
    
    324,348
 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 six
months ended June 30, 2004: Selected Condensed Consolidated Income Statement Data
Three and Six Months ended June 30, 2004
(in thousands, except per share data) Three months ended June 30, 2004
    
    
    Six Months ended June 30, 2004As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedTelephone revenue
    
    $
    29,658
    
    
    $
    84
    
    
    $
    29,742
    
    
    $
    60,295
    
    
    $
    129
    
    
    $
    60,424Total operating revenue
    
    
    40,665
    
    
    
    84
    
    
    
    40,749
    
    
    
    81,184
    
    
    
    129
    
    
    
    81,313Telephone cost of service
    
    
    8,732
    
    
    
    
    
    
    
    8,732
    
    
    
    17,333
    
    
    
    (43
    )
    
    
    17,290Wireless and internet
cost of service
    
    
    4,715
    
    
    
    22
    
    
    
    4,737
    
    
    
    9,439
    
    
    
    145
    
    
    
    9,584Selling, general and
administrative
    
    
    13,677
    
    
    
    
    
    
    
    13,677
    
    
    
    26,917
    
    
    
    (437
    )
    
    
    26,480Depreciation
    
    
    7,405
    
    
    
    18
    
    
    
    7,423
    
    
    
    15,548
    
    
    
    (700
    )
    
    
    14,848Total operating expense
    
    
    34,529
    
    
    
    40
    
    
    
    34,569
    
    
    
    69,237
    
    
    
    (1,035
    )
    
    
    68,202Operating income
    
    
    6,136
    
    
    
    44
    
    
    
    6,180
    
    
    
    11,947
    
    
    
    1,164
    
    
    
    13,111Equity in income of
unconsolidated
companies, net
    
    
    1,504
    
    
    
    (166
    )
    
    
    1,338
    
    
    
    2,895
    
    
    
    (166
    )
    
    
    2,729Other expenses,
principally interest
    
    
    (1,219
    )
    
    
    (199
    )
    
    
    (1,020
    )
    
    
    (2,759
    )
    
    
    (307
    )
    
    
    (2,452
    )Total other income
(expense)
    
    
    759
    
    
    
    33
    
    
    
    792
    
    
    
    846
    
    
    
    141
    
    
    
    987Income from continuing
operations before income
taxes
    
    
    6,895
    
    
    
    77
    
    
    
    6,972
    
    
    
    12,793
    
    
    
    1,305
    
    
    
    14,098Income taxes
    
    
    2,785
    
    
    
    22
    
    
    
    2,807
    
    
    
    5,191
    
    
    
    503
    
    
    
    5,694Income from continuing
operations
    
    
    4,110
    
    
    
    55
    
    
    
    4,165
    
    
    
    7,602
    
    
    
    802
    
    
    
    8,404Net income
    
    
    4,110
    
    
    
    55
    
    
    
    4,165
    
    
    
    7,602
    
    
    
    802
    
    
    
    8,404Net income for common
stock
    
    
    4,105
    
    
    
    55
    
    
    
    4,160
    
    
    
    7,592
    
    
    
    802
    
    
    
    8,394Basic earnings per share:Continuing operations
    
    $
    0.22
    
    
    $
    
    
    
    $
    0.22
    
    
    $
    0.40
    
    
    $
    0.05
    
    
    $
    0.45Net income for common
stock
    
    
    0.22
    
    
    
    
    
    
    
    0.22
    
    
    
    0.40
    
    
    
    0.05
    
    
    
    0.45Diluted earnings per
share:Continuing operations
    
    
    0.22
    
    
    
    
    
    
    
    0.22
    
    
    
    0.40
    
    
    
    0.04
    
    
    
    0.44Net income for common
stock
    
    
    0.22
    
    
    
    
    
    
    
    0.22
    
    
    
    0.40
    
    
    
    0.04
    
    
    
    0.44
 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 six
months ended June 30, 2003: Selected Condensed Consolidated Income Statement Data
Three and Six Months ended June 30, 2003
(in thousands, except per share data) Three months ended June 30, 2003
    
    
    Six Months ended June 30, 2003As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedTelephone revenue
    
    $
    30,510
    
    
    $
    13
    
    
    $
    30,523
    
    
    $
    59,825
    
    
    $
    47
    
    
    $
    59,872Wireless and Internet
revenue
    
    
    9,443
    
    
    
    
    
    
    
    9,443
    
    
    
    18,824
    
    
    
    49
    
    
    
    18,873Total operating revenue
    
    
    39,953
    
    
    
    13
    
    
    
    39,966
    
    
    
    78,649
    
    
    
    96
    
    
    
    78,745Wireless and internet
cost of service
    
    
    4,420
    
    
    
    28
    
    
    
    4,448
    
    
    
    8,931
    
    
    
    56
    
    
    
    8,987Depreciation
    
    
    7,599
    
    
    
    (307
    )
    
    
    7,292
    
    
    
    15,184
    
    
    
    (1,001
    )
    
    
    14,183Total operating expense
    
    
    34,807
    
    
    
    (279
    )
    
    
    34,528
    
    
    
    69,171
    
    
    
    (945
    )
    
    
    68,226Operating income
    
    
    5,146
    
    
    
    292
    
    
    
    5,438
    
    
    
    9,478
    
    
    
    1,041
    
    
    
    10,519Interest, dividend
income and gain on sale
of investments
    
    
    14,747
    
    
    
    
    
    
    
    14,747
    
    
    
    15,264
    
    
    
    (244
    )
    
    
    15,020Other expenses,
principally interest
    
    
    (2,236
    )
    
    
    (56
    )
    
    
    (2,180
    )
    
    
    (3,877
    )
    
    
    (127
    )
    
    
    (3,750
    )Total other income
(expense)
    
    
    12,636
    
    
    
    56
    
    
    
    12,692
    
    
    
    12,551
    
    
    
    (118
    )
    
    
    12,433Income from continuing
operations before
income taxes
    
    
    17,782
    
    
    
    348
    
    
    
    18,130
    
    
    
    22,029
    
    
    
    923
    
    
    
    22,952Income taxes
    
    
    7,000
    
    
    
    134
    
    
    
    7,134
    
    
    
    8,765
    
    
    
    359
    
    
    
    9,124Income from continuing
operations
    
    
    10,782
    
    
    
    214
    
    
    
    10,996
    
    
    
    13,264
    
    
    
    564
    
    
    
    13,828Net income
    
    
    10,358
    
    
    
    214
    
    
    
    10,572
    
    
    
    12,840
    
    
    
    564
    
    
    
    13,404Net income for common
stock
    
    
    10,353
    
    
    
    214
    
    
    
    10,567
    
    
    
    12,830
    
    
    
    564
    
    
    
    13,394Basic earnings per
share:Continuing operations
    
    $
    0.58
    
    
    $
    0.01
    
    
    $
    0.59
    
    
    $
    0.71
    
    
    $
    0.03
    
    
    $
    0.74Net income for
common stock
    
    
    0.55
    
    
    
    0.01
    
    
    
    0.56
    
    
    
    0.69
    
    
    
    0.03
    
    
    
    0.72Diluted earnings per
share:Continuing operations
    
    
    0.57
    
    
    
    0.02
    
    
    
    0.59
    
    
    
    0.71
    
    
    
    0.03
    
    
    
    0.74Net income for
common stock
    
    
    0.55
    
    
    
