##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q   (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR (  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission file number 0-19179 CT COMMUNICATIONS, INC.  NORTH CAROLINA
    
    56-1837282(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1000 Progress Place NEP.O. Box 227, Concord, NC
    
    28026-0227(Address of principal executive offices)
    
    (Zip Code)
 (704) 722-2500
(Registrants telephone number, including area code) Not Applicable
(Former name, former address and former fiscal year,
if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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. 18,879,041 shares of Common Stock outstanding as of October 28, 2004.




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX Page No.PART I. Financial InformationItem 1. Financial Statements.Condensed Consolidated Balance Sheets
September 30, 2004 (Unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three and Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 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.
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    31Item 4. Controls and Procedures.
    
    
    31PART II. Other InformationItem 1. Legal Proceedings.
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    32Item 3. Defaults Upon Senior Securities.
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    32Item 5.Other Information.
    
    
    32Item 6. Exhibits.
    
    
    33Signatures
    
    
    34Exhibit Index
    
    
    35
  1




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##### 



Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets
 (Unaudited)September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,742
    
    
    $
    16,957Accounts receivable and unbilled revenue, net
    
    
    20,116
    
    
    
    22,301Other
    
    
    4,636
    
    
    
    5,372Total current assets
    
    
    49,494
    
    
    
    44,630Investment securities
    
    
    6,542
    
    
    
    6,901Other investments
    
    
    1,347
    
    
    
    1,078Investments in unconsolidated companies
    
    
    15,641
    
    
    
    14,146Property and equipment, net
    
    
    202,430
    
    
    
    208,370Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,201
    
    
    
    35,201Other assets
    
    
    1,823
    
    
    
    1,436Total assets
    
    $
    322,384
    
    
    $
    321,668LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    3,750
    
    
    $
    Accounts payable
    
    
    7,146
    
    
    
    6,414Customer deposits and advance billings
    
    
    2,476
    
    
    
    2,665Other accrued liabilities
    
    
    19,097
    
    
    
    17,314Liabilities of discontinued operations
    
    
    682
    
    
    
    1,072Total current liabilities
    
    
    33,151
    
    
    
    27,465Long-term debt
    
    
    66,250
    
    
    
    80,000Deferred credits and other liabilities:Deferred income taxes
    
    
    24,599
    
    
    
    22,618Post-retirement benefits other than pension
    
    
    11,087
    
    
    
    11,246Other
    
    
    2,552
    
    
    
    2,809Total deferred credits and other liabilities
    
    
    38,238
    
    
    
    36,673Total liabilities
    
    
    137,639
    
    
    
    144,138Stockholders equity:Preferred stock not subject to mandatory redemption:5% series, $100 par value; 3,356 shares outstanding at
September 30, 2004 and December 31, 2003
    
    
    336
    
    
    
    3364.5% series, $100 par value; 614 shares outstanding at
September 30, 2004 and December 31, 2003
    
    
    61
    
    
    
    61Common stock, 18,879,041 and 18,769,187 shares outstanding at
September 30, 2004 and December 31, 2003, respectively
    
    
    42,165
    
    
    
    40,800Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    (425
    )
    
    
    (264
    )Other accumulated comprehensive income
    
    
    182
    
    
    
    558Retained earnings
    
    
    142,128
    
    
    
    135,741Total stockholders equity
    
    
    184,745
    
    
    
    177,530Total liabilities and stockholders equity
    
    $
    322,384
    
    
    $
    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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Operating revenue:Telephone
    
    $
    29,796
    
    
    $
    30,583
    
    
    $
    90,091
    
    
    $
    90,408Wireless and internet
    
    
    10,863
    
    
    
    10,020
    
    
    
    31,752
    
    
    
    28,844Total operating revenue
    
    
    40,659
    
    
    
    40,603
    
    
    
    121,843
    
    
    
    119,252Operating expense:Telephone cost of service (excluding depreciation)
    
    
    9,409
    
    
    
    9,280
    
    
    
    26,743
    
    
    
    26,741Wireless and internet cost of service (excluding depreciation)
    
    
    4,397
    
    
    
    4,968
    
    
    
    13,835
    
    
    
    13,899Selling, general and administrative (excluding depreciation)
    
    
    14,240
    
    
    
    14,369
    
    
    
    41,157
    
    
    
    41,762Depreciation
    
    
    7,687
    
    
    
    7,605
    
    
    
    23,235
    
    
    
    22,991Total operating expense
    
    
    35,733
    
    
    
    36,222
    
    
    
    104,970
    
    
    
    105,393Operating income
    
    
    4,926
    
    
    
    4,381
    
    
    
    16,873
    
    
    
    13,859Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,820
    
    
    
    1,787
    
    
    
    4,714
    
    
    
    4,235Interest, dividend income and gain (loss) on sales of
investments
    
    
    184
    
    
    
    858
    
    
    
    934
    
    
    
    16,122Impairment of investments
    
    
    (1,454
    )
    
    
    (460
    )
    
    
    (1,494
    )
    
    
    (1,744
    )Other expenses, principally interest
    
    
    (1,225
    )
    
    
    (1,682
    )
    
    
    (3,984
    )
    
    
    (5,558
    )Total other income (expense)
    
    
    (675
    )
    
    
    503
    
    
    
    170
    
    
    
    13,055Income from continuing operations before income
taxes
    
    
    4,251
    
    
    
    4,884
    
    
    
    17,043
    
    
    
    26,914Income taxes
    
    
    1,780
    
    
    
    1,735
    
    
    
    6,971
    
    
    
    10,501Income from continuing operations
    
    
    2,471
    
    
    
    3,149
    
    
    
    10,072
    
    
    
    16,413Discontinued operations:Loss from operations of discontinued business, net of
income tax benefits of $276 for the nine months ended
September 30, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (424
    )Net income
    
    
    2,471
    
    
    
    3,149
    
    
    
    10,072
    
    
    
    15,989Dividends on preferred stock
    
    
    5
    
    
    
    5
    
    
    
    15
    
    
    
    15Net income for common stock
    
    $
    2,466
    
    
    $
    3,144
    
    
    $
    10,057
    
    
    $
    15,974Basic Earnings per share:Continuing operations
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    0.53
    
    
    $
    0.88Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.13
    
    
    
    0.17
    
    
    
    0.53
    
    
    
    0.85Diluted Earnings per share:Continuing operations
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    0.53
    
    
    $
    0.87Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income for common stock
    
    
    0.13
    
    
    
    0.17
    
    
    
    0.53
    
    
    
    0.85Basic weighted average shares outstanding
    
    
    18,877
    
    
    
    18,765
    
    
    
    18,862
    
    
    
    18,740Diluted weighted average shares outstanding
    
    
    19,054
    
    
    
    18,853
    
    
    
    19,010
    
    
    
    18,791
 See accompanying notes to condensed consolidated financial statements (unaudited). 3




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    2,471
    
    
    $
    3,149
    
    
    $
    10,072
    
    
    $
    15,989Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on
available-for-sale
securities
    
    
    (176
    )
    
    
    94
    
    
    
    (1,177
    )
    
    
    470Unrealized holding gains on interest rate swaps
    
    
    12
    
    
    
    136
    
    
    
    193
    
    
    
    212Reclassification adjustment for losses (gains)
realized
in net income
    
    
    797
    
    
    
    (4
    )
    
    
    608
    
    
    
    4Comprehensive income
    
    $
    3,104
    
    
    $
    3,375
    
    
    $
    9,696
    
    
    $
    16,675
 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)
 Nine Months Ended September 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    10,072
    
    
    $
    15,989Adjustments to reconcile net income to net cash provided
by operating activities:Loss from discontinued operations, net of tax
    
    
    
    
    
    
    424Depreciation
    
    
    23,235
    
    
    
    22,991Amortization of restricted stock
    
    
    640
    
    
    
    589Post-retirement benefits
    
    
    (158
    )
    
    
    424(Gain) loss on sale of investment securities
    
    
    (300
    )
    
    
    7Gain on sale of investments in unconsolidated companies
    
    
    
    
    
    
    (15,063
    )Impairment of investments
    
    
    1,494
    
    
    
    1,744Undistributed income of unconsolidated companies
    
    
    (4,714
    )
    
    
    (4,235
    )Undistributed patronage dividends
    
    
    (269
    )
    
    
    (483
    )Deferred income taxes and tax credits
    
    
    2,079
    
    
    
    6,730Changes in operating assets and liabilities
    
    
    5,424
    
    
    
    7,805Net cash provided by operating activities
    
    
    37,503
    
    
    
    36,922Cash flows from investing activities:Capital expenditures
    
    
    (17,294
    )
    
    
    (16,923
    )Purchases of investments
    
    
    (1,397
    )
    
    
    (3,312
    )Proceeds from sale of investment in unconsolidated companies
    
    
    
    
    
    
    17,052Proceeds from sale of investment securities
    
    
    1,067
    
    
    
    208Capital distribution from unconsolidated companies
    
    
    1,834
    
    
    
    3,438Net cash provided by (used in) investing activities
    
    
    (15,790
    )
    
    
    463Cash flows from financing activities:Repayment of long-term debt
    
    
    (10,000
    )
    
    
    (24,000
    )Dividends paid
    
    
    (3,692
    )
    
    
    (3,665
    )Proceeds from common stock issuances
    
    
    154
    
    
    
    383Net cash used in financing activities
    
    
    (13,538
    )
    
    
    (27,282
    )Net cash used in discontinued operations
    
    
    (390
    )
    
    
    (930
    )Net increase in cash and cash equivalents
    
    
    7,785
    
    
    
    9,173Cash and cash equivalents at beginning of period
    
    
    16,957
    
    
    
    7,652Cash and cash equivalents at end of period
    
    $
    24,742
    
    
    $
    16,825Supplemental disclosure of non-cash investing and financing activities:Cancellation of note payable and reduction in other intangibles in
connection with disposition of wireless spectrum
    
    
    
    
    
    $
    (17,697
    )
 See accompanying notes to condensed consolidated financial statements (unaudited). 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
September 30, 2004 and December 31, 2003, the results of its
operations for the three and nine months ended September 30, 2004
and September 30, 2003 and its cash flows for the nine months ended
September 30, 2004 and September 30, 2003. These unaudited financial
statements do not include all disclosures associated with the
Companys annual financial statements and should be read along with
the Companys Annual Report on Form 10-K for the year ended December
31, 2003.  2.
    
    In certain instances, amounts previously reported in the 2003
consolidated financial statements have been reclassified to conform
to the presentation of the 2004 consolidated financial statements.
Such reclassifications have no effect on net income or retained
earnings as previously reported.  3.
    
    The results of operations for the nine months ended September 30,
2004 and 2003 are not necessarily indicative of the results to be
expected for the full year.  4.
    
