##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.
20549
 FORM 10-Q/A (Amendment No. 1)
 (MARK ONE)
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____ to ____ Commission file number 0-19179 CT COMMUNICATIONS, INC.  NORTH CAROLINA
(State or other jurisdiction of
incorporation or organization)
    
    56-1837282
(I.R.S. Employer
Identification No.)1000 Progress Place NE
P.O. Box 227, Concord, NC
(Address of principal executive offices)
    
    28026-0227
(Zip Code)
 (704) 722-2500
(Registrants telephone number, including area code) (Former name, former address and former fiscal year,
if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. 18,875,875 shares of Common Stock outstanding as of April 28, 2004.




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX Page No.Explanatory
    
    Note
    
    
    
    
    2PART I. Financial InformationItem 1.
    
    Financial Statements.Condensed Consolidated Balance
Sheets March 31, 2004 (Unaudited)(Restated) and December 31, 2003
    
    
    4Condensed Consolidated Statements
of Income (Unaudited) Three Months Ended March 31, 2004(Restated) and 2003(Restated)
    
    
    5Condensed Consolidated Statements
of Comprehensive Income (Unaudited) Three Months Ended March 31, 2004(Restated) and 2003(Restated)
    
    
    6Condensed Consolidated Statements
of Cash Flows (Unaudited) Three Months Ended March 31, 2004(Restated) and 2003(Restated)
    
    
    7Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    31Item 4.
    
    Controls and Procedures.
    
    
    32PART II. Other InformationItem 1.
    
    Legal Proceedings.
    
    
    34Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
    
    
    34Item 3.
    
    Defaults Upon Senior Securities.
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    34Item 5.
    
    Other Information.
    
    
    34Item 6.
    
    Exhibits and Reports on Form 8-K.
    
    
    35Signatures
    
    
    36Exhibit Index
    
    
    37
 1




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EXPLANATORY NOTE The purpose of this Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of CT
Communications, Inc. (the Company) for the quarter ended March 31, 2004 is to restate our interim
consolidated financial statements for the quarters ended March 31, 2004 and 2003 and related
disclosures as discussed in Note 4 of the Notes to Condensed Consolidated Financial Statements. The Company has not attempted in this amendment to modify or update other disclosures presented in
the original report on Form 10-Q except as required to reflect the effects of the restatement. The
Form 10-Q/A also does not reflect events occurring after the filing of the Form 10-Q or modify or
update those disclosures, including the exhibits to the Form 10-Q, affected by subsequent events.
Information not affected by the restatement is unchanged and reflects the disclosures made at the
time of the original filing of the Form 10-Q on May 5, 2004. Accordingly, this Form 10-Q/A should
be read in conjunction with our filings made with the Securities and Exchange Commission (SEC)
subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The
following items have been amended as a result of the restatement: o Part I  Item 1  Financial Statements;
o Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations;
o Part I  Item 3  Quantitative and Qualitative Disclosures About Market Risk;
o Part I  Item 4  Controls and Procedures;
o Part II  Item 6  Exhibits and Reports on Form 8-K (Exhibit 11) In addition, as required by Rule 12b-15 under the Securities and Exchange Act of 1934, as amended,
new certifications from our Chief Executive Officer and Chief Financial Officer are being filed
with this Form 10-Q/A. The Company identified certain errors related to its accounting for telephone system sales that
occurred in 1999 through the first three quarters of 2004, which resulted in the overstatement of
revenue for the periods 1999 through 2002 and the understatement of revenue for 2003 and the first
three quarters of 2004. The cumulative effect of the correction of this error at March 31, 2004
resulted in a reduction of accounts receivable, income taxes payable and retained earnings of $1.6
million, $0.5 million and $1.3 million, respectively, and a $0.2 million increase in customer
deposits and advanced billings. The correction of this error for the three months ended March 31,
2004 and March 31, 2003 resulted in a $45,000 and $34,000 increase in revenue, respectively. The Company discovered certain errors relating to the Companys reporting of depreciation expense
(which is included in operating expense on the Condensed Consolidated Statement of Income) in 2002,
2003 and the first three quarters of 2004. These depreciation errors were caused by calculation
errors in the Companys fixed asset system. The cumulative effect of these errors resulted in an
increase in property and equipment, net of $3.3 million at March 31, 2004. These errors resulted
in an overstatement of depreciation expense of $0.8 million and $0.7 million for the three months
ended March 31, 2004 and March 31, 2003, respectively. The correction of these errors increased net
income $0.5 million and $0.5 million for the three months ended March 31, 2004 and March 31, 2003,
respectively. The Company identified an error in the accounting for a capital lease agreement that also impacted
certain accrual accounts. The Company discovered that it had not properly recorded the asset
associated with a capital lease and that certain accruals were erroneously adjusted in recording
the liability associated with the capital lease. The correction of this error resulted in a
decrease in operating expense of $0.3 million for the three months ended March 31, 2004 and an
increase in operating expense of $0.1 million for the three months ended March 31, 2003. The
after tax impact of these adjustments resulted in an increase to net income of $0.2 million for
the three months ended March 31, 2004 and a decrease to net income of $30,000 for the three months
ended March 31, 2003. The Company received a distribution notice in 2004 relating to an equity security held by a member
of the Companys equity portfolio, and recorded the distribution when the notice was received. The
Company subsequently learned that the distribution was actually completed in the fourth quarter of
2003, and has adjusted this 2




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##### 



investment at December 31, 2003 through a $0.7 million reduction of investment securities and a
$0.4 million reduction in accumulated other comprehensive income, net of tax effect of $0.3
million. During the course of preparing its year-end financial statements for 2004, an error was identified
in the Companys accounting related to three interest rate swap agreements entered into during 1999
and 2001. The Company was incorrectly applying hedge accounting and was recording the adjustment
to fair value of its interest rate swaps through accumulated other comprehensive income instead of
interest expense. The correction of this error resulted in a decrease in interest expense of $0.1
million and $0.1 million for the three months ended March 31, 2004 and March 31, 2003,
respectively. The after tax impact of the correction of this error resulted in an increase to net
income of $0.1 million and $0.1 million for the three months ended March 31, 2004 and March 31,
2003, respectively. The Company reviewed its accounting with respect to leasing transactions and has concluded there
was an error in the determination of lease expense for certain leases related primarily to wireless
cell tower sites. The Company had not properly reflected rent escalation provisions contained in
its leases on a straight-line basis as required by SFAS No. 13, Accounting for Leases. To
correct this error, the Company has considered the escalation provisions of the leases and has
considered renewal periods when there is reasonable assurance that one or more of the renewal
options would be exercised. The result of the Companys assessment was to increase the lease term
as defined in SFAS No. 13 for most of its operating leases. The impact of this error for the three
months ended March 31, 2004 and March 31, 2003 was an increase in rent expense (which is included
in operating expense on the Condensed Consolidated Statements of Income) of $22,000 and $28,000,
respectively. The Company also restated certain previously recorded, out-of-period items to include them in the
periods in which they actually occurred in order to more accurately present the financial
statements for those prior periods. These adjustments include a decrease in dividend income of
$0.2 million for the three months ended March 31, 2003. In addition, the Company also reclassified
to other assets $1.2 million of certain items previously recorded as accounts receivable on the
consolidated balance sheet at March 31, 2004. The aggregate impact of the correction of all the errors discussed above resulted in an increase in
net income of $0.7 million and $0.4 million for the three months ended March 31, 2004 and March 31,
2003, respectively. The Company has reflected the results of the restatement for the fiscal years ended December 31,
2004 and December 31, 2003 in its Annual Report on Form 10-K for such year, filed with the SEC on
March 31, 2005 and has restated its interim financial statements in this Form 10-Q/A and in
amendments to its Quarterly Reports on Form 10-Q/A for the quarterly periods ended June 30, 2004
and September 30, 2004. See Note 4 of the Notes to Condensed Consolidated Financial Statements for additional information. 3