    0.01
    
    
    
    0.56
    
    
    
    0.68
    
    
    
    0.03
    
    
    
    0.71
 12




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Selected Condensed Consolidated Statements of Comprehensive Income (Loss) data for the
six months ended June 30, 2004 and June 30, 2003: Selected Condensed Consolidated Statement of Comprehensive Income (Loss)
Three and Six Months ended June 30, 2004
(in thousands) Three months ended June 30, 2004
    
    
    Six Months ended June 30, 2004As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    4,110
    
    
    $
    55
    
    
    $
    4,165
    
    
    $
    7,602
    
    
    $
    802
    
    
    $
    8,404Unrealized holding
gains(losses) on
available-for-sale
securities
    
    
    (315
    )
    
    
    
    
    
    
    (315
    )
    
    
    (1,002
    )
    
    
    (394
    )
    
    
    (608
    )Unrealized holding
gains on interest
rate swaps
    
    
    117
    
    
    
    (117
    )
    
    
    
    
    
    
    181
    
    
    
    (181
    )
    
    
    Comprehensive income
    
    
    3,714
    
    
    
    (62
    )
    
    
    3,652
    
    
    
    6,593
    
    
    
    1,015
    
    
    
    7,608
 Selected Condensed Consolidated Statement of Comprehensive Income (Loss)
Three and Six Months ended June 30, 2003
(in thousands) Three months ended June 30, 2003
    
    
    Six Months ended June 30, 2003As
    
    
    Restate-
    
    
    
    
    
    
    As
    
    
    Restate-Previously
    
    
    ment
    
    
    As
    
    
    Previously
    
    
    ment
    
    
    AsReported
    
    
    Adjustment
    
    
    Restated
    
    
    Reported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    10,358
    
    
    $
    214
    
    
    $
    10,572
    
    
    $
    12,840
    
    
    $
    564
    
    
    $
    13,404Unrealized holding
gains on interest
rate swaps
    
    
    34
    
    
    
    (34
    )
    
    
    
    
    
    
    76
    
    
    
    (76
    )
    
    
    Comprehensive income
    
    
    10,773
    
    
    
    180
    
    
    
    10,953
    
    
    
    13,300
    
    
    
    488
    
    
    
    13,788
 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 six
months ended June 30, 2004 and June 30,2003: Selected Condensed Consolidated Statement of Cash Flows Data
Six Months ended June 30, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    7,602
    
    
    $
    802
    
    
    $
    8,404Depreciation
    
    
    15,548
    
    
    
    (700
    )
    
    
    14,848Undistributed
income of
unconsolidated
companies
    
    
    (2,895
    )
    
    
    166
    
    
    
    (2,729
    )Deferred income
taxes and tax
credits
    
    
    2,542
    
    
    
    367
    
    
    
    2,909Changes in
operating assets
and liabilities
    
    
    988
    
    
    
    (635
    )
    
    
    353
 Selected Condensed Consolidated Statement of Cash Flows Data
Six Months ended June 30, 2003
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    12,840
    
    
    $
    564
    
    
    $
    13,404Depreciation
    
    
    15,184
    
    
    
    (1,001
    )
    
    
    14,183Undistributed
patronage dividends
    
    
    (391
    )
    
    
    185
    
    
    
    (206
    )Deferred income
taxes and tax
credits
    
    
    4,409
    
    
    
    3
    
    
    
    4,412Changes in
operating assets
and liabilities
    
    
    3,028
    
    
    
    249
    
    
    
    3,277
  5.
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands): (Restated)June 30,
    
    
    December 31,2004
    
    
    2003Land, buildings and general equipment
    
    $
    91,656
    
    
    $
    90,915Central office equipment
    
    
    168,681
    
    
    
    164,210Poles, wires, cables and conduit
    
    
    150,372
    
    
    
    143,805Construction in progress
    
    
    3,040
    
    
    
    5,438413,749
    
    
    
    404,368Accumulated depreciation
    
    
    (207,312
    )
    
    
    (192,847
    )Property and equipment, net
    
    $
    206,437
    
    
    $
    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 June 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 June 30, 2004 and December 31, 2003 consist of the following
(in thousands): June 30,
    
    
    December 31,2004
    
    
    2003Liabilities of discontinued operations:Other liabilities, primarily lease obligations
    
    $
    798
    
    
    $
    1,072Total liabilities of discontinued operations
    
    $
    798
    
    
    $
    1,072
 A summary of restructuring liability activity related to the discontinued operations
for the six months ended June 30, 2004 is as follows (in thousands): Balance at December 31, 2003
    
    $
    1,072Lease termination costs
    
    
    (274
    )Balance at June 30, 2004
    
    $
    798
 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 six months ended
June 30, 2004 (in thousands): Shares
    
    
    AmountOutstanding at December 31, 2003
    
    
    18,769
    
    
    $
    40,800Purchase/forfeitures of Common
Stock
    
    
    (27
    )
    
    
    (321
    )Issuance of Common Stock
    
    
    135
    
    
    
    1,667Outstanding at June 30, 2004
    
    
    18,877
    
    
    $
    42,146
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Weighted average shares
outstanding:Basic
    
    
    18,876
    
    
    
    18,740
    
    
    
    18,855
    
    
    
    18,728Diluted
    
    
    19,051
    
    
    
    18,782
    
    
    
    18,999
    
    
    
    18,748
  Outstanding options to purchase approximately 550,000 and 496,000 shares of Common
Stock for the three and six months ended June 30, 2004 and approximately 597,000 and
624,000 shares of Common Stock for the three and six months ended June 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 June 30,
2004 and June 30, 2003, the Company had total options outstanding of 1,338,000 and
856,000, 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 six months ended June 30,
2004.8.
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and fair value for the
Companys investments at June 30, 2004 and December 31, 2003 were as follows (in
thousands): Gross
    
    
    GrossUnrealized
    
    
    UnrealizedEquity Securities
    
    Amortized
    
    
    Holding
    
    
    HoldingAvailable-for-Sale
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueJune 30, 2004
(Restated)
    
    $
    6,295
    
    
    $
    603
    
    
    $
    (1,076
    )
    
    $
    5,822December 31, 2003
    
    $
    6,798
    
    
    $
    815
    
    
    $
    (95
    )
    
    $
    7,518
 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 June 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
    
    $
    1,271
    
    
    $
    1,030
    
    
    $
    815
    
    
    $
    46
    
    
    $
    2,086
    
    
    $
    1,076Total temporarily
impaired securities
    
    $
    1,271
    
    
    $
    1,030
    
    
    $
    815
    
    
    $
    46
    
    
    $
    2,086
    
    
    $
    1,076
  The fair value and unrealized losses noted above that are less than 12 months relate
primarily to one investment. The Company determined that this investment was not
other-than-temporarily impaired due to the relatively short duration of the decline in
stock price (since February 2004) as well as other business and market factors. 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 is currently 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.
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consist of the following (in thousands): June 30,
    
    
    December 31,2004
    
    
    2003Equity Method:Palmetto MobileNet, L.P.
    