    PROPERTY AND EQUIPMENT  Property and equipment is composed of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Land, buildings and general equipment
    
    $
    91,012
    
    
    $
    89,929Central office equipment
    
    
    170,968
    
    
    
    164,452Poles, wires, cables and conduit
    
    
    152,405
    
    
    
    144,775Construction in progress
    
    
    6,025
    
    
    
    4,576420,410
    
    
    
    403,732Accumulated depreciation
    
    
    (217,980
    )
    
    
    (195,362
    )Property and equipment, net
    
    $
    202,430
    
    
    $
    208,370
  5.
    
    DISCONTINUED OPERATIONS  On December 9, 2002, the Company discontinued its wireless broadband
commercial trial operations in Fayetteville, North Carolina. These
operations were provided by Wavetel, L.L.C. (Wavetel), a subsidiary
of the Company. The Company ceased Wavetels operations due to
significant operating losses, the limited coverage area provided by
the technology available at the time and the inability to obtain
outside investment. Complete disposal of the business through sale
and disposal of assets was completed by June 30, 2003. As a result,
Wavetels operations have been reflected as discontinued operations
and as assets and liabilities held for sale in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. In
the second quarter of 2003, the Company re-evaluated the potential
future liabilities related to the discontinued Wavetel operations and
determined that the potential liabilities exceeded the remaining
restructuring reserve. Therefore, the Company recorded an additional
loss from discontinued operations, before income taxes, of $0.7
million in the second quarter of 2003. The additional loss relates
to the Companys inability to sublease certain facilities that were
previously used in Wavetels operations. The adjustment is an
estimate based on the current market condition and could be revised
on a quarterly basis as new information becomes available. As of
September 30, 2004, the Company believes that the reserve is
adequate. The Company had no outstanding indebtedness directly
related to the Wavetel operations; therefore, no interest expense was
allocated to discontinued operations.  In connection with the discontinuance of operations, the Company
recognized a loss of $4.4 million in 2002 to write down the related
carrying amounts of assets to their fair values less cost to sell in
accordance with SFAS No. 144 and recorded related liabilities for
estimated severance costs, lease termination costs and other exit
costs in accordance with Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in Restructuring). The liabilities of the discontinued
operations at September 30, 2004 and December 31, 2003 consist of the
following (in thousands): 6




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30,
    
    December 31,2004
    
    2003Liabilities of discontinued operations:Other liabilities, primarily lease obligations
    
    $
    682
    
    
    $
    1,072Total liabilities of discontinued operations
    
    $
    682
    
    
    $
    1,072
  A summary of restructuring liability activity related to the
discontinued operations for the nine months ended September 30, 2004
is as follows (in thousands): Balance at December 31, 2003
    
    $
    1,072Lease termination costs
    
    
    (390
    )Balance at September 30, 2004
    
    $
    682
  6.
    
    COMMON STOCK  The following is a summary of Common Stock transactions during the
nine months ended September 30, 2004 (in thousands): Shares
    
    AmountOutstanding at December 31, 2003
    
    
    18,769
    
    
    $
    40,800Purchases/(forfeitures) of Common Stock
    
    
    (29
    )
    
    
    (353
    )Issuance of Common Stock
    
    
    139
    
    
    
    1,718Outstanding at September 30, 2004
    
    
    18,879
    
    
    $
    42,165
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Weighted average shares
outstanding:Basic
    
    
    18,877
    
    
    
    18,765
    
    
    
    18,862
    
    
    
    18,740Diluted
    
    
    19,054
    
    
    
    18,853
    
    
    
    19,010
    
    
    
    18,791
  Outstanding options to purchase approximately 543,000 and 490,000
shares of Common Stock for the three and nine months ended September
30, 2004 and approximately 582,000 shares of Common Stock for the
three and nine months ended September 30, 2003 were not included in
the computation of diluted earnings per share and diluted weighted
shares outstanding because the exercise price of these options was
greater than the average market price of the Common Stock during the
respective periods. At September 30, 2004 and September 30, 2003,
the Company had total options outstanding of 1,325,000 and 849,000,
respectively.  On April 22, 2004, the Board of Directors approved the continuation
of the Companys existing stock repurchase program. Under this
program, the Company is authorized, subject to certain conditions,
to repurchase up to 1,000,000 shares of its outstanding Common Stock
during the twelve-month period from April 28, 2004 to April 27,
2005. There were no shares repurchased by the Company during the
nine months ended September 30, 2004. 7




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  7.
    
    INVESTMENT SECURITIES  The amortized cost, gross unrealized holding gains and losses and
fair value for the Companys investments at September 30, 2004 and
December 31, 2003 were as follows (in thousands): Gross
    
    GrossUnrealized
    
    UnrealizedEquity Securities
    
    Amortized
    
    Holding
    
    HoldingAvailable-for-Sale
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueSeptember 30, 2004
    
    $
    4,936
    
    
    $
    561
    
    
    $
    (67
    )
    
    $
    5,430December 31, 2003
    
    $
    5,520
    
    
    $
    1,476
    
    
    $
    (95
    )
    
    $
    6,901
 Debt Securities
    
    AmortizedHeld-to-Maturity
    
    CostSeptember 30, 2004
    
    $
    1,112
  The Company holds an investment in shares of convertible, redeemable
preferred stock. In accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, this investment
was reclassified as of September 30, 2004, as a held-to-maturity
debt security. The preferred stock is subject to mandatory
redemption in cash ten years after the issuance date, which was
October 29, 2002. The shares may be converted into common stock at
the option of the investee beginning three years after the issuance
date. The investment is carried at the Companys cost basis, as
there is no readily determinable fair value for this security.  During the third quarter of 2004, the Company revised the
classification of certain investments that were historically
classified as investment securities. These investments will be
accounted for under the cost method as there is no readily
determinable market value. As a result of the change, $0.2 million
of investment securities were reclassified as investments in
unconsolidated companies on the Condensed Consolidated Balance
Sheets as of December 31, 2003 and September 30, 2004. This change
did not affect gross unrealized holding gains or losses and had no
impact on the Condensed Consolidated Statements of Income.  During the third quarter of 2004, the Company recognized an
impairment loss of $1.2 million on an equity security investment due
to a decline in fair value of the equity security that, in the
opinion of management, was considered to be other than temporary.
This impairment loss is included in the caption Impairment of
investments on the Condensed Consolidated Statements of Income. 8




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Certain investments of the Company are and have been in continuous
unrealized loss positions. The gross unrealized losses and fair
value and length of time the securities have been in the continuous
unrealized loss position at September 30, 2004 is as follows (in
thousands): Less than 12 months
    
    12 months or more
    
    TotalDescription of
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedSecurities
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesCommon stock
    
    $
    1,321
    
    
    $
    12
    
    
    $
    749
    
    
    $
    55
    
    
    $
    2,070
    
    
    $
    67Total temporarily
impaired securities
    
    $
    1,321
    
    
    $
    12
    
    
    $
    749
    
    
    $
    55
    
    
    $
    2,070
    
    
    $
    67
  The fair value and unrealized losses noted above that are greater
than 12 months relate to three different investments, the largest of
which is a mutual fund investment that is expected to recover as the
economy improves and has been increasing in value. The Company will
continue to evaluate these investments on a quarterly basis to
determine if the unrealized loss is other-than-temporarily impaired
at which time the impairment loss would be realized.  8.
    
    OTHER INVESTMENTS  Other investments consist primarily of the Companys investment in
CoBank, ACB (CoBank). The Company receives patronage dividends
from its investment in CoBank which is organized as a cooperative
for federal income tax purposes. Patronage dividends represent cash
distributions of CoBanks earnings and notices of allocations of
CoBanks earnings to the Company. Non-cash allocations of earnings
are included in the Companys carrying value of the investment and
are recognized as other income in the period earned.  During the third quarter of 2004, the Company revised the
classification of one investment previously classified as an other
investment. This investment was reclassified as an investment in
unconsolidated companies and will be accounted for under the cost
method, as there is no readily determinable market value. As a
result of this change, $0.3 million of other investments were
reclassified to investments in unconsolidated companies on the
Condensed Consolidated Balance Sheets as of December 31, 2003 and
September 30, 2004. This change had no impact on the Condensed
Consolidated Statements of Income.  9.
    
    INVESTMENTS IN UNCONSOLIDATED COMPANIES  Investments in unconsolidated companies consist of the following (in
thousands): September 30,
    
    December 31,2004
    
    2003Equity Method:Palmetto MobileNet, L.P.
    
    $
    11,627
    
    
    $
    8,738Other
    
    
    99
    
    
    
    100Cost Method:Magnolia Holding Company
    
    
    1,681
    
    
    
    2,958ITC
Financial Services, LLC
    
    
    840
    
    
    
    840Other
    
    
    1,394
    
    
    
    1,510Total
    
    $
    15,641
    
    
    $
    14,146
  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 9




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  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 preferred stock, which were later converted to common stock.
This distribution by Magnolia reduced the value of the Companys
investment in Magnolia. The shares of Knology stock are classified
as available-for-sale investment securities.  In December 2003, the Company committed to purchase a 4.0% interest
in ITC Financial Services, LLC (ITC Financial) for up to $2.1
million. ITC Financial was formed to develop a prepaid debit card
business that uses a nationwide network of automated terminals that
re-charge the debit card in exchange for certain transaction fees.
As of September 30, 2004, the Company had funded $0.8 million of the
committed amount. The remaining $1.3 million can be called at any
time at the discretion of ITC Financial based on its cash operating
requirements.  During the third quarter of 2004, the Company recognized impairment
losses of $0.2 million on two cost method investments. These
impairment losses are included in the caption Impairment of
investments on the Condensed Consolidated Statements of Income.  The Company recognized income of $1.8 million in the three months
ended September 30, 2004 and 2003 and $4.7 million and $4.2 million
in the nine months ended September 30, 2004 and 2003, respectively,
as its share of earnings from unconsolidated companies accounted for
under the equity method. Substantially all of the income was
attributable to the Companys 22.4% interest in Palmetto MobileNet,
L.P. Palmetto MobileNet, L.P. is a partnership that holds a 50%
interest in 10 cellular rural service areas (RSAs) in North and
South Carolina. Summarized unaudited interim results of operations
for Palmetto MobileNet, L.P. for the three and nine months ended
September 30, 2004 and 2003 are as follows (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Equity in earnings
of RSA partnership
interests
    
    $
    7,630
    
    
    $
    8,041
    
    
    $
    21,204
    
    
    $
    22,353Other expenses
    
    
    185
    
    
    
    152
    
    
    
    415
    
    
    
    246Net income
    
    $
    7,445
    
    
    $
    7,889
    
    
    $
    20,789
    
    
    $
    22,107
  10.
    
