##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-19179 CT COMMUNICATIONS, INC.  NORTH CAROLINA
    
    56-1837282(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1000 Progress Place NEP.O. Box 227, Concord, NC
    
    28026-0227(Address of principal executive offices)
    
    (Zip Code)
 (704) 722-2500
(Registrants telephone number, including area code) Not Applicable
(Former name, former address and former fiscal year,
if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. 18,877,221 shares of Common Stock outstanding as of July 29, 2004.




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX Page No.PART I. Financial InformationItem 1. Financial Statements.Condensed Consolidated Balance Sheets
June 30, 2004 (Unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
    
    
    15Item 3. Quantitative and Qualitative Disclosures
About Market Risk.
    
    
    29Item 4. Controls and Procedures.
    
    
    30PART II. Other InformationItem 1.Legal Proceedings.
    
    
    31Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
    
    
    31Item 3.Defaults Upon Senior Securities.
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    31Item 5.Other Information.
    
    
    31Item 6. Exhibits and Reports on Form 8-K.
    
    
    32Signatures
    
    

    33Exhibit Index
    
    
    34
 1




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##### 



Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets
 (Unaudited)June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,797
    
    
    $
    16,957Accounts receivable and unbilled revenue, net
    
    
    20,694
    
    
    
    22,301Other
    
    
    5,196
    
    
    
    5,372Total current assets
    
    
    50,687
    
    
    
    44,630Investment securities
    
    
    6,041
    
    
    
    7,120Other investments
    
    
    1,590
    
    
    
    1,353Investments in unconsolidated companies
    
    
    14,359
    
    
    
    13,652Property and equipment, net
    
    
    202,586
    
    
    
    208,370Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,201
    
    
    
    35,201Other assets
    
    
    1,638
    
    
    
    1,436Total assets
    
    $
    322,008
    
    
    $
    321,668LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    2,500
    
    
    $
    Accounts payable
    
    
    8,025
    
    
    
    6,414Customer deposits and advance billings
    
    
    2,591
    
    
    
    2,665Other accrued liabilities
    
    
    14,616
    
    
    
    17,314Liabilities of discontinued operations
    
    
    798
    
    
    
    1,072Total current liabilities
    
    
    28,530
    
    
    
    27,465Long-term debt
    
    
    72,500
    
    
    
    80,000Deferred credits and other liabilities:Deferred income taxes
    
    
    24,678
    
    
    
    22,618Post-retirement benefits other than pension
    
    
    11,092
    
    
    
    11,246Other
    
    
    2,585
    
    
    
    2,809Total deferred credits and other liabilities
    
    
    38,355
    
    
    
    36,673Total liabilities
    
    
    139,385
    
    
    
    144,138Stockholders 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)
    
    
    (451
    )
    
    
    558Retained earnings
    
    
    140,890
    
    
    
    135,741Total stockholders equity
    
    
    182,623
    
    
    
    177,530Total liabilities and stockholders equity
    
    $
    322,008
    
    
    $
    321,668
 See accompanying notes to condensed consolidated financial statements (unaudited). 2




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Income (Unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Operating revenue:Telephone
    
    $
    29,658
    
    
    $
    30,510
    
    
    $
    60,295
    
    
    $
    59,825Wireless and internet
    
    
    11,007
    
    
    
    9,443
    
    
    
    20,889
    
    
    
    18,824Total operating revenue
    
    
    40,665
    
    
    
    39,953
    
    
    
    81,184
    
    
    
    78,649Operating expense:Telephone cost of service (excluding depreciation)
    
    
    8,732
    
    
    
    8,916
    
    
    
    17,333
    
    
    
    17,461Wireless and internet cost of service (excluding
depreciation)
    
    
    4,715
    
    
    
    4,420
    
    
    
    9,439
    
    
    
    8,931Selling, general and administrative
    
    
    13,677
    
    
    
    13,872
    
    
    
    26,917
    
    
    
    27,595Depreciation
    
    
    7,405
    
    
    
    7,599
    
    
    
    15,548
    
    
    