    $
    10,720
    
    
    $
    8,902Other
    
    
    103
    
    
    
    100Cost Method:Magnolia Holding Company
    
    
    1,680
    
    
    
    1,680ITC Financial Services, LLC
    
    
    840
    
    
    
    840Other
    
    
    1,510
    
    
    
    1,512Total
    
    $
    14,853
    
    
    $
    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 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. 17




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 June 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 cash operating requirements. The Company recognized income of $1.3 million (restated) and $1.4 million in the three
months ended June 30, 2004 and 2003, respectively and $2.7 million (restated) and
$2.4 million in the six months ended June 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. Summarized unaudited interim results of operations for
Palmetto MobileNet, L.P. for the three and six months ended June 30, 2004 and 2003 are
as follows (in thousands): Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Total operating
revenue
    
    $
    6,388
    
    
    $
    8,023
    
    
    $
    11,948
    
    
    $
    14,311Total operating
expense
    
    
    195
    
    
    
    92
    
    
    
    315
    
    
    
    173Operating income
    
    
    6,193
    
    
    
    7,931
    
    
    
    11,633
    
    
    
    14,138Net income
    
    
    6,362
    
    
    
    8,053
    
    
    
    11,886
    
    
    
    14,295
  Due to the timing of information available from Palmetto MobileNet, L.P., the
information included above for the three and six months ended June 30, 2004 includes
one month of estimated results.10.
    LONG-TERM DEBTLong-term debt consists of the following (in thousands): June 30,
    
    
    December 31,2004
    
    
    2003Line of credit with interest at LIBOR
plus 1.25% (2.44% at June 30, 2004 and
December 31, 2003)
    
    $
    25,000
    
    
    $
    30,000Term loan with interest at 7.32%
    
    
    50,000
    
    
    
    50,00075,000
    
    
    
    80,000Less: Current portion of long-term debt
    
    
    2,500
    
    
    
    Total long-term debt
    
    $
    72,500
    
    
    $
    80,000
 At June 30, 2004, the Company had 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 June 30, 2004 was 2.44%. During the
six months ended June 30, 2004, the Company elected to pay down $5.0 million in
principal on this credit facility. The credit facility provides for quarterly
payments of interest until maturity on March 31, 2006. As of June 30, 2004, $25.0
million was outstanding under the revolving credit facility. In July 2004, the
Company lowered the maximum debt available on the revolving credit facility to $70.0
million. 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 June 30, 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 installments 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 June 30, 2004 and December 31, 2003, the Company had no amounts
outstanding under this credit line. 18




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  The Company has two $5.0 million interest rate swap transactions to fix 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 June 30, 2004 was $(0.1)
million 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.11.
    GOODWILLOn January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. In accordance with SFAS No. 142, the Company discontinued goodwill
amortization and tested goodwill for impairment as of January 1, 2002, determining
that the recognition of an impairment loss was not necessary. The Company will
continue to test goodwill for impairment at least annually. Goodwill was $9.9 million
as of June 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.12.
    STATE INCOME TAX ASSESSMENTIn 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.13.
    RECENT ACCOUNTING PRONOUNCEMENTSIn 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 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 132 in December 2003. 19




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  14.
    STOCK OPTIONSThe Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25 issued in March 2000 to account for its fixed 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
    
    
    Six months endedJune 30,
    
    
    June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net income, as reported
    
    $
    4,165
    
    
    $
    10,572
    
    
    $
    8,404
    
    
    $
    13,404Additional 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
    
    
    
    543
    
    
    
    417Pro forma net income
    
    $
    3,893
    
    
    $
    10,363
    
    
    $
    7,861
    
    
    $
    12,987Basic earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.56
    
    
    $
    0.45
    
    
    $
    0.72Pro forma
    
    
    0.21
    
    
    
    0.55
    
    
    
    0.42
    
    
    
    0.69Diluted earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.56
    
    
    $
    0.44
    
    
    $
    0.71Pro forma
    
    
    0.20
    
    
    
    0.55
    
    
    
    0.41
    
    
    
    0.69
 20




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  15.
    PENSION AND POST-RETIREMENT PLANSComponents of net period benefit costs for the three months ended June 30 (in
thousands): Pension Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    503
    
    
    $
    463
    
    
    $
    17
    
    
    $
    13Interest cost
    
    
    655
    
    
    
    626
    
    
    
    123
    
    
    
    128Expected return on plan assets
    
    
    (842
    )
    
    
    (664
    )
    
    
    
    
    
    
    Transition obligation
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    153Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    (160
    )
    
    
    (84
    )Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    (56
    )Net periodic benefit cost
    
    $
    317
    
    
    $
    426
    
    
    $
    94
    
    
    $
    154
 Components of net period benefit costs for the six months ended June 30 (in
thousands): Pension Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    1,006
    
    
    $
    926
    
    
    $
    34
    
    
    $
    26Interest cost
    
    
    1,310
    
    
    
    1,252
    
    
    
    247
    
    
    
    256Expected return on plan assets
    
    
    (1,684
    )
    
    
    (1,328
    )
    
    
    
    
    
    
    Transition obligation
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    306Amortization of prior service cost
    
    
    2
    
    
    
    2
    
    
    
    (321
    )
    
    
    (168
    )Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    (112
    )Net periodic benefit cost
    
    $
    634
    
    
    $
    852
    
    
    $
    188
    
    
    $
    308
 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. 21




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  16.
    SEGMENT INFORMATIONThe Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory
environment, services offered and/or customers served. The segments and a description
of their businesses are as follows: the incumbent local exchange carrier (ILEC),
which provides local telephone services; the 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 six
months ended June 30, 2004 and 2003, is as follows (in thousands):Three months ended June 30, 2004 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    22,906
    
    
    $
    8,247
    
    
    $
    4,951
    
    
    $
    1,885
    
    
    $
    2,760
    
    
    $
    
    
    
    $
    40,749External
expense
    
    
    11,541
    
    
    
    6,552
    
    
    
    4,482
    
    
    
    2,140
    
    
    
    2,182
    
    
    
    249
    
    
    
    27,146Depreciation
    
    
    4,958
    
    
    
    479
    
    
    
    624
    
    
    
    745
    
    
    
    283
    
    
    
    334
    
    
    
    7,423Operating
income (loss)
    
    $
    6,407
    
    
    $
    1,216
    
    
    $
    (155
    )
    
    $
    (1,000
    )
    
    $
    295
    
    
    $
    (583
    )
    
    $
    6,180Segment assets
    
    $
    171,675
    
    
    $
    30,421
    
    
    $
    15,610
    
    
    $
    25,192
    
    
    $
    15,127
    
    
    $
    66,323
    
    
    $
    324,348
 Three months ended June 30, 2003 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    23,581
    
    
    $
    6,808
    
    
    $
    5,377
    
    
    $
    1,565
    
    
    $
    2,635
    
    
    $
    
    
    
    $
    39,966External
expense
    
    
    11,428
    
    
    
    5,640
    
    
    
    4,790
    
    
    
    2,073
    
    
    
    2,548
    
    
    
    757
    
    
    
    27,236Depreciation
    
    
    4,897
    
    
    
    425
    
    
    
    628
    
    
    
    635
    
    
    
    376
    
    
    
    331
    
    
    
    7,292Operating
income (loss)
    
    $
    7,256
    
    
    $
    743
    
    
    $
    (41
    )
    
    $
    (1,143
    )
    
    $
    (289
    )
    
    $
    (1,088
    )
    
    $
    5,438Segment assets
    
    $
    163,408
    
    
    $
    30,785
    
    
    $
    16,227
    
    
    $
    23,168
    
    
    $
    15,496
    
    
    $
    67,315
    
    
    $
    316,399
 22




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Six months ended June 30, 2004 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    46,605
    