    LONG-TERM DEBT  Long-term debt consists of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Line of credit with interest at LIBOR
plus 1.25% (3.0% at September 30, 2004
and 2.44% at December 31, 2003)
    
    $
    20,000
    
    
    $
    30,000Term loan with interest at 7.32%
    
    
    50,000
    
    
    
    50,00070,000
    
    
    
    80,000Less: Current portion of long-term debt
    
    
    3,750
    
    
    
    Total long-term debt
    
    $
    66,250
    
    
    $
    80,000
  At September 30, 2004, the Company had a $70.0 million revolving
five-year line of credit with interest at three month LIBOR plus a
spread based on various financial ratios, that is currently 1.25%.
The interest rate on September 30, 2004 was 3.0%. During the nine
months ended September 30, 2004, the Company elected to repay 10




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  $10.0 million in principal on this credit facility. The credit
facility provides for quarterly payments of interest until maturity
on March 31, 2006. As of September 30, 2004, $20.0 million was
outstanding under the revolving credit facility. The Company also
has a 7.32% fixed rate $50.0 million term loan that matures on
December 31, 2014. All $50.0 million was outstanding as of
September 30, 2004. The term loan requires quarterly payments of
interest until maturity on December 31, 2014. Payments of principal
are due beginning March 31, 2005 and quarterly thereafter through
December 31, 2014, in equal quarterly installments of $1.25 million.  The Company has two $5.0 million interest rate swap transactions to
fix amounts outstanding under the $70.0 million revolving line of
credit at rates of 3.81% and 4.53%, respectively. The fair value of
the swaps as of September 30, 2004 was $(27,000) and $(0.2) million,
respectively. The swaps mature on November 3, 2004 and November 3,
2006, respectively.  11.
    
    GOODWILL  On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. In accordance with SFAS No. 142, the
Company discontinued goodwill amortization and tested goodwill for
impairment as of January 1, 2002, determining that the recognition
of an impairment loss was not necessary. The Company will continue
to test goodwill for impairment at least annually. Goodwill was
$9.9 million as of September 30, 2004, and was unchanged from
December 31, 2003.  Other intangible assets consist primarily of wireless licenses.
Wireless licenses have terms of 10 years, but are renewable through
a routine process involving a nominal fee. The Company has
determined that no legal, regulatory, contractual, competitive,
economic or other factors currently exist that limit the useful life
of its wireless licenses. Therefore, the Company does not amortize
wireless licenses based on the determination that these assets have
indefinite lives. In accordance with SFAS No. 142, the Company
periodically reviews its determination of indefinite useful lives
for wireless licenses and will test those licenses for impairment at
least annually.  12.
    
    STATE INCOME TAX ASSESSMENT  In October 2003, the Company received income tax assessments from
the North Carolina Department of Revenue related to certain state
tax returns filed for the years ended December 31, 1998, 1999 and
2000. The Company is currently appealing these assessments and
believes that it has meritorious defenses to the assessments and
that the ultimate outcome is not expected to result in a material
impact on the Companys consolidated financial statements.  13.
    
    RECENT ACCOUNTING PRONOUNCEMENTS  In March 2004, the EITF of the Financial Accounting Standards Board
(FASB) reached a consensus on EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. The consensus addresses how to determine the meaning
of other-than-temporary impairment and its application to
investments classified as either available-for-sale or
held-to-maturity under Statement No. 115 (including individual
securities and investments in mutual funds), and investments
accounted for under the cost method or the equity method. EITF
Issue No. 03-1 requires additional disclosures for investments
accounted for under SFAS No. 115 and SFAS No. 124 effective for fiscal
years ended after December 15, 2003. In September 2004, FASB Staff
Position EITF Issue No. 03-1-1 was issued which delayed the effective date for
the measurement and recognition guidance contained in paragraphs
10-20 of Issue No. 03-1. The adoption of this consensus is not
expected to have a material impact on the Companys current
policies.  In December 2003, the FASB issued a revision to SFAS No. 132,
Employers Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88 and 106. SFAS
No. 132 revises employers disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans required by SFAS No. 87, Employers
Accounting for Pension, SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits and SFAS No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. This Statement
retains the disclosure requirements contained in SFAS No. 132,
Employers Disclosures about Pensions and Other Postretirement
Benefits, which it replaces. It requires additional disclosures to
those in the 11




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  original Statement No. 132 about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. The Company
adopted the new disclosure requirements of SFAS No. 132 in December
2003.  14.
    
    STOCK OPTIONS  The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25 issued in March 2000 to
account for its fixed stock options plans. Under this method,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure
requirements of SFAS No. 123 and SFAS No. 148.  The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plans and its stock
purchase plan. Had compensation cost for the Companys stock-based
compensation plans been determined consistent with SFAS No. 123, the
Companys net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands except per
share data): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    2,471
    
    
    $
    3,149
    
    
    $
    10,072
    
    
    $
    15,989Additional stock-based compensation
expense that would have been
included in
net income if the fair value-based
method
had been applied, net of income tax
    
    
    272
    
    
    
    209
    
    
    
    815
    
    
    
    626Pro forma net income
    
    $
    2,199
    
    
    $
    2,940
    
    
    $
    9,257
    
    
    $
    15,363Basic earnings per common shareAs reported
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    0.53
    
    
    $
    0.85Pro forma
    
    
    0.12
    
    
    
    0.16
    
    
    
    0.49
    
    
    
    0.82Diluted earnings per common shareAs reported
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    0.53
    
    
    $
    0.85Pro forma
    
    
    0.12
    
    
    
    0.16
    
    
    
    0.49
    
    
    
    0.82
 12




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  15.
    
    PENSION AND POST-RETIREMENT PLANS  Components of net periodic benefit costs for the three months ended
September 30 (in thousands): Pension Benefits
    
    Post-Retirement Benefits2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    503
    
    
    $
    463
    
    
    $
    17
    
    
    $
    13Interest cost
    
    
    655
    
    
    
    626
    
    
    
    127
    
    
    
    128Expected return on plan assets
    
    
    (842
    )
    
    
    (664
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    16
    
    
    
    69Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (56
    )Net periodic benefit cost
    
    $
    317
    
    
    $
    426
    
    
    $
    122
    
    
    $
    154
  Components of net periodic benefit costs for the nine months ended
September 30 (in thousands): Pension Benefits
    
    Post-Retirement Benefits2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    1,509
    
    
    $
    1,389
    
    
    $
    51
    
    
    $
    39Interest cost
    
    
    1,965
    
    
    
    1,878
    
    
    
    373
    
    
    
    384Expected return on plan assets
    
    
    (2,526
    )
    
    
    (1,992
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    207Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (168
    )Net periodic benefit cost
    
    $
    951
    
    
    $
    1,278
    
    
    $
    310
    
    
    $
    462
  As previously disclosed in its financial statements for the year
ended December 31, 2003, the Company does not expect to contribute
to the pension plan in 2004. 13




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  16.
    
    SEGMENT INFORMATION  The Company has six reportable segments, each of which is a
strategic business that is managed separately due to certain
fundamental differences such as regulatory environment, services
offered and/or customers served. The segments and a description of
their businesses are as follows: the incumbent local exchange
carrier (ILEC), which provides local telephone services; the
digital wireless group (Digital Wireless), which provides wireless
phone services; the competitive local exchange carrier (CLEC),
which provides competitive local telephone services to customers
outside the ILECs operating area; the Greenfield business
(Greenfield), which provides full telecommunications services to
developments outside the ILECs operating area; Internet and data
services (IDS), which provides dial-up and high-speed internet
access and other data related services; and Palmetto MobileNet, L.P.
(Palmetto), which is a limited partnership with interests in
wireless operations in North Carolina and South Carolina in which
the Company has an equity interest through the Companys subsidiary
CT Cellular, Inc. All other business units, investments and
operations of the Company that do not meet reporting guidelines and
thresholds are reported under Other.  Accounting policies of the segments are the same as those described
in the summary of significant accounting policies included in the
Companys Annual Report on Form 10-K for the year ended December 31,
2003. The Company evaluates performance based on operating income.
Intersegment transactions have been eliminated for purposes of
calculating operating income. All segments reported below, except
Palmetto, provide services primarily within North Carolina.
Palmetto provides services in North and South Carolina. Selected
data by business segment as of and for the three and nine months
ended September 30, 2004 and 2003, is as follows (in thousands):  Three months ended September 30, 2004 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    23,161
    
    
    $
    8,222
    
    
    $
    4,596
    
    
    $
    2,039
    
    
    $
    2,641
    
    
    $
    
    
    
    $
    40,659External
expense
    
    
    12,631
    
    
    
    6,496
    
    
    
    4,494
    
    
    
    2,177
    
    
    
    1,925
    
    
    
    323
    
    
    
    28,046Depreciation
    
    
    4,540
    
    
    
    488
    
    
    
    629
    
    
    
    774
    
    
    
    922
    
    
    
    334
    
    
    
    7,687Operating
income (loss)
    
    $
    5,990
    
    
    $
    1,238
    
    
    $
    (527
    )
    
    $
    (912
    )
    
    $
    (206
    )
    
    $
    (657
    )
    
    $
    4,926Segment assets
    
    $
    168,310
    
    
    $
    33,562
    
    
    $
    14,832
    
    
    $
    25,398
    
    
    $
    13,923
    
    
    $
    66,359
    
    
    $
    322,384
  Three months ended September 30, 2003 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    24,132
    
    
    $
    7,468
    
    
    $
    4,911
    
    
    $
    1,540
    
    
    $
    2,552
    
    
    $
    
    
    
    $
    40,603External
expense
    
    
    12,217
    
    
    
    6,852
    
    
    
    4,676
    
    
    
    2,161
    
    
    
    2,448
    
    
    
    263
    
    
    
    28,617Depreciation
    
    
    4,990
    
    
    
    450
    
    
    
    635
    
    
    
    659
    
    
    
    540
    
    
    
    331
    
    
    
    7,605Operating
income (loss)
    
    $
    6,925
    
    
    $
    166
    
    
    $
    (400
    )
    
    $
    (1,280
    )
    
    $
    (436
    )
    
    $
    (594
    )
    
    $
    4,381Segment assets
    
    $
    168,295
    
    
    $
    31,065
    
    
    $
    16,115
    
    
    $
    23,630
    
    
    $
    15,093
    
    
    $
    66,867
    
    
    $
    321,065
 14




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Nine months ended September 30, 2004 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    69,637
    
    
    $
    23,591
    
    
    $
    14,585
    
    
    $
    5,869
    
    
    $
    8,161
    
    
    $
    
    
    
    $
    121,843External
expense
    
    
    35,397
    
    
    
    19,291
    
    
    
    13,333
    
    
    
    6,561
    
    
    
    6,364
    
    
    
    789
    
    
    
    81,735Depreciation
    
    
    14,918
    
    
    
    1,449
    
    
    
    1,900
    
    
    
    2,221
    
    
    
    1,708
    
    
    
    1,039
    
    
    
    23,235Operating
income (loss)
    
    $
    19,322
    
    
    $
    2,851
    
    
    $
    (648
    )
    
    $
    (2,913
    )
    
    $
    89
    
    
    $
    (1,828
    )
    
    $
    16,873Segment assets
    
    $
    168,310
    
    
    $
    33,562
    
    
    $
    14,832
    
    
    $
    25,398
    
    
    $
    13,923
    
    
    $
    66,359
    
    
    $
    322,384
  Nine months ended September 30, 2003 DigitalILEC
    
    Wireless
    
    CLEC
    
    Greenfield
    
    IDS
    
    Other
    
    TotalExternal
revenue
    
    $
    71,232
    
    
    $
    21,149
    
    
    $
    14,759
    
    
    $
    4,417
    
    
    $
    7,695
    
    
    $
    
    
    