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Part I. FINANCIAL INFORMATION Item 1. Financial Statements. CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data) (Unaudited)(Restated)March 31,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,655
    
    
    $
    16,957Accounts receivable and unbilled revenue, net
    
    
    17,857
    
    
    
    19,533Other
    
    
    6,369
    
    
    
    5,372Total current assets
    
    
    42,881
    
    
    
    41,862Investment securities
    
    
    6,979
    
    
    
    7,518Other investments
    
    
    1,251
    
    
    
    1,078Investments in unconsolidated companies
    
    
    14,432
    
    
    
    13,034Property and equipment, net
    
    
    208,010
    
    
    
    211,521Goodwill
    
    
    9,906
    
    
    
    9,906Other intangibles, net
    
    
    35,201
    
    
    
    35,201Other assets
    
    
    2,736
    
    
    
    2,565Total assets
    
    $
    321,396
    
    
    $
    322,685LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,250
    
    
    $
    Accounts payable
    
    
    7,306
    
    
    
    6,250Customer deposits and advance billings
    
    
    2,878
    
    
    
    2,840Other accrued liabilities
    
    
    13,612
    
    
    
    17,589Liabilities of discontinued operations
    
    
    936
    
    
    
    1,072Total current liabilities
    
    
    25,982
    
    
    
    27,751Long-term debt
    
    
    76,250
    
    
    
    80,000Deferred credits and other liabilities:Deferred income taxes
    
    
    23,959
    
    
    
    23,171Post-retirement benefits other than pension
    
    
    11,179
    
    
    
    11,246Other
    
    
    3,204
    
    
    
    3,123Total deferred credits and other liabilities
    
    
    38,342
    
    
    
    37,540Total liabilities
    
    
    140,574
    
    
    
    145,291Stockholders equity:Preferred stock not subject to mandatory redemption:5% series, $100 par value; 3,356 shares outstanding at
March 31, 2004 and December 31, 2003
    
    
    336
    
    
    
    3364.5% series, $100 par value; 614 shares outstanding at
March 31, 2004 and December 31, 2003
    
    
    61
    
    
    
    61Common stock, 18,875,735 and 18,769,187 shares outstanding at
March 31, 2004 and December 31, 2003, respectively
    
    
    42,129
    
    
    
    40,800Other capital
    
    
    298
    
    
    
    298Unearned compensation
    
    
    (895
    )
    
    
    (264
    )Other accumulated comprehensive income
    
    
    208
    
    
    
    492Retained earnings
    
    
    138,685
    
    
    
    135,671Total stockholders equity
    
    
    180,822
    
    
    
    177,394Total liabilities and stockholders equity
    
    $
    321,396
    
    
    $
    322,685
 See accompanying notes to condensed consolidated financial statements (unaudited). 4




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data) Three Months Ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Operating revenue
    
    $
    40,564
    
    
    $
    38,779Operating expense
    
    
    33,633
    
    
    
    33,698Operating income
    
    
    6,931
    
    
    
    5,081Other income (expense):Equity in income of unconsolidated companies, net
    
    
    1,391
    
    
    
    1,049Interest, dividend income and gain (loss) on sales of investments
    
    
    236
    
    
    
    262Other expenses, principally interest
    
    
    (1,432
    )
    
    
    (1,570
    )Total other income (expense)
    
    
    195
    
    
    
    (259
    )Income before income taxes
    
    
    7,126
    
    
    
    4,822Income taxes
    
    
    2,887
    
    
    
    1,990Net income
    
    
    4,239
    
    
    
    2,832Dividends on preferred stock
    
    
    5
    
    
    
    5Earnings for common stock
    
    $
    4,234
    
    
    $
    2,827Earnings per share:Basic
    
    $
    0.22
    
    
    $
    0.15Diluted
    
    
    0.22
    
    
    
    0.15Basic weighted average shares outstanding
    
    
    18,834
    
    
    
    18,716Diluted weighted average shares outstanding
    
    
    18,953
    
    
    
    18,726
 See accompanying notes to condensed consolidated financial statements (unaudited). 5




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands) Three Months Ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Net income
    
    $
    4,239
    
    
    $
    2,832Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on available-for-sale
Securities
    
    
    (293
    )
    
    
    7Reclassification adjustment for losses (gains) realized
in net income
    
    
    9
    
    
    
    (4
    )Comprehensive income
    
    $
    3,955
    
    
    $
    2,835
 See accompanying notes to condensed consolidated financial statements (unaudited). 6




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands) Three Months Ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income
    
    $
    4,239
    
    
    $
    2,832Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    7,425
    
    
    
    6,891Amortization of restricted stock
    
    
    202
    
    
    
    203Post-retirement benefits
    
    
    (67
    )
    
    
    152Loss on sale of investment securities
    
    
    14
    
    
    
    17Undistributed income of unconsolidated companies
    
    
    (1,391
    )
    
    
    (1,049
    )Undistributed patronage dividends
    
    
    (98
    )
    
    
    (53
    )Deferred income taxes and tax credits
    
    
    1,159
    
    
    
    998Changes in operating assets and liabilities
    
    
    (2,102
    )
    
    
    (2
    )Net cash provided by operating activities
    
    
    9,381
    
    
    
    9,989Cash flows from investing activities:Capital expenditures
    
    
    (3,913
    )
    
    
    (6,158
    )Purchases of investments
    
    
    (125
    )
    
    
    (50
    )Proceeds from sale of investment securities
    
    
    168
    
    
    
    10Partnership capital distribution
    
    
    
    
    
    
    1,197Net cash used in investing activities
    
    
    (3,870
    )
    
    
    (5,001
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (2,500
    )
    
    
    Dividends paid
    
    
    (1,228
    )
    
    
    (1,220
    )Proceeds from common stock issuances
    
    
    51
    
    
    
    49Net cash used in financing activities
    
    
    (3,677
    )
    
    
    (1,171
    )Net cash used in discontinued operations
    
    
    (136
    )
    
    
    (508
    )Net increase in cash and cash equivalents
    
    
    1,698
    
    
    
    3,309Cash and cash equivalents at beginning of period
    
    
    16,957
    
    
    