    
    $
    15,369
    
    
    $
    9,989
    
    
    $
    3,830
    
    
    $
    5,520
    
    
    $
    
    
    
    $
    81,313External
expense
    
    
    22,282
    
    
    
    12,858
    
    
    
    8,871
    
    
    
    4,359
    
    
    
    4,518
    
    
    
    466
    
    
    
    53,354Depreciation
    
    
    9,672
    
    
    
    948
    
    
    
    1,259
    
    
    
    1,465
    
    
    
    799
    
    
    
    705
    
    
    
    14,848Operating
income (loss)
    
    $
    14,651
    
    
    $
    1,563
    
    
    $
    (141
    )
    
    $
    (1,994
    )
    
    $
    203
    
    
    $
    (1,171
    )
    
    $
    13,111Segment assets
    
    $
    171,675
    
    
    $
    30,421
    
    
    $
    15,610
    
    
    $
    25,192
    
    
    $
    15,127
    
    
    $
    66,323
    
    
    $
    324,348
 Six months ended June 30, 2003 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    47,147
    
    
    $
    13,730
    
    
    $
    9,848
    
    
    $
    2,877
    
    
    $
    5,143
    
    
    $
    
    
    
    $
    78,745External
expense
    
    
    22,398
    
    
    
    11,343
    
    
    
    9,558
    
    
    
    4,001
    
    
    
    4,944
    
    
    
    1,799
    
    
    
    54,043Depreciation
    
    
    9,713
    
    
    
    794
    
    
    
    1,082
    
    
    
    1,393
    
    
    
    742
    
    
    
    459
    
    
    
    14,183Operating
income (loss)
    
    $
    15,036
    
    
    $
    1,593
    
    
    $
    (792
    )
    
    $
    (2,517
    )
    
    $
    (543
    )
    
    $
    (2,258
    )
    
    $
    10,519Segment assets
    
    $
    163,408
    
    
    $
    30,785
    
    
    $
    16,227
    
    
    $
    23,168
    
    
    $
    15,496
    
    
    $
    67,315
    
    
    $
    316,399
 In addition, the Company has an additional segment (Palmetto) which is not
consolidated. Palmetto is accounted for under the equity method and the Company
records its share of earnings from Palmetto as equity in income of unconsolidated
companies on the Consolidated Statements of Income. Summarized results of operations
for Palmetto for the three and six months ended June 30, 2004 and 2003 are as follows
(in thousands): Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Total operating
revenue
    
    $
    6,388
    
    
    $
    8,023
    
    
    $
    11,948
    
    
    $
    14,311Total operating
expense
    
    
    195
    
    
    
    92
    
    
    
    315
    
    
    
    173Operating income
    
    
    6,193
    
    
    
    7,931
    
    
    
    11,633
    
    
    
    14,138Net income
    
    
    6,362
    
    
    
    8,053
    
    
    
    11,886
    
    
    
    14,295
 Due to the timing of information available from Palmetto, the information included
above for the three and six months ended June 30, 2004 includes one month of estimated
results. Reconciliation to income from continuing operations before income taxes (in
thousands): Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Segment operating income
    
    $
    6,180
    
    
    $
    5,438
    
    
    $
    13,111
    
    
    $
    10,519Total other income (expense)
    
    
    792
    
    
    
    12,692
    
    
    
    987
    
    
    
    12,433Income from continuing
operations
before income taxes
    
    $
    6,972
    
    
    $
    18,130
    
    
    $
    14,098
    
    
    $
    22,952
 23




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.  RestatementThe 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 cumulative effect of the correction of
this error at June 30, 2004 resulted in a reduction of accounts receivable, income taxes
payable and retained earnings of $1.5 million, $0.5 million and $1.2 million, respectively,
and a $0.2 million increase in customer deposits and advance billings. The correction of
this error for the three and six months ended June 30, 2004 resulted in a $0.1 million and
$0.1 million increase in revenue, respectively, and for the three and six months ended June
30, 2003 resulted in a $13,000 and $47,000 increase 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 $3.3 million at June
30, 2004. These errors resulted in an overstatement of depreciation expense of $44,000 and
$0.8 million for the three and six months ended June 30, 2004, respectively, and an
overstatement of depreciation expense of $0.4 million and $1.1 million for the three and six
months ended June 30, 2003, respectively. The correction of these errors increased net
income for the three and six months ended June 30, 2004 by $27,000 and $0.5 million,
respectively, and increased net income $0.2 million and $0.7 million for the three and six
months ended June 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 June 30, 2004 and a decrease in operating expense of $0.3 million for the six months
ended June 30, 2004. For the three and six months ended June 30, 2003, the correction of
this error resulted in a decrease in operating expense of $0.1 million and $0.1 million,
respectively. The after tax impact of these adjustments resulted in a decrease to net
income of $38,000 for the three months ended June 30, 2004 and an increase to net income of
$0.2 million for the six months ended June 30, 2004. The after tax impact of these
adjustments for the three and six months ended June 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 $0.2 million and $0.3 million for the
three and six months ended June 30, 2004, respectively, and a decrease in interest expense
of $0.1 million and $0.1 million for the three and six months ended June 30, 2003,
respectively. The after tax impact of the correction of this error resulted in an increase
to net income of $0.1 million and $0.2 million for the three and six months ended June 30,
2004, respectively, and an increase to net income of $36,000 and $0.1 million for the three
and six months ended June 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 24




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##### 



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 six months
ended June 30, 2004 was an increase in rent expense of $22,000 and $44,000, respectively,
and an increase in rent expense (which is included in operating expense on the Condensed
Consolidated Statement of Income) for the three and six months ended June 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 six months ended June 30, 2003 and a decrease in
equity in income of affiliates of $0.2 million for the three and six months ended June 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 June
30, 2004.The aggregate impact of the correction of all the errors discussed above resulted in an
increase in net income of $0.1 million and $0.8 million for the three and six months ended
June 30, 2004 and an increase in net income of $0.2 million and $0.6 million for the three
and six months ended June 30, 2003.IntroductionCT Communications, Inc. and its subsidiaries provide a broad range of telecommunications and
related services to residential and business customers located primarily in North Carolina.
The Companys primary services include local and long distance telephone service, Internet
and data services and 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 by selling bundled services and enhancing its network
to better position the Company for increasing competition. With respect to our 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.For the three and six months ended June 30, 2004, net income for the Company was $4.2
million and $8.4 million, respectively, compared to $10.6 million and $13.4 million for the
three and six months ended June 30, 2003. The second quarter 2003 included a $9.4 million
after-tax gain on the sale of an equity investment. Diluted earnings per share were $0.22
and $0.56 for the three months ended June 30, 2004 and 2003, respectively and $0.44 and
$0.71 for the six months ended June 30, 2004 and 2003.The Company continues to be exposed to increasing competition in its ILEC territory and
regulatory developments and uncertainties that will impact its CLEC and Greenfield
businesses. For the three and six months ended June 30, 2004, the Companys ILEC continued
to experience a loss of access lines as its customers have the option of selecting from
several alternative service providers. The competitive CLEC and Greenfield wireline
businesses continued to experience strong demand for their products and services which
resulted in 10.0% and 44.2% access line growth, respectively, compared to June 30, 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. 25