    $
    119,252External
expense
    
    
    34,615
    
    
    
    18,139
    
    
    
    14,234
    
    
    
    6,162
    
    
    
    7,392
    
    
    
    1,860
    
    
    
    82,402Depreciation
    
    
    15,442
    
    
    
    1,250
    
    
    
    1,721
    
    
    
    2,074
    
    
    
    1,512
    
    
    
    992
    
    
    
    22,991Operating
income (loss)
    
    $
    21,175
    
    
    $
    1,760
    
    
    $
    (1,196
    )
    
    $
    (3,819
    )
    
    $
    (1,209
    )
    
    $
    (2,852
    )
    
    $
    13,859Segment assets
    
    $
    168,295
    
    
    $
    31,065
    
    
    $
    16,115
    
    
    $
    23,630
    
    
    $
    15,093
    
    
    $
    66,867
    
    
    $
    321,065
  The Companys Palmetto segment is not consolidated and is accounted
for under the equity method. The Companys net investment in
Palmetto of $11.6 million and $9.5 million as of September 30, 2004
and 2003, respectively, is included as part of the assets of the
Companys Other segment. The Company records its share of earnings
from Palmetto as equity in income of unconsolidated companies on the
Condensed Consolidated Statements of Income. Summarized results of
operations for Palmetto for the three and nine months ended
September 30, 2004 and 2003 are as follows (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Equity in earnings
of RSA partnership
interests
    
    $
    7,630
    
    
    $
    8,041
    
    
    $
    21,204
    
    
    $
    22,353Other expenses
    
    
    185
    
    
    
    152
    
    
    
    415
    
    
    
    246Net income
    
    $
    7,445
    
    
    $
    7,889
    
    
    $
    20,789
    
    
    $
    22,107
  Reconciliation to income from continuing operations before income
taxes (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Segment operating income
    
    $
    4,926
    
    
    $
    4,381
    
    
    $
    16,873
    
    
    $
    13,859Total other income (expense)
    
    
    (675
    )
    
    
    503
    
    
    
    170
    
    
    
    13,055Income from continuing
operations
before income taxes
    
    $
    4,251
    
    
    $
    4,884
    
    
    $
    17,043
    
    
    $
    26,914
 15




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.
  IntroductionCT Communications, Inc. and its subsidiaries (the Company) provide a
broad range of telecommunications and related services to residential and
business customers located primarily in North Carolina. The Companys
primary services include local and long distance telephone service,
Internet and data services and digital wireless products and services.The Company has worked to expand its core businesses through the
development of integrated product and service offerings, investment in
certain growth initiatives and targeted marketing efforts to efficiently
identify and obtain customers. In addition, the Company has made certain
strategic investments that complement its business units. During 2001,
the Company expanded its wireless business through the partitioning of
its area of the Cingular digital network.The Company believes that it is positioning itself to achieve its
strategic objectives by devoting substantial effort to developing
business plans, enhancing its management team, and designing and
developing its business support and operating systems. The Companys
primary focus is to maximize the ILEC business by selling bundled
services and enhancing its network, and in particular its broadband
network, to better position the Company for increasing competition. With
respect to its CLEC and Greenfield businesses, the Company continues to
place greater emphasis on projects that can be served by leveraging
existing network infrastructure. The Company will also consider
strategic acquisitions and investments as opportunities arise.On September 1, 2004, the Company announced a plan to significantly
enhance its broadband capabilities in its ILEC territory. The initiative
involves an estimated $9.0 million capital investment that, upon
completion, is expected to allow the Company to offer broadband service
speeds of up to 10 megabits per second throughout much of its ILEC
territory, a significant improvement over current DSL and cable modem
speeds. The initiative is planned for completion in 2005, with the
introduction of higher-speed services in selected areas planned by the
end of 2004.For the three and nine months ended September 30, 2004, net income for
the Company was $2.5 million and $10.1 million, respectively, compared to
$3.1 million and $16.0 million for the three and nine months ended
September 30, 2003. Net income for the nine months ended September 30,
2003 included a $9.7 million after-tax gain on the sale of an equity
investment. Diluted earnings per share were $0.13 and $0.17 for the
three months ended September 30, 2004 and 2003, respectively, and $0.53
and $0.85 for the nine months ended September 30, 2004 and 2003.The Company continues to be exposed to increasing competition in its ILEC
territory and regulatory developments and uncertainties that impact its
CLEC and Greenfield businesses. For the three and nine months ended
September 30, 2004, the Companys ILEC continued to experience a loss of
access lines due in part to an increase in broadband Internet adoption by
customers that have cancelled second lines previously used for dial-up
Internet service as well as increased competition from wireless and other
competitive providers. The competitive CLEC and Greenfield wireline
businesses continued to experience strong demand for their products and
services which resulted in 8.5% and 34.9% access line growth,
respectively, compared to September 30, 2003. The continued loss of ILEC
access lines and evolving regulatory changes that will affect certain
expenses in our CLEC and Greenfield businesses may negatively impact
operating margins in future periods.Industry and Operating 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 16




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##### 



will become more significant threats to the Companys voice business in
coming years. These technologies are capable of delivering a quality,
competitive voice service to ILEC customers. These voice providers are
not subject to certain regulatory constraints and obligations that have
shaped the Companys business model and that will become more significant
impediments to its ability to successfully compete in the coming years.The ILEC must provide basic telephone service as well as most tariffed
services to all customers in its regulated service area, regardless of
the cost to provide those services. The Company does benefit from
universal service fund (USF) payments intended to offset certain costs to
provide service. These reimbursements are increasingly at risk, yet
service obligations remain unchanged.As discussed above, VoIP and cable telephony are becoming more available
to customers and could result in lower revenues throughout the Companys
businesses. Time Warner currently offers cable television and high-speed
Internet service and is expected to offer cable telephony in our ILEC
service area in late 2004 or early 2005. This could result in a loss of
access lines, a reduction in ILEC revenue including long distance and
access revenue, and a reduction in Internet revenue. In addition,
wireless substitution is also a trend that is impacting the ILEC business
as well as our long distance revenue. Some customers are choosing to
substitute their landline service with wireless service. The Company
believes the access line decrease in the ILEC over the past several years
can be partially attributed to this trend.Also impacting access line losses over the past several years is the
adoption of digital subscriber line (DSL) and high-speed Internet
services by customers that had traditionally subscribed to dial-up
Internet service. As customers switch to DSL or high-speed Internet
service, they no longer need a second landline for use with their dial-up
Internet service. To the extent that such landline is replaced with a
Company DSL line, then the Company can ultimately recover the lost second
landline revenue through its DSL service to the customer.In recent quarters, the Company experienced a decline in wireless
interconnection access fee revenue. Wireless interconnection access
revenue has declined due to requirements to develop direct billing
relationships with wireless carriers for termination of wireless traffic
on the network. These direct billing relationships are subject to
negotiated interconnection rates that are lower than rates previously
realized for termination of this traffic. However, this rate decline has
been somewhat offset as wireless traffic terminated on the Companys
network increases. The Company expects continued pressure from other
telecommunications providers, and possibly regulators, to lower or
eliminate the recovery of fees for terminating such providers traffic on
the Companys network.In the Companys wireless business, increasing competition, market
saturation and an uncertain economy have caused and will likely continue
to cause the wireless industrys subscriber growth rate to moderate in
comparison to historical growth rates. While the wireless
telecommunications industry does continue to grow, a high degree of
competition exists among carriers. This competition will continue to put
pressure on pricing and margins as carriers compete for customers.Regulatory requirements have grown in certain areas of our business and
have added complexity and expense to the Companys business model. In
November 2003, the Company was required to provide local number
portability (LNP) to other wireless carriers. This service allows
greater customer choice in their telecommunications provider, without the
need to change established end user contact numbers. While this service
certainly enhances customer choice, it negatively impacts the cost to
provide basic service. In addition, recent regulatory decisions by the
Federal Communications Commission (FCC) that reduced the switched
access rates charged to interexchange carriers by the CLEC and Greenfield
businesses, and increased rates for unbundled network elements purchased
by those businesses from incumbent local exchange carriers, have placed a
higher degree of uncertainty and margin pressure on the CLEC and
Greenfield businesses.The Company has licenses and other rights (including lease agreements) to
certain wireless spectrum, including Multichannel Multipoint Distribution
Service (MMDS) and Instructional Television Fixed Service (ITFS). In
April 2003, the FCC initiated a proposed rulemaking to comprehensively
examine its rules regarding MMDS and ITFS spectrum. On July 29, 2004,
the FCC issued a Report and Order and 17




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##### 



Further Notice of Proposed Rulemaking, setting forth new rules for MMDS
(now called Broadband Radio Service (BRS)) and ITFS (now called
Educational Broadband Service (EBS)) in the 2495-2690 MHz band. In its
order, the FCC created a new plan for this band, eliminating the use of
interleaved channels by BRS and EBS licenses and creating distinct band
segments for high power operations and low power operations. The FCCs
order also implemented geographic area licensing for all licenses in the
band and adopted a three-year transitional mechanism for licensees to
move to new spectrum assignments. The FCCs transition mechanism
contemplates that a proponent licensee (presumably a commercial operator)
will initiate a transition for an entire Major Economic Area (MEA), and
will bear the costs of the transition for EBS licensees in such MEA.
Such a transition in the MEA that includes the Companys license
territory would require coordination by the proponent with numerous
licensees, and significant cost support for the many EBS licensees that
operate in the area.If an MEA is not transitioned within the three-year period, then the
affected channels will be re-licensed through an auction procedure.
After the three-year deadline (plus an additional 18 month grace period
for incumbents) existing licensees could lose their authorizations if a

transition has not taken place. Therefore, if the Companys licenses are
not transitioned, those rights could be forfeited. What consideration,
if any, the Company would receive in such circumstances has not been
determined by the FCC. The FCC has proposed additional rules for, and
solicited comments on, the structure of the auction for unlicensed
spectrum (including any bidding credits or other consideration to be
provided to incumbent licensees) and other matters relating to the
spectrum. The FCCs order has not yet been published in the Federal
Register, and will not become effective until after such publication, or
possibly later, if the order is subject to reconsideration. The Company
is currently evaluating whether to participate in a motion to the FCC for
reconsideration of the order.As of September 30, 2004, the Company has a cost basis of approximately
$15.2 million in MMDS and ITFS spectrum recorded as part of other
intangibles on the Condensed Consolidated Balance Sheets. The Company
will consider the FCCs Order and other regulatory and business
developments and trends when assessing the value of its intangible
assets. The Company tests intangibles for impairment at least annually.Results of OperationsThe Company has six reportable segments, each of which is a strategic
business that is managed separately due to certain fundamental
differences such as regulatory environment, services offered and/or
customers served. The identified reportable segments are: ILEC, CLEC,
Greenfield, Digital Wireless, IDS and Palmetto. All other businesses
that do not meet reporting guidelines and thresholds are reported under
Other Business Units. Summarized results of operations for Palmetto
are included in Notes 9 and 16 of the Condensed Consolidated Financial
Statements.The following discussion reviews the consolidated results of operations
and specific results within each consolidated reportable segment. 18