    7,652Cash and cash equivalents at end of period
    
    $
    18,655
    
    
    $
    10,961
 See accompanying notes to condensed consolidated financial statements (unaudited). 7




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  1.
    In the opinion of management of CT Communications, Inc. (the Company), the
accompanying unaudited financial statements contain all adjustments consisting of only
normal recurring accruals necessary to present fairly the Companys financial position
as of March 31, 2004 and December 31, 2003 and the results of its operations and cash
flows for the three months ended March 31, 2004 and March 31, 2003. These unaudited
financial statements do not include all disclosures associated with the Companys
annual financial statements and should be read along with the Companys Annual Report
on Form 10-K for the year ended December 31, 2003.2.
    In certain instances, amounts previously reported in the 2003 consolidated financial
statements have been reclassified to conform to the presentation of the 2004
consolidated financial statements. Such reclassifications have no effect on net
income or retained earnings as previously reported.3.
    The results of operations for the three months ended March 31, 2004 and 2003 are not
necessarily indicative of the results to be expected for the full year.4.
    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTSThe Company identified certain errors related to its accounting for telephone system
sales that occurred in 1999 through the first three quarters of 2004, which resulted
in the overstatement of revenue for the periods 1999 through 2002 and the
understatement of revenue for 2003 and the first three quarters of 2004. The
cumulative effect of the correction of this error at March 31, 2004 resulted in a
reduction of accounts receivable, income taxes payable and retained earnings of $1.6
million, $0.5 million and $1.3 million, respectively, and a $0.2 million increase in
customer deposits and advanced billings. The correction of this error for the three
months ended March 31, 2004 and March 31, 2003 resulted in a $45,000 and $34,000
increase in revenue, respectively.The Company discovered certain errors relating to the Companys reporting of
depreciation expense (which is included in operating expense on the Condensed
Consolidated Statement of Income) in 2002, 2003 and the first three quarters of 2004.
These depreciation errors were caused by calculation errors in the Companys fixed
asset system. The cumulative effect of these errors resulted in an increase in
property and equipment, net of $3.3 million at March 31, 2004. These errors resulted
in an overstatement of depreciation expense of $0.8 million and $0.7 million for the
three months ended March 31, 2004 and March 31, 2003, respectively. The correction of
these errors increased net income $0.5 million and $0.5 million for the three months
ended March 31, 2004 and March 31, 2003, respectively.The Company identified an error in the accounting for a capital lease agreement that
also impacted certain accrual accounts. The Company discovered that it had not
properly recorded the asset associated with a capital lease and that certain accruals
were erroneously adjusted in recording the liability associated with the capital
lease. The correction of this error resulted in a decrease in operating expense of
$0.3 million for the three months ended March 31, 2004 and an increase in operating
expense of $0.1 million for the three months ended March 31, 2003. The after tax
impact of these adjustments resulted in an increase to net income of $0.2 million for
the three months ended March 31, 2004 and a decrease to net income of $30,000 for the
three months ended March 31, 2003.The Company received a distribution notice in 2004 relating to an equity security held
by a member of the Companys equity portfolio, and recorded the distribution when the
notice was received. The Company subsequently learned that the distribution was
actually completed in the fourth quarter of 2003, and has adjusted this investment at
December 31, 2003 through a $0.7 million reduction of investment securities and a $0.4
million reduction in accumulated other comprehensive income, net of tax effect of $0.3
million.During the course of preparing its year-end financial statements for 2004, an error
was identified in the Companys accounting related to three interest rate swap
agreements entered into during 1999 and 2001. The Company was incorrectly applying hedge accounting and was recording the adjustment to
fair value of its interest rate swaps through accumulated other comprehensive income
instead of interest expense. The correction of this error resulted in a decrease in
interest expense of $0.1 million and $0.1 million for the three 8




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  months ended March 31, 2004 and March 31, 2003, respectively. The after tax impact of
the correction of this error resulted in an increase to net income of $0.1 million and
$0.1 million for the three months ended March 31, 2004 and March 31, 2003,
respectively.The Company reviewed its accounting with respect to leasing transactions and has
concluded there was an error in the determination of lease expense for certain leases
related primarily to wireless cell tower sites. The Company had not properly reflected
rent escalation provisions contained in its leases on a straight-line basis as
required by SFAS No. 13, Accounting for Leases. To correct this error, the Company
has considered the escalation provisions of the leases and has considered renewal
periods when there is reasonable assurance that one or more of the renewal options
would be exercised. The result of the Companys assessment was to increase the lease
term as defined in SFAS No. 13 for most of its operating leases. The impact of this
error for the three months ended March 31, 2004 and March 31, 2003 was an increase in
rent expense (which is included in operating expense on the Condensed Consolidated
Statement of Income) of $22,000 and $28,000, respectively.The Company also restated certain previously recorded, out-of-period items to include
them in the periods in which they actually occurred in order to more accurately
present the financial statements for those prior periods. These adjustments include a
decrease in dividend income of $0.2 million for the three months ended March 31, 2003.
In addition, the Company also reclassified to other assets $1.2 million of certain
items previously recorded as accounts receivable on the consolidated balance sheet at
March 31, 2004.The aggregate impact of the correction of all the errors discussed above resulted in
an increase in net income of $0.7 million and $0.4 million for the three months ended
March 31, 2004 and March 31, 2003, respectively.The impacts of this restatement on the financial statements for the quarters ended
March 31, 2004 and 2003 are summarized below (in thousands, except per share
information): 9




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Effect on selected Condensed Consolidated Balance Sheet data as of March 31, 2004: Selected Condensed Consolidated Balance Sheet Data
March 31, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedBalance SheetAccounts receivable
    
    $
    20,538
    
    
    $
    (2,681
    )
    
    $
    17,857Total current assets
    
    
    45,562
    
    
    
    (2,681
    )
    
    
    42,881Investment securities
    
    
    7,198
    
    
    
    (219
    )
    
    
    6,979Other investments
    
    
    1,526
    
    
    
    (275
    )
    
    
    1,251Investments in
unconsolidated companies
    
    
    13,772
    
    
    
    660
    
    
    
    14,432Property and equipment, net
    
    
    204,141
    
    
    
    3,869
    
    
    
    208,010Other assets
    
    
    1,633
    
    
    
    1,103
    
    
    
    2,736Total assets
    
    
    318,939
    
    
    
    2,457
    
    
    
    321,396Customer deposits and
advance billings
    
    
    2,687
    
    
    
    191
    
    
    
    2,878Other accrued liabilities
    
    
    12,509
    
    
    
    1,103
    
    
    
    13,612Total current liabilities
    
    
    24,688
    
    
    
    1,294
    
    
    
    25,982Deferred income taxes
    
    
    24,073
    
    
    
    (114
    )
    
    
    23,959Other liabilities
    
    
    2,868
    
    
    
    336
    
    
    
    3,204Total deferred credits and
other liabilities
    
    
    38,120
    
    
    
    222
    
    
    
    38,342Total liabilities
    
    
    139,058
    
    
    