    15,184Total operating expense
    
    
    34,529
    
    
    
    34,807
    
    
    
    69,237
    
    
    
    69,171Operating income
    
    
    6,136
    
    
    
    5,146
    
    
    
    11,947
    
    
    
    9,478Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,504
    
    
    
    1,398
    
    
    
    2,895
    
    
    
    2,448Interest, dividend income and gain (loss) on sales of
investments
    
    
    495
    
    
    
    14,747
    
    
    
    750
    
    
    
    15,264Impairment of investments
    
    
    (21
    )
    
    
    (1,273
    )
    
    
    (40
    )
    
    
    (1,284
    )Other expenses, principally interest
    
    
    (1,219
    )
    
    
    (2,236
    )
    
    
    (2,759
    )
    
    
    (3,877
    )Total other income (expense)
    
    
    759
    
    
    
    12,636
    
    
    
    846
    
    
    
    12,551Income from continuing operations before income
taxes
    
    
    6,895
    
    
    
    17,782
    
    
    
    12,793
    
    
    
    22,029Income taxes
    
    
    2,785
    
    
    
    7,000
    
    
    
    5,191
    
    
    
    8,765Income from continuing operations
    
    
    4,110
    
    
    
    10,782
    
    
    
    7,602
    
    
    
    13,264Discontinued 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
    
    
    4,110
    
    
    
    10,358
    
    
    
    7,602
    
    
    
    12,840Dividends on preferred stock
    
    
    5
    
    
    
    5
    
    
    
    10
    
    
    
    10Net income for common stock
    
    $
    4,105
    
    
    $
    10,353
    
    
    $
    7,592
    
    
    $
    12,830Basic Earnings per share:Continuing operations
    
    $
    0.22
    
    
    $
    0.58
    
    
    $
    0.40
    
    
    $
    0.71Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.22
    
    
    
    0.55
    
    
    
    0.40
    
    
    
    0.69Diluted Earnings per share:Continuing operations
    
    $
    0.22
    
    
    $
    0.57
    
    
    $
    0.40
    
    
    $
    0.71Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.22
    
    
    
    0.55
    
    
    
    0.40
    
    
    
    0.68Basic 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). 3




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    4,110
    
    
    $
    10,358
    
    
    $
    7,602
    
    
    $
    12,840Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on
available-for-sale
securities
    
    
    (315
    )
    
    
    377
    
    
    
    (1,002
    )
    
    
    376Unrealized holding gains on interest rate swaps
    
    
    117
    
    
    
    34
    
    
    
    181
    
    
    
    76Reclassification adjustment for losses (gains)
realized
in net income
    
    
    (198
    )
    
    
    4
    
    
    
    (188
    )
    
    
    8Comprehensive income
    
    $
    3,714
    
    
    $
    10,773
    
    
    $
    6,593
    
    
    $
    13,300
 See accompanying notes to condensed consolidated financial statements (unaudited). 4




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Six Months Ended June 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    7,602
    
    
    $
    12,840Adjustments to reconcile net income to net cash provided
by operating activities:Loss from discontinued operations
    
    
    
    
    
    
    424Depreciation
    
    
    15,548
    
    
    
    15,184Amortization 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
    
    
    (2,895
    )
    
    
    (2,448
    )Undistributed patronage dividends
    
    
    (183
    )
    
    
    (391
    )Deferred income taxes and tax credits
    
    
    2,542
    
    
    
    4,409Changes in operating assets and liabilities
    
    
    988
    
    
    
    3,028Net 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). 5




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  1.
    
    In the opinion of management of CT Communications, Inc. (the
Company), the accompanying unaudited financial statements contain
all adjustments consisting of only normal recurring accruals
necessary to present fairly the Companys financial position as of
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.
    
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Land, buildings and general equipment
    
    $
    90,670
    
    
    $
    89,929Central office equipment
    
    
    168,681
    
    
    
    164,452Poles, wires, cables and conduit
    
    
    150,372
    
    
    
    144,775Construction in progress
    
    
    3,390
    
    
    
    4,576413,113
    
    
    
    403,732Accumulated depreciation
    
    
    (210,527
    )
    
    
    (195,362
    )Property and equipment, net
    
    $
    202,586
    
    
    $
    208,370
  5.
    