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##### 



Consolidated Operating Results(in thousands, except lines and
subscribers) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    40,659
    
    
    $
    40,603
    
    
    $
    121,843
    
    
    $
    119,252Total operating expense
    
    
    35,733
    
    
    
    36,222
    
    
    
    104,970
    
    
    
    105,393Operating income
    
    $
    4,926
    
    
    $
    4,381
    
    
    $
    16,873
    
    
    $
    13,859Depreciation
    
    $
    7,687
    
    
    $
    7,605
    
    
    $
    23,235
    
    
    $
    22,991Capital expenditures
    
    
    7,530
    
    
    
    5,700
    
    
    
    17,294
    
    
    
    16,923Total assets
    
    
    
    
    
    
    
    
    
    
    322,384
    
    
    
    321,065Ending wired access lines
    
    
    
    
    
    
    
    
    
    
    157,206
    
    
    
    154,079Ending wireless
subscribers
    
    
    
    
    
    
    
    
    
    
    41,229
    
    
    
    36,778
  Three months ended September 30Operating revenue increased $0.1 million or 0.1% for the three months
ended September 30, 2004 compared to the three months ended September 30,
2003. The increase is attributable to a $0.8 million increase in
Wireless revenue driven by a 12.1% increase in customers, a $0.5 million
increase in Greenfield revenue driven primarily by a 34.9% increase in
access lines and a $0.1 million increase in IDS revenue. These increases
were partially offset by a $1.0 million decrease in ILEC revenue driven
primarily by a decrease in phone system sales and a decrease in access
lines, and a $0.3 million decrease in CLEC revenue due to a decrease in
access revenue primarily related to a significant reduction in interstate
access rates effective in June 2004.For the three months ended September 30, 2004, operating expense
decreased $0.5 million or 1.4% compared to the three months ended
September 30, 2003. This is primarily the result of a decrease in
handset and accessory costs, sales commissions and marketing expenses in
Wireless and lower salary and administrative expenses in CLEC.Operating margin increased to 12.1% for the three months ended September
30, 2004 from 10.8% for the three months ended September 30, 2003. This
is primarily due to improving operating margins in the Companys
Greenfield and Wireless businesses. The Company is continuously
evaluating opportunities for process improvements and efficiency gains to
offset the transition to competitive, lower margin accounts.Nine months ended September 30Operating revenue increased $2.6 million or 2.2% for the nine months
ended September 30, 2004 compared to the nine months ended September 30,
2003. The increase is attributable to a $2.4 million increase in
Wireless revenue driven by a 12.1% increase in customers, a $1.5 million
increase in Greenfield revenue driven primarily by a 34.9% increase in
access lines and a $0.5 million increase in IDS revenue. These increases
were somewhat offset by a $1.6 million decrease in ILEC revenue driven
primarily by a decrease in access lines and lower wireless
interconnection rates and a $0.2 million decrease in CLEC revenue
primarily related to a significant reduction in interstate access rates
effective in June 2004.The Company has diversified operating revenue over the past several years
through the growth in its CLEC, Greenfield and Wireless businesses. For
the nine months ended September 30, the ILEC represented 57.2% of total
revenue in 2004 compared to 59.7% in 2003, while Digital Wireless
represented 19.4% of total revenue in 2004 compared to 17.7% in 2003.
The combined CLEC and Greenfield businesses have grown to 16.8% of total
revenue in 2004 up from 16.1% in 2003 and Internet represented 6.7% in
2004 compared to 6.5% in 2003.For the nine months ended September 30, 2004, operating expense decreased
$0.4 million compared to the nine months ended September 30, 2003. This
decrease was primarily the result of lower expenses in the 19




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##### 



CLEC and
Internet businesses. Operating margins increased to 13.8% for the nine
months ended September 30, 2004 from 11.6% for the nine months ended
September 30, 2003. This increase in operating margin is primarily due
to improving operating margins in the CLEC, Greenfield and Wireless
businesses offset by declining operating margins in the ILEC. Operating
margin in the ILEC declined for the nine months ended September 30, 2004
to 27.7% compared to 29.7% for the nine months ended September 30, 2003.In October 2003, the Company received income tax assessments from the
North Carolina Department of Revenue related to certain state tax returns
filed for the years ended December 31, 1998, 1999 and 2000. The Company
is currently appealing these assessments and believes it has meritorious
defenses to the assessments and the ultimate outcome is not expected to
result in a material impact on the Companys consolidated financial
statements.ILEC(in thousands, except lines) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    23,161
    
    
    $
    24,132
    
    
    $
    69,637
    
    
    $
    71,232Total operating expense
    
    
    17,171
    
    
    
    17,207
    
    
    
    50,315
    
    
    
    50,057Operating income
    
    $
    5,990
    
    
    $
    6,925
    
    
    $
    19,322
    
    
    $
    21,175Depreciation
    
    $
    4,540
    
    
    $
    4,990
    
    
    $
    14,918
    
    
    $
    15,442Capital expenditures
    
    
    4,221
    
    
    
    2,712
    
    
    
    9,773
    
    
    
    8,887Total assets
    
    
    
    
    
    
    
    
    
    
    168,310
    
    
    
    168,295Ending business access lines
    
    
    
    
    
    
    
    
    
    
    28,912
    
    

    
    29,263Ending residential access lines
    
    
    
    
    
    
    
    
    
    
    84,816
    
    
    
    86,951Ending total access lines
    
    
    
    
    
    
    
    
    
    
    113,728
    
    
    
    116,214Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    84,760
    
    
    
    85,045
  Three months ended September 30Operating revenue for the ILEC decreased $1.0 million or 4.0% for the
three months ended September 30, 2004 compared to the three months ended
September 30, 2003. The decrease in revenue is primarily the result of a
decrease in phone system sales of $0.5 million, a decrease in line
related revenue of $0.5 million related to a 2.1% decrease in access
lines and a decrease in revenue related to certain regulatory settlements
of $0.3 million. The decrease in phone system sales is primarily due to
a significant sale that accounted for approximately $0.3 million in the
third quarter of 2003. These decreases were partially offset by a $0.4
million increase in access and interconnection revenue. The decrease in
access lines is due in part to an increase in broadband Internet adoption
by customers that have cancelled second lines previously used for dial-up
Internet service as well as increased competition from wireless and other
competitive providers.Operating expense for the ILEC remained flat for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003.
Expenses related to phone system sales decreased $0.3 million, which was
partially offset by an increase in access and interconnection expense.
Operating expense remained flat while operating revenue declined
resulting in a decline in operating margin from 28.7% for the three
months ended September 30, 2003 to 25.9% for the three months ended
September 30, 2004. The Company will continue to focus on gaining
operational efficiencies to offset lower revenue due to access line
losses.Capital expenditures for the three months ended September 30, 2004 were
18.2% of ILEC operating revenue compared to 11.2% of operating revenue
for the three months ended September 30, 2003. This
increase in capital expenditures reflects the initial expenditures
associated with the Companys $9.0 million strategic initiative to
enhance the broadband capabilities of the ILEC network. 20




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##### 



Nine months ended September 30Operating revenue for the ILEC decreased $1.6 million or 2.2% for the
nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003. The decrease in revenue is primarily the result of
a decrease in phone system sales of $0.4 million, a decrease in revenue
related to certain regulatory settlements of $0.3 million, a decrease in
long distance revenue of $0.4 million and a decrease in line related
revenue of $0.5 million related to a 2.1% decrease in access lines.
Access lines at September 30, 2004 declined 2.1% from September 30, 2003.
The decrease in access lines is due in part to an increase in broadband
Internet adoption by customers that have cancelled second lines
previously used for dial-up Internet service as well as increased
competition from wireless and other competitive providers.Operating expense in the ILEC increased $0.3 million or 0.5% for the nine
months ended September 30, 2004 compared to the nine months ended
September 30, 2003. The primary drivers of this increase were higher
general and administrative expenses, partially offset by lower expenses
related to phone system sales, lower directory expense and lower access
and interconnection expense. Operating expense increased while operating
revenue declined resulting in a decline in operating margin from 29.7%
for the nine months ended September 30, 2003 to 27.7% for the nine months
ended September 30, 2004. The Company will continue to focus on gaining
operational efficiencies to offset lower revenue due to access line
losses.Capital expenditures for the nine months ended September 30, 2004 were
14.0% of ILEC operating revenue compared to 12.5% of operating revenue
for the nine months ended September 30, 2003.For the nine months ended September 30, 2004, ILEC access lines
subscribing to our long distance service remained relatively flat despite
a 2.1% access line loss. At September 30, 2004, 74.5% of ILEC access
lines subscribed to the Companys long distance service, up from 73.2% at
September 30, 2003. While the number of ILEC customers subscribing to
long distance service remained flat, long distance revenue declined.
Long distance minutes of use increased significantly in the nine months
ended September 30, 2004 compared to the nine months ended September 30,
2003. However, increased competition has forced lower rates per minute
and as a result, long distance revenue has declined despite an increase
in minutes of use. This trend is expected to continue.Certain ILEC interstate network access revenue is based on tariffed
access charge rates filed with the FCC. A portion of this revenue may be
subject to potential over-earnings claims if ILEC interstate rates result
in earnings over the FCCs prescribed rate of return. The Company
maintains that such claims should be rejected if such revenues were
earned through the application of rates that are deemed lawful because
they were in accordance with FCC-approved tariffs. The Company maintains
a reserve related to over-earnings based on managements estimate of
potential liability for the Company. Management periodically assesses
the ILECs potential liability and makes adjustments as applicable.
Changes in managements estimate could result from changes in projected
over-earnings, current and future legislation, regulatory filings or FCC
rulings, as well as any other factors that may impact managements
estimate.In accordance with FCC rules, the ILEC filed modifications to its access
tariff rates on June 16, 2004 with a scheduled effective date of July 1,
2004. On June 23, 2004, AT&T Corporation (AT&T) filed a petition
asking the FCC to suspend and investigate tariff filings of the ILEC and
numerous other companies. AT&T asked the FCC to suspend the ILEC tariff
for the following reasons: the ILEC has had historical over-earnings,
the ILEC should be required to make a mid-course correction in rates to
address over-earnings in prior periods, the ILEC understated traffic
sensitive demand, and the ILEC filed an excessive cash working capital
requirement. The Companys response was filed with the FCC on June 30,
2004. On July 1, 2004, the FCC issued an order suspending for one day
the tariff filings of multiple carriers including the ILEC. The FCC
rejected all but one of AT&Ts arguments against the ILEC and suspended
the ILECs tariff filing for investigation of its cash working capital
calculations. On July 30, 2004, the FCC reconsidered its suspension and
declined to further investigate the ILECs cash working capital
calculations. The tariff suspension could impact the deemed lawful
nature of the Companys rates from July 1, 2004 forward, which could in
turn subject the Company to refund claims from interexchange
carriers in the event the ILEC earns more than the authorized rate of
return. The Company does not believe that the FCCs action with respect
to the Companys 2004 filing will result in a material impact to the
Companys consolidated financial statements or subject the Company to any
material refund claims. 21