    1,516
    
    
    
    140,574Other accumulated
comprehensive income
(loss)
    
    
    (56
    )
    
    
    264
    
    
    
    208Retained earnings
    
    
    138,008
    
    
    
    677
    
    
    
    138,685Total stockholders equity
    
    
    179,881
    
    
    
    941
    
    
    
    180,822Total liabilities and
stockholders equity
    
    
    318,939
    
    
    
    2,457
    
    
    
    321,396
 10




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CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Effect on selected Condensed Consolidated Statements of Income data for the three months ended
March 31, 2004 and 2003: Selected Consolidated Statement of Income Data
Three Months ended March 31, 2004
(in thousands, except per share data) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedIncome StatementOperating revenue
    
    $
    40,519
    
    
    $
    45
    
    
    $
    40,564Operating expense
    
    
    34,708
    
    
    
    (1,075
    )
    
    
    33,633Operating income
    
    
    5,811
    
    
    
    1,120
    
    
    
    6,931Other expenses, principally interest
    
    
    (1,540
    )
    
    
    108
    
    
    
    (1,432
    )Total other income (expense)
    
    
    87
    
    
    
    108
    
    
    
    195Income before income taxes
    
    
    5,898
    
    
    
    1,228
    
    
    
    7,126Income taxes
    
    
    2,406
    
    
    
    481
    
    
    
    2,887Net income
    
    
    3,492
    
    
    
    747
    
    
    
    4,239Earnings for common stock
    
    
    3,487
    
    
    
    747
    
    
    
    4,234Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.04
    
    
    $
    0.22Diluted
    
    
    0.18
    
    
    
    0.04
    
    
    
    0.22
 Selected Consolidated Statement of Income Data
Three Months ended March 31, 2003
(in thousands, except per share data) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedIncome StatementOperating revenue
    
    $
    38,696
    
    
    $
    83
    
    
    $
    38,779Operating expense
    
    
    34,364
    
    
    
    (666
    )
    
    
    33,698Operating income
    
    
    4,332
    
    
    
    749
    
    
    
    5,081Interest, dividend income and gain
on sale of investments
    
    
    506
    
    
    
    (244
    )
    
    
    262Other expenses, principally interest
    
    
    (1,640
    )
    
    
    70
    
    
    
    (1,570
    )Total other income (expense)
    
    
    (85
    )
    
    
    (174
    )
    
    
    (259
    )Income before income taxes
    
    
    4,247
    
    
    
    575
    
    
    
    4,822Income taxes
    
    
    1,766
    
    
    
    224
    
    
    
    1,990Net Income
    
    
    2,481
    
    
    
    351
    
    
    
    2,832Earnings for common stock
    
    
    2,476
    
    
    
    351
    
    
    
    2,827Earnings per share:Basic
    
    $
    0.13
    
    
    $
    0.02
    
    
    $
    0.15Diluted
    
    
    0.13
    
    
    
    0.02
    
    
    
    0.15
 11




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Selected Condensed Consolidated Statements of Comprehensive Income (Loss) data for the three
months ended March 31, 2004 and March 31, 2003: Selected Condensed Consolidated Statement of Comprehensive Income (Loss)
Three Months ended March 31, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    3,492
    
    
    $
    747
    
    
    $
    4,239Unrealized holding gains
(losses) on available for
sale securities
    
    
    (687
    )
    
    
    394
    
    
    
    (293
    )Unrealized holding gains
on interest rate swaps
    
    
    64
    
    
    
    (64
    )
    
    
    Comprehensive income (loss)
    
    
    2,878
    
    
    
    1,077
    
    
    
    3,955
 Selected Condensed Consolidated Statement of Comprehensive Income (Loss)
Three Months ended March 31, 2003
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    2,481
    
    
    $
    351
    
    
    $
    2,832Unrealized holding gains
on interest rate swaps
    
    
    43
    
    
    
    (43
    )
    
    
    Comprehensive income (loss)
    
    
    2,527
    
    
    
    308
    
    
    
    2,835
 Effect on selected Condensed Consolidated Statements of Cash Flows data for the three months
ended March 31, 2004 and March 31,2003: Selected Condensed Consolidated Statement of Cash Flows Data
Three Months ended March 31, 2004
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    3,492
    
    
    $
    747
    
    
    $
    4,239Depreciation
    
    
    8,143
    
    
    
    (718
    )
    
    
    7,425Deferred income
taxes and tax
credits
    
    
    1,772
    
    
    
    (613
    )
    
    
    1,159Changes in
operating assets
and liabilities
    
    
    (2,686
    )
    
    
    584
    
    
    
    (2,102
    )
 12




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Selected Condensed Consolidated Statement of Cash Flows Data
Three Months ended March 31, 2003
(in thousands) As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedNet income
    
    $
    2,481
    
    
    $
    351
    
    
    $
    2,832Depreciation
    
    
    7,788
    
    
    
    (897
    )
    
    
    6,891Undistributed patronage dividends
    
    
    (238
    )
    
    
    185
    
    
    
    (53
    )Deferred income taxes and tax
credits
    
    
    710
    
    
    
    288
    
    
    
    998Changes in operating assets and
liabilities
    
    
    (75
    )
    
    
    73
    
    
    
    (2
    )
  5.
    PROPERTY AND EQUIPMENTProperty and equipment is composed of the following (in thousands): (Restated)March 31,
    
    
    December 31,2004
    
    
    2003Land, buildings and general equipment
    
    $
    91,226
    
    
    $
    90,915Central office equipment
    
    
    166,238
    
    
    
    164,210Poles, wires, cables and conduit
    
    
    145,635
    
    
    
    143,805Construction in progress
    
    
    4,831
    

    
    
    5,438407,930
    
    
    
    404,368Accumulated depreciation
    
    
    (199,920
    )
    
    
    (192,847
    )Property and equipment, net
    
    $
    208,010
    
    
    $
    211,521
  6.
    DISCONTINUED OPERATIONSOn December 9, 2002, the Company discontinued its wireless broadband commercial trial
operations in Fayetteville, North Carolina. These operations were provided by
Wavetel, L.L.C. (Wavetel), a subsidiary of the Company. The Company ceased
Wavetels operations due to significant operating losses, the limited coverage area
provided by the technology available at the time and the inability to obtain outside
investment. Complete disposal of the business through sale and disposal of assets was
completed by June 30, 2003. As a result, Wavetels operations have been reflected as
discontinued operations and as assets and liabilities held for sale in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In the second quarter of 2003, the
Company re-evaluated the potential future liabilities related to the discontinued
Wavetel operations and determined that the potential liabilities exceeded the
remaining restructuring reserve. Therefore, the Company recorded an additional loss
from discontinued operations, before income taxes, of $0.7 million in the second
quarter of 2003. The additional loss relates to the Companys inability to sublease
certain facilities that were previously used in Wavetels operations. The adjustment
is an estimate based on the current market condition and could be revised on a
quarterly basis as new information becomes available. As of March 31, 2004, the
Company believes that the reserve is adequate. The Company had no outstanding
indebtedness directly related to the Wavetel operations; therefore, no interest
expense was allocated to discontinued operations.In connection with the discontinuance of operations, the Company recognized a loss of
$4.4 million in 2002 to write down the related carrying amounts of assets to their
fair values less cost to sell in accordance with SFAS No. 144 and recorded related liabilities for estimated severance costs, lease
termination costs and other exit costs in accordance with Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs 13