    DISCONTINUED OPERATIONSOn December 9, 2002, the Company discontinued its wireless broadband
commercial trial operations in Fayetteville, North Carolina. These
operations were provided by Wavetel, L.L.C. (Wavetel), a subsidiary
of the Company. The Company ceased Wavetels operations due to
significant operating losses, the limited coverage area provided by
the technology available at the time and the inability to obtain
outside investment. Complete disposal of the business through sale
and disposal of assets was completed by June 30, 2003. As a result,
Wavetels operations have been reflected as discontinued operations
and as assets and liabilities held for sale in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. In
the second quarter of 2003, the Company re-evaluated the potential
future liabilities related to the discontinued Wavetel operations and
determined that the potential liabilities exceeded the remaining
restructuring reserve. Therefore, the Company recorded an additional
loss from discontinued operations, before income taxes, of $0.7
million in the second quarter of 2003. The additional loss relates
to the Companys inability to sublease certain facilities that were
previously used in Wavetels operations. The adjustment is an
estimate based on the current market condition and could be revised
on a quarterly basis as new information becomes available. As of
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): 6




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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
  6.
    
    COMMON STOCK  The 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. 7




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  7.
    
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and
fair value for the Companys investments at June 30, 2004 and
December 31, 2003 were as follows (in thousands): Equity Securities
    
    Amortized
    
    Gross Unrealized
    
    Gross UnrealizedAvailable-for-Sale
    
    Cost
    
    Holding Gains
    
    Holding Losses
    
    Fair ValueJune 30, 2004
    
    $
    6,514
    
    
    $
    603
    
    
    $
    (1,076
    )
    
    $
    6,041December 31, 2003
    
    $
    5,739
    
    
    $
    1,476
    
    
    $
    (95
    )
    
    $
    7,120
  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.8.
    
    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
    
    
    $
    8,738Other
    
    
    103
    
    
    
    100Cost Method:Magnolia Holding Company
    
    
    1,681
    
    
    
    2,958ITC Financial Services, LLC
    
    
    840
    
    
    
    840Other
    
    
    1,015
    
    
    
    1,016Total
    
    $
    14,359
    
    
    $
    13,652
 8




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  On May 9, 2003, West Corporation (West) purchased the stock of ITC
Holding Company, Inc. (ITC). The Company had a 4.4% equity
interest in ITC. This transaction resulted in a gain to the Company
of $15.2 million in 2003. As part of the purchase agreement between
West and ITC, certain funds are being held in escrow until certain
contingencies are resolved. The Companys portion of the escrowed
funds is $1.2 million. The $1.2 million will not be recorded in the
Companys financial statements until the contingencies are resolved
and the escrowed funds become issuable.In May 2003, the Company purchased $3.0 million of stock in Magnolia
Holding Company (Magnolia). The primary asset of Magnolia was
Knology, Inc. (Knology), a public company that provides data and
Internet connectivity to small and mid-size businesses. The Company
holds a 4.6% equity interest in Magnolia. The Company later
received a distribution from Magnolia in the form of shares of
Knology common stock. This distribution by Magnolia reduced the
value of the Companys investment in Magnolia. The shares of
Knology stock are classified as available-for-sale investment
securities.In December 2003, the Company committed to purchase a 4.0% interest
in ITC Financial Services, LLC (ITC Financial) for up to $2.1
million. ITC Financial was formed to develop a prepaid debit card
business that uses a nationwide network of automated terminals that
re-charge the debit card 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 $1.5 million and $1.4 million in
the three months ended June 30, 2004 and 2003, respectively and
$2.9 million 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 June 30,
    
    Six months ended 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.9.
    
    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 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  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.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. The swaps mature on November 3, 2004 and November 3,
2006, respectively.10.
    
    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.11.
    
    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. 10




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  12.
    