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##### 



The remainder of the ILECs interstate network access revenue is derived
from revenue pooling arrangements with other local exchange carriers
administered by the National Exchange Carrier Association (NECA), a
quasi-governmental non-profit organization formed by the FCC in 1983 for
such purpose. The Companys ILEC participates in the NECA Carrier Common
Line pool and is the recipient of long-term support. In addition, the
ILEC receives Interstate Common Line Support (ICLS) funds, which are
administered by NECA. The ICLS support mechanism was implemented in July
2002. As of July 2004, long-term support became part of the ICLS support
mechanism.NECAs pooling arrangements are based on nationwide average costs that
are applied to certain projected demand quantities, and therefore
revenues are initially recorded based on estimates. These estimates
involve a variety of complex calculations, and the ultimate amount
realized from the pools may differ from the Companys estimates.
Management periodically reviews these estimates and makes adjustments as
applicable.The FCC required wireline companies in the top 100 metropolitan
statistical areas (MSAs) to begin intermodal porting of telephone
numbers (from wireline to wireless) beginning November 24, 2003. In
areas of the country below the top 100 MSAs, wireline to wireless porting
began May 24, 2004. LNP could result in increased customer churn over
time, but has not yet had any significant impact on the Companys
business.CLEC(in thousands, except lines) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    4,596
    
    
    $
    4,911
    
    
    $
    14,585
    
    
    $
    14,759Total operating expense
    
    
    5,123
    
    
    
    5,311
    
    
    
    15,233
    
    
    
    15,955Operating income (loss)
    
    $
    (527
    )
    
    $
    (400
    )
    
    $
    (648
    )
    
    $
    (1,196
    )Depreciation
    
    $
    629
    
    
    $
    635
    
    
    $
    1,900
    
    
    $
    1,721Capital expenditures
    
    
    144
    
    
    
    242
    
    

    
    540
    
    
    
    707Total assets
    
    
    
    
    
    
    
    
    
    
    14,832
    
    
    
    16,115Ending access lines
    
    
    
    
    
    
    
    
    
    
    31,194
    
    
    
    28,756Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    22,819
    
    
    
    20,598
  In the second quarter of 2004, the Company changed its methodology for
counting CLEC long distance lines. The new methodology is more
consistent with that used to count CLEC access lines. The number of
lines presented for 2003 has been revised to reflect this change in
methodology.Three months ended September 30CLEC operating revenue was $4.6 million for the three months ended
September 30, 2004, representing a $0.3 million or 6.4% decrease from the
three months ended September 30, 2003. The $0.3 million decrease
consists primarily of a $0.5 million decrease in access revenue partially
offset by a $0.2 million increase in line revenue. The increase in line
revenue is primarily attributable to an 8.5% increase in access lines.
The $0.5 million decrease in access revenue was due primarily to the
collection of approximately $0.4 million in previously disputed access
fees in the three months ended September 30, 2003 and a reduction in
certain access rates in June 2004.In 2001, the FCC adopted rules that set interstate switched access
charges at declining rates. Effective June 22, 2004, the FCC directed
that switched access rates charged by CLECs to long distance companies
for
interstate traffic be reduced from $0.012 per minute to the rate of the
applicable competing ILEC. Based on this order, the Company has
significantly reduced its CLEC interstate switched access rates by more
than 50%. The Company expects these rates to stabilize in the near term,
but to continue to be forced 22




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##### 



downward over the long term. In addition,
certain interexchange carriers 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 the remainder of 2004 and in 2005.CLEC operating expense was $5.1 million and $5.3 million for the three
months ended September 30, 2004 and 2003, respectively. Operating
expense decreased slightly; however, due to the decrease in revenue,
operating margin decreased to (11.5)% for the three months ended
September 30, 2004 compared to (8.1)% for the three months ended
September 30, 2003. The decline in operating margin was due primarily to
the reduction in access revenue partially offset by an increase in access
lines.Nine months ended September 30CLEC operating revenue was $14.6 million for the nine months ended
September 30, 2004, representing a $0.2 million or 1.2% decrease from the
nine months ended September 30, 2003. The $0.2 million decrease consists
primarily of a $1.0 million decrease in access revenue partially offset
by a $0.7 million increase in line revenue and a $0.1 million increase in
long distance revenue. The increase in line revenue is primarily
attributable to an 8.5% increase in access lines for the nine months
ended September 30, 2004 compared to the nine months ended September 30,
2003. The $1.0 million decrease in access revenue was due primarily to
the collection of approximately $0.9 million in previously disputed
access fees in 2003 and a reduction in certain access rates in June 2004.CLEC operating expense was $15.2 million and $16.0 million for the nine
months ended September 30, 2004 and 2003, respectively. The primary
drivers of the $0.8 million reduction in expenses are lower personnel and
commission expenses totaling $0.7 million. As a result of the 4.5%
decrease in expense, operating margin increased to (4.4)% for the nine
months ended September 30, 2004 compared to (8.1)% for the nine months
ended September 30, 2003. The improvement in operating margin was due
primarily to the increase in access lines and reduction in expenses
partially offset by a decrease in access fee revenue.In August 2003, the FCC released its Triennial Review Order (TRO)
addressing the obligations of incumbent local exchange carriers to
provide unbundled network elements (UNEs) to competitive local exchange
carriers. The FCCs order eliminated unbundling requirements for
broadband services provided over fiber facilities, but retained unbundled
access to mass-market narrowband loops. The FCC also held that incumbent
local exchange carriers are not required to unbundle packet switching
services or, subject to state review, local switching that serves
business customers on high-capacity loops. In addition, the FCC ordered
a three-year phase out of the unbundling of the high frequency portion of
the loop. For mass market customers served by narrowband loops, the FCC
set out specific criteria for states to use in determining whether
switching should continue to be made available as an UNE. If a state
found that such switching should be eliminated as an UNE, then the FCC
required a three-year transition period for Unbundled Network Element
Platform (UNE-P), which is a service that bundles UNE switching with
other UNEs such as UNE loop, so that the competitive local exchange
carrier can provide an entire local service platform.In March 2004, the U. S. Court of Appeals for the District of Columbia
issued a decision that upheld the FCCs elimination of unbundling
requirements for broadband loops and phase-out of unbundling requirements
for the high frequency portion of the loop (D.C. Circuit opinion).
However, the court vacated and remanded a number of the FCCs
determinations, including the FCCs finding that competitive local
exchange carriers were impaired without access to certain network
elements such as local switching. In addition, the court vacated the
FCCs delegation to the state commissions determinations related to
mass-market switching and dedicated transport elements. This decision
became effective on June 15, 2004. This issue has received significant
attention from federal and state regulators. The CLEC and Greenfield
businesses currently use certain network elements impacted by the D.C.
Circuit opinion, such as UNE-P, dedicated transport and enhanced extended
links (EELs), and high capacity combinations of
loops and dedicated transport. As of September 30, 2004, approximately
25% of the Companys current CLEC access lines are EELs, and the Company
currently has approximately 4,000 UNE-P circuits. 23




---



##### 



In response to the D.C. Circuit Opinion, on August 20, 2004 the FCC
released interim rules, which became effective on September 13, 2004, to
provide a transition period for implementation of the D.C. Circuit
decision and to provide the FCC with additional time to prepare final
unbundling rules consistent with the D.C. Circuits order. The FCC has
indicated that it will develop these final rules before the end of 2004.
The interim rules apply to switching, dedicated transport, enterprise
loops and EELs. Under the interim rules, during the first six months
after the effective date of the order, incumbent LECs are required to
provide and maintain these elements under the same terms (including
pricing) as existed before the DC Circuits opinion became effective.
Therefore, the terms and conditions, including pricing, in the Companys
current interconnection agreements will continue to govern our access to
these elements and the charges for this access. This period could be
shortened if the FCC adopts final unbundling rules that become effective
within this six month period.During the succeeding six month period ending on September 13, 2005, the
interim rules mandate that existing elements will continue to be
available under the terms of existing interconnection agreements with
rate increases established in accordance with the interim rules. New
elements cannot be added at the rates set pursuant to the interim rules.
As a result, absent new commission rules requiring unbundling of these
elements, orders for these elements after the initial six month period
will be pursuant to negotiated terms, including pricing, with the
applicable incumbent LECs.After September 13, 2005, unless the FCC has ruled otherwise, the
embedded elements subject to the full transition period will only be
available from the incumbent LECs at rates, terms and conditions that
competitive LECs negotiate with such incumbent.The Company believes that the impact to its ILEC from these regulatory
developments will be minimal. However, because the CLEC and Greenfield
businesses rely significantly on network elements, including UNE-P, EELs
and dedicated transport supplied by the applicable incumbent local
carrier, higher prices for those elements will adversely impact these
operations. The Company is currently evaluating alternative network
options and proposals from the applicable incumbent carriers to assess
the potential impact on the CLEC and Greenfield businesses.Greenfield(in thousands, except lines and signed agreements) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    2,039
    
    
    $
    1,540
    
    
    $
    5,869
    
    
    $
    4,417Total operating expense
    
    
    2,951
    
    
    
    2,820
    
    
    
    8,782
    
    
    
    8,236Operating income (loss)
    
    $
    (912
    )
    
    $
    (1,280
    )
    
    $
    (2,913
    )
    
    $
    (3,819
    )Depreciation
    
    $
    774
    
    
    $
    659
    
    
    $
    2,221
    
    
    $
    2,074Capital expenditures
    
    
    1,201
    
    
    
    996
    
    
    
    3,141
    
    
    
    3,148Total assets
    
    
    
    
    
    
    
    
    
    
    25,398
    
    
    
    23,630Ending access lines
    
    
    
    
    
    
    
    
    
    
    12,284
    
    
    
    9,109Ending long distance lines
    
    
    
    
    
    
    
    
    
    
    6,328
    
    
    
    4,154Total signed provider
agreements
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    87
  Three months ended September 30Greenfield revenue increased $0.5 million for the three months ended
September 30, 2004 to $2.0 million compared to $1.5 million for the three
months ended September 30, 2003. This revenue increase is primarily
attributable to a 34.9% increase in access lines. The Greenfield
business added five provider
agreements in the third quarter of 2004, bringing the total number of
signed agreements to 104. These agreements currently represent a
potential of more than 48,000 access lines once these developments have
been completely built out. The expected residential/business line mix of
these 104 projects is expected to be 90% residential and 10% business. 24