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  Incurred in Restructuring). The liabilities of the discontinued operations at March
31, 2004 and December 31, 2003 consist of the following (in thousands): March 31,
    
    
    December 31,2004
    
    
    2003Liabilities of discontinued operations:Other liabilities, primarily lease obligations
    
    $
    936
    
    
    $
    1,072Total liabilities of discontinued operations
    
    $
    936
    
    
    $
    1,072
  A summary of restructuring liability activity related to the discontinued operations
for the three months ended March 31, 2004 is as follows (in thousands): Balance at December 31, 2003
    
    $
    1,072Lease termination costs
    
    
    (136
    )Balance at March 31, 2004
    
    $
    936
  7.
    COMMON STOCKThe following is a summary of Common Stock transactions during the three months
ended March 31, 2004 (in thousands): Shares
    
    
    AmountOutstanding at December 31, 2003
    
    
    18,769
    
    
    $
    40,800Purchase/forfeitures of Common
Stock
    
    
    (24
    )
    
    
    (285
    )Issuance of Common Stock
    
    
    131
    
    
    
    1,614Outstanding at March 31, 2004
    
    
    18,876
    
    
    $
    42,129
 Basic
    
    
    DilutedWeighted average shares outstanding for
the three months ended March 31, 2004
    
    
    18,834
    
    
    
    18,953Weighted average shares outstanding for
the three months ended March 31, 2003
    
    
    18,716
    
    
    
    18,726
  Outstanding options to purchase approximately 571,000 shares of Common Stock for the
three months ended March 31, 2004 and approximately 654,000 shares of Common Stock
for the three months ended March 31, 2003 were not included in the computation of
diluted earnings per share and diluted weighted shares outstanding because the
exercise price of these options was greater than the average market price of the
Common Stock during the respective periods. At March 31, 2004 and March 31, 2003,
the Company had total options outstanding of 1,387,000 and 904,000, respectively.On April 22, 2004, the Board of Directors approved the continuation of the Companys
existing stock repurchase program. Under this program, the Company is authorized,
subject to certain conditions, to repurchase up to 1,000,000 shares of its
outstanding Common Stock during the twelve-month period from April 28, 2004 to April
28, 2005. There were no shares repurchased by the Company during the three months
ended March 31, 2004. 14




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  8.
    INVESTMENT SECURITIESThe amortized cost, gross unrealized holding gains and losses and fair value for the
Companys investments at March 31, 2004 and December 31, 2003 were as follows (in
thousands): Gross
    
    
    GrossUnrealized
    
    
    UnrealizedEquity Securities
    
    Amortized
    
    
    Holding
    
    
    HoldingAvailable-for-Sale
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2004 (Restated)
    
    $
    6,665
    
    
    $
    892
    
    
    $
    (578
    )
    
    $
    6,979December 31, 2003
    
    $
    6,798
    
    
    $
    815
    
    
    $
    (95
    )
    
    $
    7,518
  9.
    INVESTMENTS IN UNCONSOLIDATED COMPANIESInvestments in unconsolidated companies consist of the following (in thousands): (Restated)March 31,
    
    
    December 31,2004
    
    
    2003Equity Method:Palmetto MobileNet, L.P.
    
    $
    10,297
    
    
    $
    8,902Other
    
    
    105
    
    
    
    100Cost Method:Magnolia Holding Company
    
    
    1,680
    
    
    
    1,680ITC Financial Services, LLC
    
    
    840
    
    
    
    840Other
    
    
    1,510
    
    
    
    1,512Total
    
    $
    14,432
    
    
    $
    13,034
  On May 9, 2003, West Corporation (West) purchased the stock of ITC Holding
Company, Inc. (ITC). The Company had a 4.4% equity interest in ITC. This
transaction resulted in a gain to the Company of $15.2 million in 2003. As part of
the purchase agreement between West and ITC, certain funds are being held in escrow
until certain contingencies are resolved. The Companys portion of the escrowed
funds is $1.2 million. The $1.2 million will not be recorded in the Companys
financial statements until the contingencies are resolved and the escrowed funds
become issuable.In May 2003, the Company purchased $3.0 million of stock in Magnolia Holding Company
(Magnolia). The primary asset of Magnolia was Knology, Inc. (Knology), a public
company that provides data and Internet connectivity to small and mid-size
businesses. The Company holds a 4.6% equity interest in Magnolia. The Company
later received a distribution from Magnolia in the form of shares of Knology common
stock. This distribution by Magnolia reduced the value of the Companys investment
in Magnolia. The shares of Knology stock are classified as available-for-sale
investment securities.In December 2003, the Company committed to purchase a 4.0% interest in ITC Financial
Services, LLC (ITC Financial) for up to $2.1 million. ITC Financial was formed to
develop a prepaid debit card business that uses a nationwide network of automated
terminals that re-charge the debit card for certain transaction fees. As of March
31, 2004, the Company had funded $0.8 million of the committed amount.
The remaining $1.3 million can be called at any time at the discretion of ITC
Financial based on cash operating requirements. 15




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  10.
    LONG-TERM DEBTLong-term debt consists of the following (in thousands): March 31,
    
    
    December 31,2004
    
    
    2003Line of credit with interest at LIBOR
plus 1.25% (2.44% at March 31, 2004
and December 31, 2003)
    
    $
    27,500
    
    
    $
    30,000Term loan with interest at 7.32%
    
    
    50,000
    
    
    
    50,00077,500
    
    
    
    80,000Less: Current portion of long-term debt
    
    
    1,250
    
    
    