    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
2003.13.
    
    STOCK OPTIONSThe Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25 issued in March 2000 to
account for its fixed 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): 11




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    4,110
    
    
    $
    10,358
    
    
    $
    7,602
    
    
    $
    12,840Additional 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
    
    $
    3,838
    
    
    $
    10,149
    
    
    $
    7,059
    
    
    $
    12,423Basic earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.55
    
    
    $
    0.40
    
    
    $
    0.69Pro forma
    
    
    0.20
    
    
    
    0.54
    
    
    
    0.37
    
    
    
    0.66Diluted earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.55
    
    
    $
    0.40
    
    
    $
    0.68Pro forma
    
    
    0.20
    
    
    
    0.54
    
    
    
    0.37
    
    
    
    0.66
  14.
    
    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. 12




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  15.
    
    SEGMENT INFORMATIONThe Company has six reportable segments, each of which is a
strategic business that is managed separately due to certain
fundamental differences such as regulatory environment, services
offered and/or customers served. The segments and a description of
their businesses are as follows: the incumbent local exchange
carrier (ILEC), which provides local telephone services; the
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 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    22,822
    
    
    $
    8,247
    
    
    $
    4,951
    
    
    $
    1,885
    
    
    $
    2,760
    
    
    $
    
    
    
    $
    40,665External
expense
    
    
    11,541
    
    
    
    6,530
    
    
    
    4,482
    
    
    
    2,140
    
    
    
    2,182
    
    
    
    249
    
    
    
    27,124Depreciation
    
    
    5,032
    
    
    
    480
    
    
    
    630
    
    
    
    736
    
    
    
    193
    
    
    
    334
    
    
    
    7,405Operating
income (loss)
    
    $
    6,249
    
    
    $
    1,237
    
    
    $
    (161
    )
    
    $
    (991
    )
    
    $
    385
    
    
    $
    (583
    )
    
    $
    6,136Segment assets
    
    $
    169,960
    
    
    $
    30,689
    
    
    $
    16,246
    
    
    $
    24,509
    
    
    $
    14,284
    
    
    $
    66,320
    
    
    $
    322,008
  Three months ended June 30, 2003 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    23,568
    
    
    $
    6,808
    
    
    $
    5,377
    
    
    $
    1,565
    
    
    $
    2,635
    
    
    $
    
    
    
    $
    39,953External
expense
    
    
    11,428
    
    
    
    5,612
    
    
    
    4,790
    
    
    
    2,073
    
    
    
    2,548
    
    
    
    757
    
    
    
    27,208Depreciation
    
    
    5,045
    
    
    
    437
    
    
    
    424
    
    
    
    861
    
    
    
    501
    
    
    
    331
    
    
    
    7,599Operating
income (loss)
    
    $
    7,095
    
    
    $
    759
    
    
    $
    163
    
    
    $
    (1,369
    )
    
    $
    (414
    )
    
    $
    (1,088
    )
    
    $
    5,146Segment assets
    
    $
    163,125
    
    
    $
    30,742
    
    
    $
    16,215
    
    
    $
    23,153
    
    
    $
    14,937
    
    
    $
    67,312
    
    
    $
    315,484
 13




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Six months ended June 30, 2004 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    46,476
    
    
    $
    15,369
    
    
    $
    9,989
    
    
    $
    3,830
    
    
    $
    5,520
    
    
    $
    
    
    
    $
    81,184External
expense
    
    
    22,766
    
    
    
    12,795
    
    
    
    8,839
    
    
    
    4,384
    
    
    
    4,439
    
    
    
    466
    
    
    
    53,689Depreciation
    
    
    10,378
    
    
    
    961
    
    
    
    1,271
    
    
    
    1,447
    
    
    
    786
    
    
    
    705
    
    
    
    15,548Operating
income (loss)
    
    $
    13,332
    
    
    $
    1,613
    
    
    $
    (121
    )
    
    $
    (2,001
    )
    
    $
    295
    
    
    $
    (1,171
    )
    