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##### 



Industry and Operating TrendsThe 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 our 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.In particular, the ILEC must provide certain basic services to all customers in its
regulated service area, regardless of the cost to provide those services. The Company is the
beneficiary of certain cost reimbursements that are intended to offset certain costs to
provide service. These reimbursements are increasingly at risk, yet service obligations
remain unchanged. The future risk and uncertainty of regulatory service requirements and
the recovery of expense subsidies will impact the Companys ability to maintain existing
margins and profitability.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. 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 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.In recent quarters, the Company experienced a decline in the recovery of wireless
interconnection access fee revenue. The Company expects continued pressure from other
telecommunications providers to lower or eliminate its recovery of fees for terminating
their traffic on our 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 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 achieves 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 the Companys business model. In November 2003, the Company was
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 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 Companys
CLEC, and proposed increased rates for unbundled network elements purchased by the CLEC and
Greenfield businesses from incumbent local exchange carriers, have placed a higher degree of
uncertainty and margin pressure on the CLEC and Greenfield businesses. 26




---



##### 



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. Summarized
results of operations for Palmetto are included in Notes 9 and 16 of the Condensed
Consolidated Financial Statements.The following discussion reviews the consolidated results of operations and specific results
within each reportable segment.Consolidated Operating Results(in thousands, except lines and subscribers) Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    40,749
    
    
    $
    39,966
    
    
    $
    81,313
    
    
    $
    78,745Total operating expense
    
    
    34,569
    
    
    
    34,528
    
    
    
    68,202
    
    
    
    68,226Operating income
    
    $
    6,180
    
    
    $
    5,438
    
    
    $
    13,111
    
    
    $
    10,519Depreciation
    
    $
    7,423
    
    
    $
    7,292
    
    
    $
    14,848
    
    
    $
    14,183Capital expenditures
    
    
    5,851
    
    
    
    5,248
    
    
    
    9,764
    
    
    
    11,223Total assets
    
    
    
    
    
    
    
    
    
    
    324,348
    
    
    
    316,399Ending wired access lines
    
    
    
    
    
    
    
    
    
    
    156,627
    
    
    
    152,720Ending wireless
subscribers
    
    
    
    
    
    
    
    
    
    
    40,358
    
    
    
    34,572
  Three months ended June 30Operating revenue increased $0.8 million or 2.0% for the three months ended June 30, 2004
compared to the three months ended June 30, 2003. The increase is attributable to a $1.4
million increase in Wireless revenue driven by a 16.7% increase in customers, a $0.3 million
increase in Greenfield revenue driven primarily by a 44.2% increase in access lines and a
$0.1 million increase in IDS revenue offset by a $0.7 million decrease in ILEC revenue
driven primarily by a decrease in access lines and lower wireless interconnection rates, and
a $0.4 million decrease in CLEC revenue due to a decrease in access revenue.Operating margin increased to 15.2% for the three months ended June 30, 2004 from 13.6% for
the three months ended June 30, 2003. This increase in operating margin is primarily due to
improving operating margins in the Companys CLEC and Greenfield businesses and higher
operating margins in the Wireless business. The Company is continuously evaluating
opportunities for process improvements and efficiency gains to offset the transition to
competitive, lower margin accounts.Six months ended June 30Operating revenue increased $2.6 million or 3.3% for the six months ended June 30, 2004
compared to the six months ended June 30, 2003. The increase is attributable to a $1.6
million increase in Wireless revenue driven by a 16.7% increase in customers, a $1.0 million
increase in Greenfield revenue driven primarily by a 44.2% increase in access lines, a $0.4
million increase in IDS revenue and a $0.1 million increase in CLEC revenue offset by a $0.5
million decrease in ILEC revenue driven primarily by a decrease in access lines and lower
wireless interconnection rates.The Company has diversified operating revenue over the past several years through the growth
in our competitive businesses. For the six months ended June 30, ILEC represented 57.3% of
total revenue in 2004 compared to 59.9% in 2003, while Digital Wireless represented 18.9% of
total revenue in 2004 27




---



##### 



compared to 17.4% in 2003, the combined CLEC and Greenfield businesses have grown to 17.0%
of total revenue in 2004 up from 16.2% in 2003 and Internet represented 6.8% in 2004
compared to 6.5% in 2003.The operating margin increased to 16.1% for the six months ended June 30, 2004 from 13.4%
for the six months ended June 30, 2003. This increase in operating margin is primarily due
to improving operating margins in the competitive businesses offset by declining operating
margins in the ILEC. Operating margin in the ILEC declined for the six months ended June
30, 2004 to 31.4% compared to 31.9% for the six months ended June 30, 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 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
and ITFS 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 MMDS and ITFS licenses and creating distinct
band segments for high power operations, such as one-way video transmission and low power
operations, such as two-way fixed and mobile broadband applications. The FCCs order also
implemented geographic area licensing for all licenses in the band and adopted a
transitional mechanism for licensees to move to new spectrum assignments in the new plan.
The FCCs order retained the existing eligibility rules for ITFS spectrum. The Company is
in the process of examining the FCCs order so that it can assess the implications of the
new rules.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 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 June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    22,906
    
    
    $
    23,581
    
    
    $
    46,605
    
    
    $
    47,147Total operating expense
    
    
    16,499
    
    
    
    16,325
    
    
    
    31,954
    
    
    
    32,111Operating income
    
    $
    6,407
    
    
    $
    7,256
    
    
    $
    14,651
    
    
    $
    15,036Depreciation
    
    $
    4,958
    
    
    $
    4,897
    
    
    $
    9,672
    
    
    $
    9,713Capital expenditures
    
    
    3,564
    
    
    
    2,868
    
    
    
    5,552
    
    
    
    6,176Total assets
    
    
    
    
    
    
    
    
    
    
    171,675
    
    
    
    163,408Ending business access lines
    
    
    
    
    
    
    
    
    
    
    29,068
    
    
    
    29,373Ending residential access lines
    
    
    
    
    
    
    
    
    
    
    85,394
    
    
    
    87,489Ending total access lines
    
    
    
    
    
    
    
    
    
    
    114,462
    
    
    
    116,862Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    84,763
    
    
    
    84,686
  Three months ended June 30Operating revenue for the ILEC decreased $0.7 million or 2.9% for the three months ended
June 30, 2004 compared to the three months ended June 30, 2003. The decrease in revenue is
primarily the result of a decrease in wireless interconnection access revenue of $0.3
million and a decrease in line related revenue related to a 2.1% decrease in access lines.
These decreases were partially offset by an increase in revenue related to our bundled
product offerings. The decrease in access lines is due in part to an increase in 28