    Total long-term debt
    
    $
    76,250
    
    
    $
    80,000
  The Company has a $90.0 million revolving five year line of credit with interest at
three month LIBOR plus a spread based on various financial ratios, that is currently
1.25%. The interest rate on March 31, 2004 was 2.44%. The credit facility provides
for quarterly payments of interest until maturity on March 31, 2006. As of March
31, 2004, $27.5 million was outstanding under the revolving credit facility. The
Company also has a 7.32% fixed rate $50.0 million term loan that matures on December
31, 2014. All $50.0 million was outstanding as of March 31, 2004. The term loan
requires quarterly payments of interest until maturity on December 31, 2014.
Payments of principal are due beginning March 31, 2005 and quarterly thereafter
through December 31, 2014, in equal quarterly amounts of $1.25 million. The Company
also has an additional line of credit for $10.0 million at one month LIBOR plus
1.25%. As of March 31, 2004 and December 31, 2003, the Company had no amounts
outstanding under this credit line.The Company has two interest rate swap agreements to fix $5.0 million and $5.0
million of the amounts outstanding under the $90.0 million revolving line of credit
at rates of 3.81% and 4.53%, respectively. The fair value of the swap agreements as
of March 31, 2004 and December 31, 2003 was $(0.4) million and $(0.5) million,
respectively and are recorded in other long-term liabilities. The swaps mature on
November 3, 2004 and November 3, 2006, respectively.11.
    GOODWILLOn January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. In accordance with SFAS No. 142, the Company discontinued goodwill
amortization and tested goodwill for impairment as of January 1, 2002, determining
that the recognition of an impairment loss was not necessary. The Company will
continue to test goodwill for impairment at least annually. Goodwill was $9.9
million as of March 31, 2004, and was unchanged for the quarter then ended.Other intangible assets consist primarily of wireless licenses. Wireless licenses
have terms of 10 years, but are renewable through a routine process involving a
nominal fee. The Company has determined that no legal, regulatory, contractual,
competitive, economic or other factors currently exist that limit the useful life of
its wireless licenses. Therefore, the Company does not amortize wireless licenses
based on the determination that these assets have indefinite lives. In accordance
with SFAS No. 142, the Company periodically reviews its determination of indefinite
useful lives for wireless licenses and will test those licenses for impairment at
least annually. 16




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  12.
    STATE INCOME TAX ASSESSMENTIn October 2003, the Company received income tax assessments from the North Carolina
Department of Revenue related to certain state tax returns filed for the years ended
December 31, 1998, 1999 and 2000. The Company intends to vigorously appeal these
assessments. The Company believes that it has meritorious defenses to the
assessments and that the ultimate outcome is not expected to result in a material
impact on the Companys consolidated financial statements.13.
    RECENT ACCOUNTING PRONOUNCEMENTSIn March 2004, the EITF of the Financial Accounting Standards Board (FASB) reached
a consensus on EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The consensus addresses how to determine the
meaning of other-than-temporary impairment and its application to investments
classified as either available-for-sale or held-to-maturity under Statement No. 115
(including individual securities and investments in mutual funds), and investments
accounted for under the cost method or the equity method. The EITF required
additional disclosures for investments accounted for under SFAS No. 115 and No. 124
effective for fiscal years ended after December 15, 2003. The remaining consensus
is applicable to all reporting periods beginning after June 15, 2004. The Company
will adopt this consensus in the third quarter of 2004 and will apply the provisions
of this statement on a prospective basis. The impact to the Companys overall
financial position or results of operations is not expected to be material.In December 2003, the FASB issued a revision to SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88 and 106. SFAS No. 132 revises employers disclosures about
pension plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by SFAS No. 87, Employers
Accounting for Pension, SFAS No. 88, Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefit and SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. This
Statement retains the disclosure requirements contained in SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It
requires additional disclosures to those in the original Statement No. 132 about the
assets, obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The Company adopted
the new disclosure requirements of SFAS 132 in December 2003.14.
    STOCK OPTIONSThe Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation an Interpretation
of APB Opinion No. 25 issued in March 2000 to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS No.
123 and SFAS No. 148.The Company applies APB Opinion No. 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans and its stock purchase plan. Had compensation cost for the
Companys stock-based compensation plans been determined consistent with SFAS No. 123, the Companys net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in thousands
except per share data): 17




---



##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Net income, as reported
    
    $
    4,239
    
    
    $
    2,832Additional stock-based compensation
expense that would have been included
in net income if the fair value method had
been applied, net of income tax
    
    
    272
    
    
    
    205Pro forma net income
    
    $
    3,967
    
    
    $
    2,627Basic earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.15Pro forma
    
    
    0.21
    
    
    
    0.14Diluted earnings per common shareAs reported
    
    $
    0.22
    
    
    $
    0.15Pro forma
    
    
    0.21
    
    
    
    0.14
  15.
    PENSION AND POST-RETIREMENT PLANSComponents of net period benefit costs for the three months ended March 31 (in
thousands): Pension Benefits
    
    
    Post-Retirement Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    503
    
    
    $
    463
    
    
    $
    15
    
    
    $
    13Interest cost
    
    
    655
    
    
    
    626
    
    
    
    126
    
    
    
    128Expected return on plan assets
    
    
    (842
    )
    
    
    (664
    )
    
    
    
    
    
    
    Transition obligation
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    153Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    (84
    )
    
    
    (84
    )Amortization of the net gain
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    
    (56
    )Net periodic benefit cost
    
    $
    317
    
    
    $
    426
    
    
    $
    166
    
    
    $
    154
  The Company previously disclosed in its financial statements for the year ended
December 31, 2003 that it does not expect to contribute to the pension plan in 2004.16.
    SEGMENT INFORMATIONThe Company has six reportable segments, each of which is a strategic business that
is managed separately due to certain fundamental differences such as regulatory
environment, services offered and/or customers served. The segments and a
description of their businesses are as follows: the incumbent local exchange
carrier (ILEC), which provides local telephone services, the digital wireless
group (Digital Wireless), which provides wireless phone services, the competitive
local exchange carrier (CLEC), which provides competitive local telephone services
to customers outside the ILECs operating area, the Greenfield business
(Greenfield), which provides full telecommunications services to developments
outside the ILECs operating area, Internet and data services (IDS), which
provides dial-up and high-speed internet access and other data related services and
Palmetto MobileNet, L.P. (Palmetto), which is a limited partnership with interests
in wireless operations in North Carolina and South Carolina in which the Company has
an equity interest through the Companys subsidiary CT Cellular, Inc. All other
business units, investments and operations of the Company that do not meet reporting
guidelines and thresholds are reported under Other. Quarterly information for the
Palmetto reporting segment is not shown separately below due to the lack of
availability of timely financial information. Palmetto is not a public company and
therefore, is not subject to the same reporting deadlines as the Company. The
Company will continue to 18




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##### 



CT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  include the financial information for Palmetto on an annual basis as presented in
the Companys Annual Report on Form 10-K for the year ended December 31, 2003.Accounting policies of the segments are the same as those described in the summary
of significant accounting policies included in the Companys Annual Report on Form
10-K for the year ended December 31, 2003. The Company evaluates performance based
on operating income. Intersegment transactions have been eliminated for purposes of
calculating operating income. All segments reported below provide services
primarily within North Carolina. Selected data by business segment as of and for
the three months ended March 31, 2004 and 2003, is as follows (in thousands): Three months ended March 31, 2004 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    23,699
    
    
    $
    7,122
    
    
    $
    5,038
    
    
    $
    1,945
    
    
    $
    2,760
    
    
    $
    
    
    
    $
    40,564External
expense
    
    
    10,741
    
    
    
    6,306
    
    
    
    4,389
    
    
    
    2,219
    
    
    
    2,336
    
    
    
    217
    
    
    
    26,208Depreciation
    
    
    4,714
    
    
    
    469
    
    
    
    635
    
    
    
    720
    
    
    
    516
    
    
    
    371
    
    
    
    7,425Operating
income (loss)
    
    $
    8,244
    
    
    $
    347
    
    
    $
    14
    
    
    $
    (994
    )
    