    $
    11,947Segment assets
    
    $
    169,960
    
    
    $
    30,689
    
    
    $
    16,246
    
    
    $
    24,509
    
    
    $
    14,284
    
    
    $
    66,320
    
    
    $
    322,008
  Six months ended June 30, 2003 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    47,100
    
    
    $
    13,681
    
    
    $
    9,848
    
    
    $
    2,877
    
    
    $
    5,143
    
    
    $
    
    
    
    $
    78,649External
expense
    
    
    22,398
    
    
    
    11,287
    
    
    
    9,558
    
    
    
    4,001
    
    
    
    4,944
    
    
    
    1,799
    
    
    
    53,987Depreciation
    
    
    10,452
    
    
    
    800
    
    
    
    1,086
    
    
    
    1,415
    
    
    
    972
    
    
    
    459
    
    
    
    15,184Operating
income (loss)
    
    $
    14,250
    
    
    $
    1,594
    
    
    $
    (796
    )
    
    $
    (2,539
    )
    
    $
    (773
    )
    
    $
    (2,258
    )
    
    $
    9,478Segment assets
    
    $
    163,125
    
    
    $
    30,742
    
    
    $
    16,215
    
    
    $
    23,153
    
    
    $
    14,937
    
    
    $
    67,312
    
    
    $
    315,484
  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
    
    2003Segment operating income
    
    $
    6,136
    
    
    $
    5,146
    
    
    $
    11,947
    
    
    $
    9,478Total other income (expense)
    
    
    759
    
    
    
    12,636
    
    
    
    846
    
    
    
    12,551Income from continuing
operations
before income taxes
    
    $
    6,895
    
    
    $
    17,782
    
    
    $
    12,793
    
    
    $
    22,029
 14




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.  IntroductionCT Communications, Inc. and its subsidiaries provide a broad range of
telecommunications and related services to residential and business
customers located primarily in North Carolina. The Companys primary
services include local and long distance telephone service, Internet and
data services and 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 $4.1 million and $7.6 million, respectively, compared to
$10.4 million and $12.8 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 and equity investment. Diluted earnings per share were
$0.22 and $0.55 for the three months ended June 30, 2004 and 2003,
respectively and $0.40 and $0.68 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.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 15




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##### 



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.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 8 and 15 of the Condensed Consolidated
Financial Statements.The following discussion reviews the consolidated results of operations
and specific results within each reportable segment. 16




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##### 



Consolidated Operating Results(in thousands, except lines and
subscribers) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    40,665
    
    
    $
    39,953
    
    
    $
    81,184
    
    
    $
    78,649Total operating expense
    
    
    34,529
    
    
    
    34,807
    
    
    
    69,237
    
    
    
    69,171Operating income
    
    $
    6,136
    
    
    $
    5,146
    
    
    $
    11,947
    
    
    $
    9,478Depreciation
    
    $
    7,405
    
    
    $
    7,599
    
    
    $
    15,548
    
    
    $
    15,184Capital expenditures
    
    
    5,851
    
    
    
    5,248
    
    
    
    9,764
    
    
    
    11,223Total assets
    
    
    
    
    

    
    
    
    
    
    322,008
    
    
    
    315,484Ending wired access lines
    
    
    
    
    
    
    
    
    
    
    156,627
    
    
    
    152,720Ending wireless
subscribers
    
    
    
    
    
    
    
    
    
    
    40,358
    
    
    
    34,572
  Three months ended June 30Operating revenue increased $0.7 million or 1.8% 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.For the three months ended June 30, 2004, operating expense decreased
$0.3 million or 0.8% as compared to the three months ended June 30, 2003.
This decrease is primarily the result of a decrease in depreciation
expense of $0.2 million.Our operating margin increased to 15.1% for the three months ended June
30, 2004 from 12.9% 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. However, 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 $2.5 million or 3.2% for the six months ended
June 30, 2004 compared to the six months ended June 30, 2003. The
increase is attributable to a $1.7 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 $0.6 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 57.2% of total revenue in 2004 compared
to 59.9% in 2003, while Digital Wireless represented 18.9% of total
revenue in 2004 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.For the six months ended June 30, 2004, operating expense increased $0.1
million as compared to the six months ended June 30, 2003. This increase
was primarily the result of an increase in depreciation expense of $0.4
million partially offset by lower expenses in the CLEC and Greenfield
businesses. 17