---



##### 



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 $0.2 million or 1.1% for the three months ended June
30, 2004 compared to the three months ended June 30, 2003. The primary drivers of this
increase were higher corporate related expenses, partially offset by lower access and
interconnection expense. Operating expense increased slightly while operating revenue
declined resulting in a decline in operating margin from 30.8% for the three months ended
June 30, 2003 to 28.0% for the three months ended June 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 June 30, 2004 were 15.6% of ILEC operating
revenue compared to 12.2% of operating revenue for the three months ended June 30, 2003.Six months ended June 30Operating revenue for the ILEC decreased $0.5 million or 1.1% for six months ended June 30,
2004 compared to the six months ended June 30, 2003. The decrease in revenue is primarily
the result of a decrease in wireless interconnection access revenue of $0.4 million and a
2.1% decrease in access lines. These decreases were partially offset by an increase in
revenue related to our bundled product offerings. During the six months ended June 30,
2004, the Company recognized revenue of approximately $0.3 million related to the collection
of previously disputed access charges. Access lines at June 30, 2004 declined 2.1% from
June 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.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 our network
increases.Operating expense in the ILEC decreased $0.2 million or 0.5% for the six months ended June
30, 2004 compared to the six months ended June 30, 2003. The primary driver of this
decrease was lower access and interconnection charges. Operating margin for the six months
ended June 30, 2004 decreased to 31.4% from 31.9% during the six months ended June 30, 2003.
The Company will continue to focus on gaining operational efficiencies to offset lower
revenue due to access line losses.Capital expenditures for the six months ended June 30, 2004 were 11.9% of ILEC operating
revenue compared to 13.1% of operating revenue for the six months ended June 30, 2003.For the six months ended June 30, 2004, ILEC access lines subscribing to our long distance
service increased slightly despite a 2.1% access line loss. At June 30, 2004, 74.1% of ILEC
access lines subscribed to our long distance service, up from 72.5% at June 30, 2003.
Despite the increase in ILEC customers subscribing to our long distance service, long
distance revenue declined. Long distance minutes of use increased significantly in the six
months ended June 30, 2004 compared to the six months ended June 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 charges
prescribed by 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 because 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 29




---



##### 



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. The Company is in the process of evaluating the FCCs action to
determine if the reserve should be modified. The Company believes the FCCs action will not
result in a material impact on the Companys consolidated financial statements.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 (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. Local number portability (LNP) could result in increased customer churn over time,
but has not yet had any significant impact on our business. 30




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##### 



CLEC(in thousands, except lines) Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    4,951
    
    
    $
    5,377
    
    
    $
    9,989
    
    
    $
    9,848Total operating expense
    
    
    5,106
    
    
    
    5,418
    
    
    
    10,130
    
    
    
    10,640Operating income (loss)
    
    $
    (155
    )
    
    $
    (41
    )
    
    $
    (141
    )
    
    $
    (792
    )Depreciation
    
    $
    624
    
    
    $
    628
    
    
    $
    1,259
    
    
    $
    1,082Capital expenditures
    
    
    185
    
    
    
    209
    
    
    
    396
    
    
    
    465Total assets
    
    
    
    
    
    
    
    
    
    
    15,610
    
    
    
    16,227Ending access lines
    
    
    
    
    
    
    
    
    
    
    30,686
    
    
    
    27,897Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    22,171
    
    
    
    19,810
  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 presented for 2003 has been changed to reflect this change in
methodology.Three months ended June 30CLEC operating revenue was $5.0 million for the three months ended June 30, 2004,
representing a $0.4 million or 7.9% decrease from the three months ended June 30, 2003. The
$0.4 million decrease consists primarily of a $0.8 million decrease in access revenue
partially offset by a $0.3 million increase in line revenue. The increase in line revenue
is primarily attributable to a 10.0% increase in access lines. The $0.8 million decrease in
access revenue was due primarily to the collection of approximately $0.5 million in
previously disputed access fees in the three months ended June 30, 2003 and a reduction in
certain access rates.CLEC operating expense was $5.1 million and $5.4 million for the three months ended June 30,
2004 and 2003, respectively. Operating expense decreased $0.3 million or 5.8%. Operating
margin decreased to (3.1)% for the three months ended June 30, 2004 compared to (0.8)% for
the three months ended June 30, 2003. The decline in operating margin was due primarily to
the reduction in access revenue partially offset by an increase in access lines, and a
decrease in operating expenses.Six months ended June 30CLEC operating revenue was $10.0 million for the six months ended June 30, 2004,
representing a $0.1 million or 1.4% increase over the six months ended June 30, 2003. The
$0.1 million increase consists primarily of a $0.5 million increase in line revenue and a
$0.1 million increase in long distance revenue, partially offset by a $0.5 million decrease
in access revenue. The increase in line revenue is primarily attributable to a 10.0%
increase in access lines for the six months ended June 30, 2004 compared to the six months
ended June 30, 2003. The $0.5 million decrease in access revenue was due primarily to the
collection of approximately $0.5 million in previously disputed access fees in 2003.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. The Company estimates this change will result in
a significant reduction in the Companys CLEC interstate switched access rates. In
addition, certain interexchange carriers, such as AT&T, have been deploying VoIP 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 31




---



##### 



transporting long distance calls. It is expected that this issue will continue to receive
significant attention from the FCC in 2004.CLEC operating expense was $10.1 million and $10.6 million for the six months ended June 30,
2004 and 2003, respectively. Operating expense decreased despite revenue growth of 1.4%.
As a result, operating margin increased to (1.4)% for the six months ended June 30, 2004
compared to (8.0%) for the six months ended June 30, 2003. The improvement in operating
margin was due primarily to the increase in access lines partially offset by a decrease in
access fee revenue.We did not enter any new markets in the first half 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 (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, or high capacity combinations of loops and dedicated transport (EELs). As
of June 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.The Company believes that the impact to its ILEC from these regulatory developments will be
minimal. However, because the CLEC relies 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 our CLEC and Greenfield operations.
The Company is currently evaluating alternative network options and proposals from the
applicable incumbent carriers to assess the potential impact on our CLEC and Greenfield
businesses. 32




---



##### 



Greenfield(in thousands, except lines and signed agreements) Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    1,885
    
    
    $
    1,565
    
    
    $
    3,830
    
    
    $
    2,877Total operating expense
    
    
    2,885
    
    
    
    2,708
    
    
    
    5,824
    
    
    
    5,394Operating income (loss)
    
    $
    (1,000
    )
    
    $
    (1,143
    )
    
    $
    (1,994
    )
    
    $
    (2,517
    )Depreciation
    
    $
    745
    
    
    $
    635
    
    
    $
    1,465
    
    
    $
    1,393Capital expenditures
    
    
    1,198
    
    
    
    1,003
    
    
    
    1,940
    
    
    
    2,149Total assets
    
    
    
    
    
    
    
    
    
    
    25,192
    
    
    
    23,168Ending access lines
    
    
    
    
    
    
    
    
    
    
    11,479
    
    
    
    7,961Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    5,655
    
    
    
    3,397Total signed provider
agreements
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    80
  Three months ended June 30Greenfield revenue increased $0.3 million for the three months ended June 30, 2004 to $1.9
million compared to $1.6 million for the three months ended June 30, 2003. This revenue
increase is primarily attributable to a 44.2% increase in access lines. Our Greenfield
business added two provider agreements in the second quarter of 2004, bringing the total
number of signed agreements to 99. 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 99 projects is expected to be 90%
residential and 10% business.Operating expense increased 6.5% for the three months ended June 30, 2004 to $2.9 million as
compared to $2.7 million for the three months ended June 30, 2003. The increase is related
primarily to the expenses associated with the increase in access lines.Operating margin increased to (53.1)% for the three months ended June 30, 2004 compared to
(73.0%) for the three months ended June 30, 2003. Capital expenditures for the three months
ended June 30, 2004 increased $0.2 million compared to the three months ended June 30, 2003,
as the Company continues its strategy of targeting new developments with the most efficient
capital deployments.Six months ended June 30Greenfield revenue increased $1.0 million for the six months ended June 30, 2004 to $3.8
million compared to $2.9 million for the six months ended June 30, 2003. This revenue
increase is primarily attributable to a 44.2% increase in access lines.Operating expense increased 8.0% for the six months ended June 30, 2004 to $5.8 million,
related primarily to a $0.2 million increase in transport expenses associated with the
increase in access lines.Capital expenditures for the six months ended June 30, 2004 decreased $0.2 million compared
to the six months ended June 30, 2003, as the Company continues its strategy of targeting
new developments with the most efficient capital deployments.At June 30, 2004, 49.3% of Greenfield access lines also subscribed to our long distance
service, up from 42.7% at June 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 our long distance service as frequently as residential
customers since many retail businesses have national long 33