    $
    (92
    )
    
    $
    (588
    )
    
    $
    6,931Segment assets
    
    $
    167,557
    
    
    $
    30,788
    
    
    $
    16,407
    
    
    $
    24,739
    
    
    $
    15,103
    
    
    $
    66,802
    
    
    $
    321,396
 Three months ended March 31, 2003 (Restated) DigitalILEC
    
    
    Wireless
    
    
    CLEC
    
    
    Greenfield
    
    
    IDS
    
    
    Other
    
    
    TotalExternal
revenue
    
    $
    23,566
    
    
    $
    6,922
    
    
    $
    4,471
    
    
    $
    1,312
    
    
    $
    2,508
    
    
    $
    
    
    
    $
    38,779External
expense
    
    
    10,970
    
    
    
    5,703
    
    
    
    4,768
    
    
    
    1,928
    
    
    
    2,396
    
    
    
    1,042
    
    
    
    26,807Depreciation
    
    
    4,816
    
    
    
    369
    
    
    
    454
    
    
    
    758
    
    
    
    366
    
    
    
    128
    
    
    
    6,891Operating
income (loss)
    
    $
    7,780
    
    
    $
    850
    
    
    $
    (751
    )
    
    $
    (1,374
    )
    
    $
    (254
    )
    
    $
    (1,170
    )
    
    $
    5,081Segment assets
    
    $
    171,429
    
    
    $
    30,753
    
    
    $
    13,024
    
    
    $
    22,800
    
    
    $
    15,477
    
    
    $
    84,804
    
    
    $
    338,287
 Reconciliation to income from continuing operations before income taxes (in
thousands): Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Segment operating income
    
    $
    6,931
    
    
    $
    5,081Total other income (expense)
    
    
    195
    
    
    
    (259
    )Income from continuing operations
before income taxes
    
    $
    7,126
    
    
    $
    4,822
 19




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. Restatement The Company identified certain errors related to its accounting for telephone system sales
that occurred in 1999 through the first three quarters of 2004, which resulted in the
overstatement of revenue for the periods 1999 through 2002 and the understatement of revenue
for 2003 and the first three quarters of 2004. The cumulative effect of the correction of
this error at March 31, 2004 resulted in a reduction of accounts receivable, income taxes
payable and retained earnings of $1.6 million, $0.5 million and $1.3 million, respectively,
and a $0.2 million increase in customer deposits and advanced billings. The correction of
this error for the three months ended March 31, 2004 and March 31, 2003 resulted in a
$45,000 and $34,000 increase in revenue, respectively. The Company discovered certain errors relating to the Companys reporting of depreciation
expense (which is included in operating expense on the Condensed Consolidated Statement of
Income) in 2002, 2003 and the first three quarters of 2004. These depreciation errors were
caused by calculation errors in the Companys fixed asset system. The cumulative effect of
these errors resulted in an increase in property and equipment, net of $3.3 million at March
31, 2004. These errors resulted in an overstatement of depreciation expense of $0.8 million
and $0.7 million for the three months ended March 31, 2004 and March 31, 2003, respectively.
The correction of these errors increased net income $0.5 million and $0.5 million for the
three months ended March 31, 2004 and March 31, 2003, respectively. The Company identified an error in the accounting for a capital lease agreement that also
impacted certain accrual accounts. The Company discovered that it had not properly recorded
the asset associated with a capital lease and that certain accruals were erroneously
adjusted in recording the liability associated with the capital lease. The correction of
this error resulted in a decrease in operating expense of $0.3 million for the three months
ended March 31, 2004 and an increase in operating expense of $0.1 million for the three
months ended March 31, 2003. The after tax impact of these adjustments resulted in an
increase to net income of $0.2 million for the three months ended March 31, 2004 and a
decrease to net income of $30,000 for the three months ended March 31, 2003. The Company received a distribution notice in 2004 relating to an equity security held by a
member of the Companys equity portfolio, and recorded the distribution when the notice was
received. The Company subsequently learned that the distribution was actually completed in
the fourth quarter of 2003, and has adjusted this investment at December 31, 2003 through a
$0.7 million reduction of investment securities and a $0.4 million reduction in accumulated
other comprehensive income, net of tax effect of $0.3 million. During the course of preparing its year-end financial statements for 2004, an error was
identified in the Companys accounting related to three interest rate swap agreements
entered into during 1999 and 2001. The Company was incorrectly applying hedge accounting
and was recording the adjustment to fair value of its interest rate swaps through
accumulated other comprehensive income instead of interest expense. The correction of this
error resulted in a decrease in interest expense of $0.1 million and $0.1 million for the
three months ended March 31, 2004 and March 31, 2003, respectively. The after tax impact of
the correction of this error resulted in an increase to net income of $0.1 million and $0.1
million for the three months ended March 31, 2004 and March 31, 2003, respectively. The Company reviewed its accounting with respect to leasing transactions and has concluded
there was an error in the determination of lease expense for certain leases related
primarily to wireless cell tower sites. The Company had not properly reflected rent
escalation provisions contained in its leases on a straight-line basis as required by SFAS
No. 13, Accounting for Leases. To correct this error, the Company has considered the
escalation provisions of the leases and has considered renewal periods when there is
reasonable assurance that one or more of the renewal options would be exercised. The result
of the Companys assessment was to increase the lease term as defined in SFAS No. 13 for
most of its operating leases. The impact of this error for the three months ended March 31,
2004 and March 31, 2003 was an increase in rent expense (which is included in operating
expense on the Condensed Consolidated Statement of Income) of $22,000 and $28,000,
respectively. 20