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##### 



The operating margin increased to 14.7% for the six months ended June 30,
2004 from 12.1% 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 28.7% compared to 30.3% 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
    
    2003Total operating revenue
    
    $
    22,822
    
    
    $
    23,568
    
    
    $
    46,476
    
    
    $
    47,100Total operating expense
    
    
    16,573
    
    
    
    16,473
    
    
    
    33,144
    
    
    
    32,850Operating income
    
    $
    6,249
    
    
    $
    7,095
    
    
    $
    13,332
    
    
    $
    14,250Depreciation
    
    $
    5,032
    
    
    $
    5,045
    
    
    $
    10,378
    
    
    $
    10,452Capital expenditures
    
    
    3,564
    
    
    
    2,868
    
    
    
    5,552
    
    
    
    6,176Total assets
    
    
    
    
    
    
    
    
    
    
    169,960
    
    
    
    163,125Ending 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 3.2% 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 broadband Internet adoption by customers that have
cancelled second lines previously used for dial-up Internet service as
well as increased competition from wireless and other competitive
providers.Operating expense in the ILEC increased $0.1 million or 0.6% 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 18




---



##### 



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 30.1% for the three months ended June 30, 2003 to 27.4% 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 $0.6 million or 1.3% 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 increased $0.3 million or 0.9% for the six
months ended June 30, 2004 compared to the six months ended June 30,
2003. The primary drivers of this increase were higher general and
administrative expenses, partially offset by lower access and
interconnection expense. Operating expense increased while operating
revenue declined resulting in a decline in operating margin from 30.3%
for the six months ended June 30, 2003 to 28.7% for the six 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 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 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 19




---



##### 



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.CLEC(in thousands, except lines) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    4,951
    
    
    $
    5,377
    
    
    $
    9,989
    
    
    $
    9,848Total operating expense
    
    
    5,112
    
    
    
    5,214
    
    
    
    10,110
    
    
    
    10,644Operating income (loss)
    
    $
    (161
    )
    
    $
    163
    
    
    $
    (121
    )
    
    $
    (796
    )Depreciation
    
    $
    630
    
    
    $
    424
    
    
    $
    1,271
    
    
    $
    1,086Capital expenditures
    
    
    185
    
    
    
    209
    
    
    
    396
    
    
    
    465Total assets
    
    
    
    
    
    
    
    
    
    
    16,246
    
    
    
    16,215Ending 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. 20




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##### 



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 $5.2 million for the three
months ended June 30, 2004 and 2003, respectively. Operating expense
decreased slightly; however, due to the decrease in revenue, operating
margin decreased to (3.3)% for the three months ended June 30, 2004
compared to 3.0% 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.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 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 (1.2)% for the six months ended June 30, 2004 compared to
(8.1%) 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 21




---



##### 



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.Greenfield(in thousands, except lines and signed agreements) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    1,885
    
    
    $
    1,565
    
    
    $
    3,830
    
    
    $
    2,877Total operating expense
    
    
    2,876
    
    
    
    2,934
    
    
    
    5,831
    
    
    
    5,416Operating income (loss)
    
    $
    (991
    )
    
    $
    (1,369
    )
    
    $
    (2,001
    )
    
    $
    (2,539
    )Depreciation
    
    $
    736
    
    
    $
    861
    
    
    $
    1,447
    
    
    $
    1,415Capital expenditures
    
    
    1,198
    
    
    
    1,003
    
    
    
    1,940
    
    
    
    2,149Total assets
    
    
    
    
    
    
    
    
    
    
    24,509
    
    
    
    23,153Ending 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 decreased 2.0% for the three months ended June 30, 2004
to $2.9 million, despite revenue growth of 20.4%. As a result, operating
margin increased to (52.6)% for the three months ended June 30, 2004
compared to (87.5%) 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, 22