---



##### 



Operating expense increased 4.6% for the three months ended September 30,
2004 to $3.0 million, while revenue grew 32.4%. As a result, operating
margin increased to (44.7)% for the three months ended September 30, 2004
compared to (83.1)% for the three months ended September 30, 2003.
Capital expenditures for the three months ended September 30, 2004
increased $0.2 million compared to the three months ended September 30,
2003, primarily due to the construction of fiber facilities to bring
certain competitive operations onto the Companys network.Nine months ended September 30Greenfield revenue increased $1.5 million for the nine months ended
September 30, 2004 to $5.9 million compared to $4.4 million for the nine
months ended September 30, 2003. This revenue increase is primarily
attributable to a 34.9% increase in access lines.Operating expense increased 6.6% for the nine months ended September 30,
2004 to $8.8 million, related primarily to a $0.2 million increase in
access and transport expenses associated with the increase in access
lines and an increase in other network expenses.At September 30, 2004, 51.5% of Greenfield access lines also subscribed
to the Companys long distance service, up from 45.6% at September 30,
2003. This increase is mainly due to the fact that many of the early
Greenfield access lines were business lines located in mall projects.
Business customers historically do not elect the Companys long distance
service as frequently as residential customers since many retail
businesses have national long distance contracts. As the residential
percentage of Greenfield access lines increases, long distance
penetration rates will likely increase.In June 2003, the North Carolina Utilities Commission (NCUC) initiated
a general inquiry involving all certificated telecommunications providers
regarding preferred provider contracts. The Company has preferred
provider telecommunications contracts with developers through its
Greenfield operations. In its inquiry, the NCUC examined all
telecommunications preferred provider contracts filed by CLECs and ILECs
with the NCUC and held hearings on the legality of such arrangements in
late January 2004. On October 29, 2004, the NCUC issued an order ruling
on a variety of different matters with respect to such contracts. The
ruling confirmed the invalidity of exclusive access provisions, which the
Company does not impose in its contracts, but upheld exclusive marketing
arrangements. The NCUC also required providers in preferred provider
relationships to provide unbundled subloops to competitors seeking access
to customers, and to offer its services on a resale basis to such
competitors. The NCUC has not yet crafted final rules implementing its
order, and the decision is subject to motions for reconsideration.
Accordingly, the Company has not fully determined the impact of this
order on its Greenfield business. However, the Company does not
anticipate a material impact at this time.The Greenfield segment is also subject to the switched access rates
reduction affecting the Companys CLEC. The impact on Greenfield is not
significant and should be offset by increased levels of traffic as the
Company continues to build out its projects. As discussed above, the
Companys Greenfield also relies, to a lesser extent than the CLEC, on
unbundled network elements purchased from incumbent local exchange
carriers, and is therefore impacted by the TRO, D.C. Circuit decision and
the FCCs interim rules. 25




---



##### 



Digital Wireless(in thousands, except subscribers) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    8,222
    
    
    $
    7,468
    
    
    $
    23,591
    
    
    $
    21,149Total operating expense
    
    
    6,984
    
    
    
    7,302
    
    
    
    20,740
    
    
    
    19,389Operating income
    
    $
    1,238
    
    
    $
    166
    
    
    $
    2,851
    
    
    $
    1,760Depreciation
    
    $
    488
    
    
    $
    450
    
    
    $
    1,449
    
    
    $
    1,250Capital expenditures
    
    
    1,286
    
    
    
    784
    
    
    
    1,904
    
    
    
    965Total assets
    
    
    
    
    
    
    
    
    
    
    33,562
    
    
    
    31,065Ending post-pay subscribers
    
    
    
    
    
    
    
    
    
    
    41,229
    
    
    
    36,778
  Three months ended September 30Digital Wireless revenue grew $0.8 million or 10.1% for the three months
ended September 30, 2004 compared to the three months ended September 30,
2003. Post-pay wireless subscribers increased 12.1% compared to
September 30, 2003. Recurring revenue increased $0.6 million due
primarily to the increase in subscribers. Also contributing to the
increase in revenue was increased settlement and roaming revenue of $0.3
million related to a 10.1% increase in the minutes of use on the
Companys wireless network during the three months ended September 30,
2004 compared to the three months ended September 30, 2003.Operating expense decreased 4.4% for the three months ended September 30,
2004 to $7.0 million compared to the three months ended September 30,
2003. The primary drivers of the decrease in operating expense were
decreases in handset and accessory expense of $0.2 million related to
lower customer additions, lower personnel expense of $0.2 and lower
marketing and sales expenses.Operating margin increased to 15.1% for the three months ended September
30, 2004 compared to 2.2% for the three months ended September 30, 2003.
This improvement in operating margin is due primarily to the increase in
settlement and roaming revenue and a decrease in operating expenses.Capital expenditures were $1.3 million for the three months ended
September 30, 2004, primarily related to the completion of network
upgrades associated with the deployment of higher speed data services.Nine months ended September 30Digital Wireless revenue grew $2.4 million or 11.5% for the nine months
ended September 30, 2004 compared to the nine months ended September 30,
2003. Recurring revenue increased $2.1 million primarily due to a 12.1%
increase in post-pay wireless subscribers compared to the nine months
ended September 30, 2003. Also contributing to the increase in revenue
was increased settlement revenue of $0.9 million related to a 24.1%
increase in the minutes of use on the Companys wireless network during
the nine months ended September 30, 2004 compared to the nine months
ended September 30, 2003.Operating expense increased 7.0% for the nine months ended September 30,
2004 to $20.7 million compared to the nine months ended September 30,
2003. The primary drivers of the increase in operating expense were
increases in settlement and switching expenses of $0.6 million,
depreciation expense of $0.2 million and other corporate related
expenses. Settlement expenses increased primarily due to the increase in
post-pay customers and the related increase in minutes-of-use on our
network.Operating margins increased to 12.1% for the nine months ended September
30, 2004 compared to 8.3% for the nine months ended September 30, 2003.
This increase was primarily due to an increase in settlement and roaming
revenue and an increase in subscribers. 26




---



##### 



In November 2003, the FCC mandated that wireless carriers implement LNP.
This means that customers will be able to retain their number when they
change service providers. The Company expects that wireless LNP could
result in increased rates of customer churn. In addition, the FCC also
required wireline companies to begin intermodal porting (from wireline to
wireless) on the same date. In areas of the country below the top 100
MSAs, wireless to wireless and wireline to wireless porting began on May
24, 2004. LNP could result in increased customer churn over time, but
has not yet had any significant impact on our business.Cingular and AT&T Wireless, which had cell sites in the Companys
partitioned area, recently announced the closing of their merger. At
this time, we are unable to determine how this will affect the Company.Cingular, AT&T Wireless, and Triton PCS (Triton) signed a definitive
agreement to exchange certain assets of Triton PCS for assets of AT&T
Wireless that were recently purchased by Cingular. This agreement was
contingent on the closing of the Cingular acquisition of AT&T Wireless,
which recently occurred. Additionally, Triton and Cingular will be
entering into a long-term reciprocal roaming agreement. The Company is
currently discussing with Cingular the impact, if any, of this
transaction on the Companys joint operating agreement with Cingular.
The Company does not believe, at this time, that this transaction will
have a material impact on its wireless business. In essence, the Company
would be replacing one competitor in its market, AT&T Wireless, with
Triton.FCC rules require the Wireless business to provide enhanced 911 emergency
service (E-911) in a two-phased approach. Phase one has been completed
and involves delivery of the callers number and the location of the cell
site serving the customer to the Public Safety Answering Point (PSAP).
Phase two was completed on August 12, 2004, and involves triangulation to
allow PSAPs the ability to more accurately locate the calling party.Internet and Data Services (IDS)(in thousands, except lines and
accounts) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating revenue
    
    $
    2,641
    
    
    $
    2,552
    
    
    $
    8,161
    
    
    $
    7,695Total operating expense
    
    
    2,847
    
    
    
    2,988
    
    
    
    8,072
    
    
    
    8,904Operating income (loss)
    
    $
    (206
    )
    
    $
    (436
    )
    
    $
    89
    
    
    $
    (1,209
    )Depreciation
    
    $
    922
    
    
    $
    540
    
    
    $
    1,708
    
    
    $
    1,512Capital expenditures
    
    
    408
    
    
    
    639
    
    
    
    1,084
    
    
    
    1,954Total assets
    
    
    
    
    
    
    
    
    
    
    13,923
    
    
    
    15,093Ending DSL lines
    
    
    
    
    
    
    
    
    
    
    12,477
    
    
    
    9,591Ending dial-up accounts
    
    
    
    
    
    
    
    
    
    
    9,686
    
    
    
    11,535Ending high-speed accounts
    
    
    
    
    
    
    
    
    
    
    561
    
    
    
    536
  Three months ended September 30IDS operating revenue grew 3.5% for the three months ended September 30,
2004 to $2.6 million compared to the three months ended September 30,
2003. This increase is primarily due to higher DSL revenue of $0.5
million related to an increase in DSL lines. This increase was partially
offset by decreases in dial-up and high-speed revenue of $0.2 million
combined.IDS operating expense decreased $0.1 million compared to the three months
ended September 30, 2003, despite a 3.5% increase in revenue. The
primary driver of this decrease was a $0.4 million decrease in network
expense as a result of certain network transport efficiency initiatives
partially offset by an increase in depreciation expense. Due to the
nature of the Companys fixed assets and technological changes in the
industry, the Company periodically performs an assessment of the useful
lives of its fixed assets. Due to an 27




---



##### 



assessment completed in the third quarter of 2004, the Company shortened
the useful lives of certain assets in the Internet business, which
resulted in the acceleration of depreciation expense for these assets.Operating margins improved to (7.8)% for the three months ended September
30, 2004 compared to (17.1)% for the three months ended September 30,
2003. This improvement is primarily due to increases in revenue and
lower expenses related to network efficiencies, offset by an increase in
depreciation expense. The Company continues to focus on opportunities to
leverage existing network infrastructure to reduce transport expenses.Nine months ended September 30IDS operating revenue grew 6.1% for the nine months ended September 30,
2004 to $8.2 million compared to the nine months ended September 30,
2003. This increase is primarily due to higher DSL revenue of $1.3
million related to an increase in DSL lines. This increase was partially
offset by decreases in dial-up and high-speed revenue of $0.5 million
combined.IDS operating expense decreased 9.3% compared to the nine months ended
September 30, 2003, despite a 6.1% increase in revenue. The decrease is
primarily due to a decrease in network expenses as the Company continues
to focus on opportunities to leverage existing network infrastructure to
reduce transport expenses. As a result, operating margins improved to
1.1% for the nine months ended September 30, 2004 compared to (15.7)% for
the nine months ended September 30, 2003.DSL customers at September 30, 2004 increased 30.1% compared to September
30, 2003, to a total of 12,477. This represents a penetration rate of
9.9% of combined Greenfield and ILEC access lines.Other(in thousands) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total operating expense
    
    $
    657
    
    
    $
    594
    
    
    $
    1,828
    
    
    $
    2,852Operating income (loss)
    
    $
    (657
    )
    
    $
    (594
    )
    