---



##### 



distance contracts. As the residential percentage of Greenfield access lines increases, we
have seen our long distance penetration rates 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 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 were to be filed by interested parties by May 14, 2004. Since then, parties involved
in real estate development and management have made filings with the NCUC opposing the
proposed regulation of preferred provider contracts. 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. As
discussed above, the Companys Greenfield also relies, to a lesser extent than our CLEC, on
unbundled network elements purchased from incumbent local exchange carriers, and is
therefore impacted by the TRO, D.C. Circuit decision and interim rules proposed by the FCC.Digital Wireless(in thousands, except subscribers) Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    8,247
    
    
    $
    6,808
    
    
    $
    15,369
    
    
    $
    13,730Total operating expense
    
    
    7,031
    
    
    
    6,065
    
    
    
    13,806
    
    
    
    12,137Operating income
    
    $
    1,216
    
    
    $
    743
    
    
    $
    1,563
    
    
    $
    1,593Depreciation
    
    $
    479
    
    
    $
    425
    
    
    $
    948
    
    
    $
    794Capital expenditures
    
    
    236
    
    
    
    124
    
    
    
    618
    
    
    
    183Total assets
    
    
    
    
    
    
    
    
    
    
    30,421
    
    
    
    30,785Ending post-pay subscribers
    
    
    
    
    
    
    
    
    
    
    40,358
    
    
    
    34,572
  Three months ended June 30Digital Wireless revenue grew $1.4 million or 21.1% for the three months ended June 30, 2004
compared to the three months ended June 30, 2003. Post-pay wireless subscribers increased
16.7% compared to June 30, 2003. Recurring revenue increased $1.2 million due primarily to
the increase in subscribers. Also contributing to the increase in revenue was increased
settlement and roaming revenue of $0.5 million related to a 35.1% increase in the minutes of
use on the Companys wireless network and a roaming revenue true-up of $0.3 million during
the three months ended June 30, 2004 compared to the three months ended June 30, 2003. The
increase in subscribers is partly due to a reduction in monthly churn to 2.0% for the three
months ended June 30, 2004 compared to 2.4% for the three months ended June 30, 2003.Operating expense increased 15.9% for the three months ended June 30, 2004 to $7.0 million
compared to the three months ended June 30, 2003. The primary drivers of the increase in
operating expense were increases in settlement and switching expenses of $0.4 million,
increases in handset and accessory expense of $0.2 million related to higher customer
additions and changes in product mix, and other corporate and marketing related expenses.
Settlement expense increased primarily due to the increase in post-pay customers and the
related increase in minutes of use on the network. 34




---



##### 



Operating margin increased to 14.7% for the three months ended June 30, 2004 compared to
10.9% for the three months ended June 30, 2003. This improvement in operating margin is due
primarily to the increase in settlement and roaming revenue.Capital expenditures were $0.2 million for the three months ended June 30, 2004, primarily
related to the addition of capacity on selected cell sites.Six months ended June 30Digital Wireless revenue grew $1.6 million or 11.9% for the six months ended June 30, 2004
compared to the six months ended June 30, 2003. Post-pay wireless subscribers increased
16.7% compared to the six months ended June 30, 2003. Also contributing to our increase in
revenue was increased settlement revenue of $0.6 million related to a 31.9% increase in the
minutes of use on the Companys wireless network during the six months ended June 30, 2004
compared to the six months ended June 30, 2003.Operating expense increased 13.8% for the six months ended June 30, 2004 to $13.8 million
compared to the six months ended June 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 decreased to 10.2% for the six months ended June 30, 2004 compared to
11.6% for the six months ended June 30, 2003. This decrease was primarily due to a decrease
in average revenue per subscriber and an increase in settlement expenses, corporate expenses
and an increase in depreciation expense.In November 2003, the FCC mandated that wireless carriers implement LNP. 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 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 recently announced its plan to merge with AT&T Wireless, which has cell sites in
the Companys partitioned area. At this time, we are unable to determine how this will
affect the Company.Cingular and Triton PCS (Triton) have signed a letter of intent to exchange certain assets
of Triton PCS for assets of AT&T Wireless currently designated for purchase by Cingular. In
particular, Cingular would reportedly exchange AT&T Wireless network assets and customers in
North Carolina and Puerto Rico for Tritons network assets and customers in Virginia. This
letter of intent is contingent on the closing of the Cingular acquisition of AT&T Wireless.
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.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 the 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.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 $2.0 million. 35




---



##### 



Internet and Data Services (IDS)(in thousands, except lines and accounts) Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating revenue
    
    $
    2,760
    
    
    $
    2,635
    
    
    $
    5,520
    
    
    $
    5,143Total operating expense
    
    
    2,465
    
    
    
    2,924
    
    
    
    5,317
    
    
    
    5,686Operating income (loss)
    
    $
    295
    
    
    $
    (289
    )
    
    $
    203
    
    
    $
    (543
    )Depreciation
    
    $
    283
    
    
    $
    376
    
    
    $
    799
    
    
    $
    742Capital expenditures
    
    
    379
    
    
    
    477
    
    
    
    676
    
    
    
    1,315Total assets
    
    
    
    
    
    
    
    
    
    
    15,127
    
    
    
    15,496Ending DSL lines
    
    
    
    
    
    
    
    
    
    
    11,582
    
    
    
    8,546Ending dial-up accounts
    
    
    
    
    
    
    
    
    
    
    10,038
    
    
    
    11,983Ending high-speed accounts
    
    
    
    
    
    
    
    
    
    
    577
    
    
    
    565
  Three months ended June 30IDS operating revenue grew 4.7% for the three months ended June 30, 2004 to $2.8 million
compared to the three months ended June 30, 2003. This increase is primarily due to higher
DSL revenue of $0.4 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 decreased 15.7% compared to the three months ended June 30, 2003. The
primary driver of this decrease was a $0.2 million decrease in network expense and a $0.1
million decline in depreciation expense.As a result, operating margins improved to 10.7% for the three months ended June 30, 2004
compared to (11.0%) for the three months ended June 30, 2003. The Company continues to
focus on opportunities to leverage existing network infrastructure to reduce transport
expenses.Six months ended June 30IDS operating revenue grew 7.3% for the six months ended June 30, 2004 to $5.5 million
compared to the six months ended June 30, 2003. This increase is primarily due to higher
DSL revenue of $0.8 million related to an increase in DSL lines. This increase was
partially offset by decreases in dial-up and high-speed revenue of $0.4 million combined.IDS operating expense decreased 6.5% compared to the six months ended June 30, 2003. As a
result, operating margins improved to 3.7% for the six months ended June 30, 2004 compared
to (10.6%) for the six months ended June 30, 2003.DSL customers at June 30, 2004 increased 35.5% compared to June 30, 2003, to a total of
11,582. This represents a penetration rate of 9.2% of combined Greenfield and ILEC access
lines. 36