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##### 



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 7.7% 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
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. 23




---



##### 



Digital Wireless(in thousands, except subscribers) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    8,247
    
    
    $
    6,808
    
    
    $
    15,369
    
    
    $
    13,681Total operating expense
    
    
    7,010
    
    
    
    6,049
    
    
    
    13,756
    
    
    
    12,087Operating income
    
    $
    1,237
    
    
    $
    759
    
    
    $
    1,613
    
    
    $
    1,594Depreciation
    
    $
    480
    
    
    $
    437
    
    
    $
    961
    
    
    $
    800Capital expenditures
    
    
    236
    
    
    
    124
    
    
    
    618
    
    
    
    183Total assets
    
    
    
    
    
    
    
    
    
    
    30,689
    
    
    
    30,742Ending 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.Operating margin increased to 15.0% for the three months ended June 30,
2004 compared to 11.1% 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 $1.7 million or 12.3% 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. 24




---



##### 



Operating margins decreased to 10.5% for the six months ended June 30,
2004 compared to 11.7% 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. 25




---



##### 



Internet and Data Services (IDS)(in thousands, except lines and
accounts) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    2,760
    
    
    $
    2,635
    
    
    $
    5,520
    
    
    $
    5,143Total operating expense
    
    
    2,375
    
    
    
    3,049
    
    
    
    5,225
    
    
    
    5,916Operating income (loss)
    
    $
    385
    
    
    $
    (414
    )
    
    $
    295
    
    
    $
    (773
    )Depreciation
    
    $
    193
    
    
    $
    501
    
    
    $
    786
    
    
    $
    972Capital expenditures
    
    
    379
    
    
    
    477
    
    
    
    676
    
    
    
    1,315Total assets
    
    
    
    
    
    
    
    
    
    
    14,284
    
    
    
    14,937Ending 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 22.1% compared to the three months ended
June 30, 2003, despite a 4.7% increase in revenue. The primary driver of
this decrease was a $0.2 million decrease in network expense and a $0.3
million decline in depreciation expense. Depreciation expense for the
three months ended June 30, 2003 included expense related to certain
computer equipment which became fully depreciated prior to the current
quarter.As a result, operating margins improved to 13.9% for the three months
ended June 30, 2004 compared to (15.7%) 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 11.7% compared to the six months ended
June 30, 2003, despite a 7.3% increase in revenue. As a result,
operating margins improved to 5.3% for the six months ended June 30, 2004
compared to (15.0%) 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. 26




---



##### 



Other(in thousands) Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Total 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
    
    
    
    
    
    
    
    
    
    
    66,320
    
    
    
    67,312
  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 $0.1 million increase in equity in income of
unconsolidated companies, a $1.3 million decrease in impairment on
investments and a $1.0 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. 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
$11.7 million compared to the six months ended June 30, 2003. This
decrease relates primarily to lower gains on sale of investments of $14.5
million offset by a $0.4 million increase in equity in income of
unconsolidated companies, a $1.2 million decrease in impairment on
investments and a $1.1 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. 27




---



##### 



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 yearTotal
    
    Less than one year
    
    1-3 years
    
    4 -5 years
    
    After 5 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
    
    
    9,541
    
    
    
    3,206
    
    
    
    5,045
    
    
    
    939
    
    
    
    351Capital leases
    
    
    1,702
    
    
    
    552
    
    
    
    1,150
    
    
    
    
    
    
    