    $
    (1,828
    )
    
    $
    (2,852
    )Depreciation
    
    $
    334
    
    
    $
    331
    
    
    $
    1,039
    
    
    $
    992Capital expenditures
    
    
    270
    
    
    
    327
    
    
    
    852
    
    
    
    1,262Total assets
    
    
    
    
    
    
    
    
    
    
    66,359
    
    
    
    66,867
  Three months ended September 30Operating expense for the Companys other business units increased $0.1
million for the three months ended September 30, 2004 to $0.7 million.
This increase was related primarily to an increase in corporate related
expenses attributable to the other operating segment. The expenses of
the other business units consist primarily of certain expenses that are
not allocated to the operating segments.Nine months ended September 30Operating expense for the Companys other business units decreased $1.0
million for the nine months ended September 30, 2004 to $1.8 million.
This decrease was related primarily to a decrease in corporate related
expenses attributable to the other operating segment. 28




---



##### 



Other IncomeThree months ended September 30Other income (expense) for the three months ended September 30, 2004
decreased $1.2 million compared to the three months ended September 30,
2003. This decrease relates primarily to an increase in impairment
charges on the Companys investment securities. The Company recognized
impairment charges of $1.5 million in the three months ended September
30, 2004 compared to $0.5 million in the three months ended September 30,
2003. In addition, the Company recorded gains on sales of investments of
$0.2 million during the three months ended September 30, 2004 compared to
$0.9 million during the three months ended September 30, 2003. Partially
offsetting these declines was a reduction in other expenses (principally
interest) of $0.5 million. This decrease was partially due to lower debt
levels in 2004 compared to 2003.Nine months ended September 30Other income (expense) for the nine months ended September 30, 2004
decreased $12.9 million compared to the nine months ended September 30,
2003. This decrease relates primarily to lower gains on sale of
investments of $15.2 million offset by a $0.5 million increase in equity
in income of unconsolidated companies, a $1.6 million decrease in other
expenses and a $0.3 million increase in impairment on investments. The
decrease in gains on sale of investments was due to a $15.2 million gain
recognized in 2003 related to the sale of the Companys investment in
ITC. The increase in equity in income of unconsolidated companies
relates to the Companys investment in Palmetto. Other expenses,
principally interest, decreased due primarily to lower debt levels in
2004.Liquidity and Capital ResourcesCash provided by operating activities increased $0.6 million to $37.5
million for the nine months ended September 30, 2004 compared to $36.9
million for the nine months ended September 30, 2003. The increase was
primarily due to higher operating income.Cash used in investing activities was $15.8 million during the nine
months ended September 30, 2004 compared with cash provided by investing
activities of $0.5 million for the nine months ended September 30, 2003.
The decrease was primarily the result of the proceeds received by the
Company in 2003 related to the sale of the Companys investment in ITC.
Capital expenditures increased $0.4 million during the nine months ended
September 30, 2004 compared with the nine months ended September 30,
2003.Net cash used in financing activities was $13.5 million during the nine
months ended September 30, 2004 compared with $27.3 million during the
nine months ended September 30, 2003. During the nine months ended
September 30, 2004, the Company repaid $10.0 million in long-term debt.
In 2003, the Company used the proceeds from the sale of ITC and cash from
operations to repay $24.0 million in long-term debt.At September 30, 2004, the fair market value of the Companys marketable
investment securities was $6.5 million, all of which could be pledged to
secure additional borrowing, or sold, if needed for liquidity purposes.
At September 30, 2004, the Company had a $70.0 million revolving
five-year line of credit with interest at three month LIBOR plus a spread
that is based on various financial ratios, currently 1.25%. The interest
rate on September 30, 2004 was 3.0%. During the nine months ended
September 30, 2004, the Company elected to pay down $10.0 million in
principal on this credit facility. The credit facility provides for
quarterly installments of interest until maturity on March 31, 2006. As
of September 30, 2004, $20.0 million was outstanding under the revolving
credit facility. The Company also has a 7.32% fixed rate $50.0 million
term loan that matures on December 31, 2014. All $50.0 million was
outstanding as of September 30, 2004. The term loan requires quarterly
payments of interest until maturity on December 31, 2014. Payments of
principal are due beginning on March 31, 2005 and quarterly thereafter
through December 31, 2014, in equal quarterly installments of $1.25
million. 29




---



##### 



The following table discloses aggregate information about the Companys
contractual obligations and the periods in which payments are due (in
thousands): Payments due by yearLess than
    
    
    
    
    
    
    
    
    
    After 5Total
    
    one year
    
    1-3 years
    
    4 -5 years
    
    yearsContractual obligations:Revolving credit facility
    
    $
    20,000
    
    
    $
    
    
    
    $
    20,000
    
    
    $
    
    
    
    $
    Term loan
    
    
    50,000
    
    
    
    3,750
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    21,250Variable interest payments
    
    
    900
    
    
    
    600
    
    
    
    300
    
    
    
    
    
    
    
    Fixed interest payments
    
    
    19,673
    
    
    
    3,591
    
    
    
    8,647
    
    
    
    3,935
    
    
    
    3,500Operating leases
    
    
    7,319
    
    
    
    2,792
    
    
    
    3,895
    
    
    
    435
    
    
    
    197Capital leases
    
    
    974
    
    
    
    404
    
    
    
    570
    
    
    
    
    
    
    
    $
    98,866
    
    
    $
    11,137
    
    
    $
    48,412
    
    
    $
    14,370
    
    
    $
    24,947
  The variable interest payments shown above on the revolving credit
facility were determined based on the balance outstanding and the
interest rate at September 30, 2004.The Company anticipates that it has adequate resources to meet its
currently foreseeable obligations and capital requirements associated
with the ILEC, CLEC, Greenfield, Digital Wireless and IDS units, as well
as its operations and payments associated with long-term debt and
investments as summarized above.Cautionary Note Regarding Forward-Looking 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 businesses. These forward-looking statements are subject to
certain risks, uncertainties and assumptions about the Company that could
cause actual results to differ materially from those reflected in the
forward-looking statements.Factors that may cause actual results to differ materially from these
forward-looking statements include:  
    
    the Companys ability to respond effectively to the issues
surrounding the telecommunications industry caused by state and
federal legislation and regulations,  
    
    the impact of economic conditions related to the financial
performance of customers, business partners, competitors and peers
within the telecommunications industry,  
    
    the Companys ability to recover the substantial costs
incurred over the past few years in connection with the expansion
into new businesses,  
    
    the Companys ability to attract and retain key personnel,  
    
    the Companys ability to retain existing customers
against competition from new technologies such as voice over
internet protocol (VoIP),  
    
    the Companys ability to retain its existing customer base
against wireless competition and cable telephony in all areas of the
business including local and long distance and internet and data
services,  
    
    the Companys ability to control pricing and product offerings in a highly competitive industry,  
    
    the performance of investments,  
    
    the Companys ability to effectively manage rapid changes in
technology and control capital expenditures related to those
technologies, and  
    
    the impact of economic, political and other events, including
terrorist attacks.  In some cases, these forward-looking statements can be identified by the
use of words such as may, will, should, expect, intend, plan,
anticipate, believe, estimate, predict, project or potential
or the negative of these words or other comparable words. 30




---



##### 



In making forward-looking statements, the Company claims the protection
of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The Company undertakes
no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors
discussed in documents filed by the Company with the Securities and
Exchange Commission (SEC), including those matters summarized under the
caption Risk Factors in the Companys Annual Report onForm 10-Kfor
the year ended December 31, 2003. All forward-looking statements should
be viewed with caution. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.  At September 30, 2004, the Company had a $70.0 million revolving
five-year line of credit with interest at three month LIBOR plus a spread
based on various financial ratios, that is currently 1.25%. The interest
rate on September 30, 2004 was 3.0%. The credit facility provides for
quarterly payments of interest until maturity on March 31, 2006. During
the nine months ended September 30, 2004, the Company elected to repay
$10.0 million in principal on this credit facility. As of September 30,
2004, $20.0 million was outstanding under the revolving credit facility.
The Company also has a 7.32% fixed rate $50.0 million term loan that
matures on December 31, 2014. All $50.0 million was outstanding as of
September 30, 2004.The Company has two $5.0 million interest rate swap transactions to fix
amounts outstanding under the $70.0 million revolving line of credit at
rates of 3.81% and 4.53%, respectively. The fair value of the swaps as of
September 30, 2004 was $(27,000) and $(0.2) million, respectively. 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 ensure that appropriate information is
accumulated and communicated to the Companys management, including its
chief executive officer and chief financial officer, as appropriate to
allow for timely decisions regarding disclosure.As required by the SEC rules, the Companys management, under the
supervision and with the participation of the Companys chief executive
officer and chief financial officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures as of September 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. 31




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##### 



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 previously determined
that its controls over the accounting for property and equipment needed
enhancement. Accordingly, the Company initiated the following steps
during the second quarter of 2004 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
    
    began 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.  During the fiscal quarter ended September 30, 2004, there have been no
changes in the Companys internal control over financial reporting that
have materially affected, or that are reasonably likely to materially
affect, the Companys internal control over financial reporting.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. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings.  None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  None 
 Item 3. Defaults Upon Senior Securities.  None 
 Item 4. Submission of Matters to a Vote of Security Holders.  None 
 Item 5. Other Information.  None 32




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##### 



Item 6. Exhibits. Exhibit No.
    
    Description of Exhibit10.1
    
    CT Communications, Inc. Amended and Restated
2001 Stock Incentive Plan: Form of Non-Qualified Stock Option
Agreement.10.2
    
    CT Communications, Inc. Amended and Restated
2001 Stock Incentive Plan: Form of Incentive Stock Option
Agreement.10.3
    
    CT Communications, Inc. Amended and Restated
2001 Stock Incentive Plan: Form of Restricted Stock
Agreement.10.4
    
    CT Communications, Inc. Amended and Restated
2001 Stock Incentive Plan: Form of Director Non-Qualified
Stock Option Agreement.11
    
    Computation of Earnings Per Share.31.1
    
    Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934.31.2
    
    Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934.32
    
    Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934 and 18 U.S.C. 1350.
 33




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. CT COMMUNICATIONS, INC.
(Registrant) /s/ Ronald A. Marino 
 
 November 5, 2004   (The above signatory has dual responsibility as a duly authorized officer
and chief accounting officer of the Registrant.) 34




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##### 



EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit10.1
    
    CT Communications,
Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Non-Qualified Stock
Option Agreement.10.2
    
    CT Communications,
Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Incentive Stock
Option Agreement.10.3
    
    CT Communications,
Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Restricted Stock
Agreement.10.4
    
    CT Communications,
Inc. Amended and Restated 2001 Stock
Incentive Plan: Form of Director
Non-Qualified Stock Option Agreement.11
    
    Computation of
Earnings Per Share.31.1
    
    Certification of
Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act
of 1934.31.2
    
    Certification of
Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act
of 1934.32
    
    Certification of
Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934 and 18
U.S.C. 1350.
 35