---



##### 



Other(in thousands) Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Total operating expense
    
    $
    583
    
    
    $
    1,088
    
    
    $
    1,171
    
    
    $
    2,258Operating income (loss)
    
    $
    (583
    )
    
    $
    (1,088
    )
    
    $
    (1,171
    )
    
    $
    (2,258
    )Depreciation
    
    $
    334
    
    
    $
    331
    
    
    $
    705
    
    
    $
    459Capital expenditures
    
    
    289
    
    
    
    567
    
    
    
    582
    
    
    
    935Total assets
    
    
    
    
    
    
    
    
    
    
    66,323
    
    
    
    67,315
  Three months ended June 30Operating expense for the Companys other business units decreased $0.5 million for the
three months ended June 30, 2004 to $0.6 million. This decrease was related primarily to a
decrease 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.Six months ended June 30Operating expense for the Companys other business units decreased $1.1 million for the six
months ended June 30, 2004 to $1.2 million. This decrease was related primarily to a
decrease in corporate related expenses attributable to the other operating segment.Other IncomeThree months ended June 30Other income (expense) for the three months ended June 30, 2004 decreased $11.9 million
compared to the three months ended June 30, 2003. This decrease relates primarily to lower
gains on sale of investments of $14.3 million offset by a $1.3 million decrease in
impairment on investments and a $1.2 million decrease in other expenses. The decrease in
gains on sale of investments was due to a $14.5 million gain recognized in June 2003 related
to the sale of the Companys investment in ITC Holding. Other expenses, principally
interest, decreased due primarily to lower debt levels in 2004.Six months ended June 30Other income (expense) for the six months ended June 30, 2004 decreased $11.4 million
compared to the six months ended June 30, 2003. This decrease relates primarily to lower
gains on sale of investments of $14.3 million offset by a $0.3 million increase in equity in
income of unconsolidated companies, a $1.2 million decrease in impairment on investments and
a $1.3 million decrease in other expenses. The decrease in gains on sale of investments was
due to a $14.5 million gain recognized in June 2003 related to the sale of the Companys
investment in ITC Holding. The increase in equity in income of unconsolidated companies
relates to the Companys investment in Palmetto, L.P. Other expenses, principally interest,
decreased due primarily to lower debt levels in 2004. 37




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##### 



Liquidity and Capital ResourcesCash provided by operating activities increased $3.2 million to $23.6 million for the six
months ended June 30, 2004. The increase was primarily due to higher operating income.Cash used in investing activities was $8.1 million during the six months ended June 30, 2004
compared with cash provided by investing activities of $3.3 million for the six months ended
June 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 Holding. Capital
expenditures decreased $1.5 million during the six months ended June 30, 2004 compared with
the six months ended June 30, 2003.Net cash used in financing activities was $7.4 million during the six months ended June 30,
2004 compared with $22.1 million during the six months ended June 30, 2003. During the six
months ended June 30, 2004, the Company repaid $5.0 million in long-term debt. In 2003,
the Company used the proceeds from the sale of ITC Holding and cash from operations to repay
$20.0 million in long-term debt.At June 30, 2004, the fair market value of the Companys marketable investment securities
was $6.0 million, all of which could be pledged to secure additional borrowing, or sold, if
needed for liquidity purposes. At June 30, 2004, the Company had a $90.0 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 June 30, 2004 was 2.44%.
During the six months ended June 30, 2004, the Company elected to pay down $5.0 million in
principal on this credit facility. The credit facility provides for quarterly installments
of interest until maturity on March 31, 2006. As of June 30, 2004, $25.0 million was
outstanding under the revolving credit facility. In July 2004, the Company lowered the
maximum debt available on the revolving credit facility to $70.0 million and elected to pay
down an additional $5.0 million in principal on the 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 June 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. The Company also has an additional line of credit for $10.0
million at one month LIBOR plus 1.25%. As of June 30, 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
    
    $
    25,000
    
    
    $
    
    
    
    $
    25,000
    
    
    $
    
    
    
    $
    Term loan
    
    
    50,000
    
    
    
    2,500
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    22,500Fixed interest payments
    
    
    20,585
    
    
    
    3,637
    
    
    
    8,921
    
    
    
    4,115
    
    
    
    3,912Operating leases (Restated)
    
    
    14,202
    
    
    
    3,262
    
    
    
    6,151
    
    
    
    2,690
    
    
    
    2,099Capital leases
    
    
    1,702
    
    
    
    552
    
    
    
    1,150
    
    
    
    
    
    
    
    $
    111,489
    
    
    $
    9,951
    
    
    $
    56,222
    
    
    $
    16,805
    
    
    $
    28,511
  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. 38




---



##### 



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, 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
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 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 June 30, 2004, the Company had 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 June 30, 2004 was 2.44%. The credit facility
provides for quarterly payments of interest until maturity on March 31, 2006. During the
six months ended June 30, 2004, the Company elected to pay down $5.0 million in principal on
this credit facility. As of June 30, 2004, $25.0 million was outstanding under the
revolving credit facility. In July 2004, the Company lowered the maximum debt available on
the revolving credit facility to $70 million. 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 June 30, 2004. In addition, the Company has another line of credit for $10.0 million at
one month LIBOR plus 1.25%. As of June 30, 2004, the Company had no amounts outstanding
under this credit line. 39




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##### 



The Company has two $5.0 million interest rate swap transactions to fix 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 June 30, 2004 was $(0.1) million 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 June 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 June 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 June
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 June 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 and procedures
were not effective as of June 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 40




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##### 



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 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 June 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 41




---



##### 



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. 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. An Annual Meeting of Shareholders was held on April 22, 2004. Proxies were solicited for the following matters:  (1)
    To elect to the Board of Directors for the terms set forth below: One Director for a two-year term expiring in 2006: Votes
    
    
    VotesFor
    
    
    WithheldJames L. Moore, Jr.
    
    
    15,653,644
    
    
    
    472,860
 Three Directors for a three-year term expiring in 2007: Votes
    
    
    VotesFor
    
    
    WithheldWilliam A. Coley
    
    
    15,653,644
    
    
    
    472,860Barry W. Eveland
    
    
    15,653,644
    
    
    
    472,860Tom E. Smith
    
    
    15,653,644
    
    
    
    472,860
  (2)
    To approve the Companys Amended and Restated 2001 Stock Incentive Plan. Votes
    
    Votes
    
    
    
    BrokerFor
    
    Against
    
    Abstentions
    
    Non-Votes11,572,259
    
    1,982,223
    
    80,435
    
    
 42




---



##### 



(3)
    To ratify the appointment of KPMG LLP as independent public accountants of the
Company for the 2004 fiscal year. Votes
    
    Votes
    
    
    
    BrokerFor
    
    Against
    
    Abstentions
    
    Non-Votes16,100,991
    
    22,055
    
    3,458
    
    
 Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No.
    
    Description of Exhibit11
    
    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 April 23, 2004, the Company filed a Current Report on Form 8-K announcing that
(i) its Board of Directors approved the continuance of its stock repurchase program
until April 28, 2005 and (ii) 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 June 1, 2004. On April 28, 2004, the Company filed a Current Report on Form 8-K announcing the
Companys consolidated financial results for the first quarter of 2004. 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 Exhibit11
    
    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.
 45