    $
    106,828
    
    
    $
    9,895
    
    
    $
    55,116
    
    
    $
    15,054
    
    
    $
    26,763
  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. 28




---



##### 



Cautionary Note Regarding Forward-Looking StatementsThe foregoing discussion contains forward-looking statements, as
defined in Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, that are based on the beliefs of
management, as well as assumptions made by, and information currently
available to, management. Management has based these forward-looking
statements on its current expectations and projections about future
events and trends affecting the financial condition and operations of the
Companys business. These forward-looking statements are subject to
certain risks, uncertainties and assumptions about us that could cause
actual results to differ materially from those reflected in the
forward-looking statements.Factors that may cause actual results to differ materially from these
forward-looking statements include:  
    
    our ability to respond effectively to the issues surrounding
the telecommunications industry caused by state and federal
legislation and regulations,  
    
    the impact of economic conditions related to the financial
performance of customers, business partners, competitors and peers
within the telecommunications industry,  
    
    our ability to recover the substantial costs incurred over
the past few years in connection with our expansion into new
businesses,  
    
    our ability to attract and retain key personnel,  
    
    our ability to retain our existing customer base against
wireless competition and cable telephony in all areas of the
business including local and long distance and internet and data
services,  
    
    our ability to control pricing and product offerings in a highly competitive industry,  
    
    the performance of our investments,  
    
    our ability to effectively manage rapid changes in technology
and control capital expenditures related to those technologies, and  
    
    the impact of economic and political events on the Companys
business, operating regions and customers, including terrorist
attacks.  In some cases, these forward-looking statements can be identified by the
use of words such as may, will, should, expect, intend, plan,
anticipate, believe, estimate, predict, project or potential
or the negative of these words or other comparable words.In making forward-looking statements, the Company claims the protection
of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The Company undertakes
no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors
discussed in documents filed by us with the Securities and Exchange
Commission, including those matters summarized under the caption Risk
Factors in the Companys Annual Report onForm 10-Kfor the year ended
December 31, 2003. All forward-looking statements should be viewed with
caution. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.  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. 29




---



##### 



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. 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.  The Company maintains disclosure controls and procedures that are
designed to provide that information required to be disclosed by the
Company in the reports it files under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within time periods
specified in the rules and forms of the SEC. These disclosures and
procedures are designed to provide that appropriate information is
accumulated and communicated to the Companys management, including its
chief executive officer and chief financial officer, as appropriate to
allow for timely decisions regarding disclosure.As required by the SEC rules, the Companys management, under the
supervision and with the participation of the Companys chief executive
officer and chief financial officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures as of June 30, 2004.
The disclosure controls and procedures are designed to provide a
reasonable level of assurance of achieving the Companys desired
disclosure control objectives. Management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, the Company has investments in
certain unconsolidated entities, including Palmetto. As the Company
neither controls nor manages these entities, its disclosure controls and
procedures with respect to these entities are necessarily substantially
more limited than those it maintains with respect to its consolidated
subsidiaries.The Company has begun extensive efforts to support managements
evaluation of the Companys internal control over financial reporting for
the year ending December 31, 2004. Although this process is not
complete, potential deficiencies with the Companys internal controls are
being identified and evaluated for significance and remediation as
necessary. As part of this effort, the Company has determined that its
controls over the accounting for property and equipment needed
enhancement. Accordingly, the Company has taken the following steps to
strengthen these controls:  
    
    reviewed, modified and enhanced the policies and
procedures surrounding the procurement, tracking and reporting of
property and equipment;
    
    hired additional accounting staff with appropriate
skill levels and re-assigned duties of some current staff
members; and
    
    begun implementation of fixed asset reporting software
that will improve the Companys ability to track property and
equipment and record depreciation expense on these assets. The
implementation of this software will likely take an extended
period of time and may not be completed by year-end.  During the fiscal quarter ended June 30, 2004, there have been no
changes, other than those noted above, in the Companys internal control
over financial reporting that have materially affected, or that are
reasonably likely to materially affect, the Companys internal control
over financial reporting.  Based upon the foregoing evaluation, the Companys chief executive
officer and chief financial officer have concluded that the Companys
disclosure controls and procedures are, in fact, effective at a
reasonable assurance level as of the end of the period covered by this
report. 30




---



##### 



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
    
    
    
    
  (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 31




---



##### 



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-KOn 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. 32




---



##### 



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 OfficerAugust 4, 2004Date
 (The above signatory has dual responsibility as a duly authorized officer
and chief accounting officer of the Registrant.) 33




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##### 



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.
 34