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##### 



The Company also restated certain previously recorded, out-of-period items to include them
in the periods in which they actually occurred in order to more accurately present the
financial statements for those prior periods. These adjustments include a decrease in
dividend income of $0.2 million for the three months ended March 31, 2003. In addition, the
Company also reclassified to other assets $1.2 million of certain items previously recorded
as accounts receivable on the consolidated balance sheet at March 31, 2004. The aggregate impact of the correction of all the errors discussed above resulted in an
increase in net income of $0.7 million and $0.4 million for the three months ended March 31,
2004 and March 31, 2003, respectively. The following discussion reflects, to the extent applicable, this restatement. See Note 4
of the Notes to Condensed Consolidated Financial Statements for additional information. Introduction CT Communications, Inc. and its subsidiaries provide a broad range of telecommunications and
related services to residential and business customers located primarily in North Carolina.
Our primary services include local and long distance telephone service, Internet and data
services and digital wireless products and services. The Company has worked to expand its core businesses through the development of integrated
product and service offerings, investment in certain growth initiatives and targeted
marketing efforts to efficiently identify and obtain customers. In addition, the Company
has made certain strategic investments that complement our business units. During 2001, the
Company expanded its wireless business through the partitioning of its area of the Cingular
digital network. The Company believes that it is positioning itself to achieve its strategic objectives by
devoting substantial effort to developing business plans, enhancing its management team, and
designing and developing its business support and operating systems. The Companys primary
focus is to maximize the ILEC business in its current markets by cross-selling bundled
products and packages and growing its customer base through its CLEC, Greenfield, IDS, and
Digital Wireless businesses. The Company will also consider strategic acquisitions and
investments as opportunities arise. For the three months ended March 31, 2004, net income for the Company was $4.2 million
compared to $2.8 million for the three months ended March 31, 2003. Diluted earnings per
share were $0.22 and $0.15 for the three months ended March 31, 2004 and 2003, respectively. Revenue increased across all operating segments during the quarter ended March 31, 2004 and
the Companys competitive businesses showed improved operating margins. The Companys ILEC
experienced a loss of access lines as its customers can select from several alternative
service providers. The competitive CLEC and Greenfield wireline businesses continued to
experience strong demand for their products and services that resulted in 11.4% and 50.6%
access line growth, respectively, for the three months ended March 31, 2004 compared to the
three months ended March 31, 2003. The replacement of higher margin ILEC lines with lower
margin CLEC and Greenfield lines will continue to pressure operating margins downward.
However, the Company is continuously evaluating opportunities for process improvements and
efficiency gains to offset the transition to competitive, lower margin accounts. Operating
margins in the CLEC and Greenfield businesses should continue to be positively impacted as
we leverage existing transport infrastructure to support new customers. Industry and Operating Trends Telecommunications continues to evolve into a highly competitive industry. Industry
participants are faced with the challenge of adapting their organizations, services,
processes and systems to this environment. Our ILEC is facing more competitive pressure
than at any other time in its history. Wireless providers and CLECs have targeted our
customers and will continue to promote low cost, flexible communications alternatives. The
more recent introduction of cable telephony and Voice over Internet Protocol (VoIP)
services will become more significant threats to our voice business in the coming years.
These technologies 21




---



##### 



are capable of delivering a quality, competitive voice service to our ILEC customers. These
voice providers are not subject to certain regulatory constraints that have shaped our
business model and that will become more significant impediments to our ability to
successfully compete in the coming years. In particular, our ILEC must provide certain basic services to all customers in our
regulated service area, regardless of the cost to provide that service. We are the
beneficiaries of certain cost reimbursements that are intended to offset certain costs to
provide service. These reimbursements are increasingly at risk, yet our service obligations
remain unchanged. The future risk and uncertainty of regulatory service requirements and
the recovery of expense subsidies will impact our ability to maintain existing margins and
profitability. As discussed above, VoIP and cable telephony are becoming more available to customers and
could result in lower revenues throughout our businesses. Time Warner currently offers
cable television and high-speed Internet service and is expected to offer cable telephony in
our ILEC service area, which could result in a loss of access lines, a reduction in ILEC
revenue including long distance and access revenue, and a reduction in Internet revenue. In
addition, wireless substitution is also a trend that is impacting our ILEC business as well
as our long distance revenue. Some customers are choosing to substitute their landline
service with wireless service. We believe this has contributed to the access line decrease
in the ILEC over the past several years. Also impacting access line losses over the past several years is the adoption of digital
subscriber line (DSL) and high-speed Internet services by customers that had traditionally
subscribed to dial-up Internet service. As customers switch to DSL or high-speed Internet
service, they no longer need a second landline for use with their dial-up Internet service. In recent quarters we experienced a decline in the recovery of wireless interconnection
access fee revenue. We expect continued pressure from other telecommunications providers to
lower or eliminate our recovery of fees for terminating their traffic on our network. In our wireless business, increasing competition, market saturation and an uncertain economy
have caused and will likely continue to cause the wireless industrys subscriber growth rate
to moderate in comparison to historical growth rates. While the wireless telecommunications
industry does continue to grow, a high degree of competition exists among carriers. This
competition will continue to put pressure upon pricing and margins as carriers compete for
potential customers. Future carrier revenue growth is highly dependent upon the number of
net customer additions a carrier can achieve and the average revenue per user derived from
its customers. Regulatory requirements have grown in certain areas of our business and have added
complexity and expense to our business model. In November 2003, we were required to provide
number portability to wireless carriers. This service allows greater customer choice in
their telecommunications provider, without the need to change established end user contact
numbers. While this service certainly enhances customer choice, it negatively impacts our
cost to provide basic service. As federal and state agencies continue their pursuit of
opening all telecommunications services to competition, additional expenses are likely to be
incurred by the established local exchange carriers to facilitate more open networks. Results of Operations The Company has six reportable segments, each of which is a strategic business that is
managed separately due to certain fundamental differences such as regulatory environment,
services offered and/or customers served. The identified reportable segments are: ILEC,
CLEC, Greenfield, Digital Wireless, IDS and Palmetto. All other businesses that do not meet
reporting guidelines and thresholds are reported under Other Business Units. Quarterly
information for the Palmetto reporting segment is not shown separately below due to the lack
of availability of timely financial information. Palmetto is not a public company and
therefore, is not subject to the same reporting deadlines as the Company. The following discussion reviews the results of our consolidated operations and specific
results within each reportable segment. 22




---



##### 



Consolidated Operating Results(in thousands, except lines and subscribers) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating revenue
    
    $
    40,564
    
    
    $
    38,779Total operating expense
    
    
    33,633
    
    
    
    33,698Operating income
    
    $
    6,931
    
    
    $
    5,081Depreciation
    
    $
    7,425
    
    
    $
    6,891Capital expenditures
    
    
    3,913
    
    
    
    6,158Total assets
    
    
    321,396
    
    
    
    338,287Ending wired access lines
    
    
    156,410
    
    
    
    152,398Ending wireless subscribers
    
    
    39,250
    
    
    
    33,984
 Operating revenue increased $1.8 million or 4.6% for the three months ended March 31, 2004
compared to the three months ended March 31, 2003. The increase is attributable to a $0.6
million increase in CLEC revenue driven primarily by an 11.4% increase in access lines, a
$0.6 million increase in Greenfield revenue driven by a 50.6% increase in Greenfield access
lines, a $0.3 million increase in IDS revenue, a $0.2 million increase in wireless revenue
driven by a 15.5% increase in customers and a $0.1 million increase in ILEC revenue.
Overall, total operating revenue increased in all operating segments for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. We have diversified operating revenue in the Company significantly over the past several
years through the growth in our competitive businesses. For the three months ended March
31, ILEC revenue represented 58.4% of total revenue in 2004 compared to 60.8% in 2003, while
Digital Wireless revenue represented 17.6% of total revenue in 2004 compared to 17.8% in
2003, the combined CLEC and Greenfield businesses have grown to 17.2% of total revenue in
2004 up from 14.9% in 2003 and Internet revenue represented 6.8% in 2004 compared to 6.5% in
2003. For the three months ended March 31, 2004, operating expense decreased $0.1 million or 0.2%
compared to the three months ended March 31, 2003. Our operating margin increased to 17.1% for the three months ended March 31, 2004 from 13.1%
for the three months ended March 31, 2003. This increase in operating margin is primarily
due to improving operating margins in our competitive businesses and the Companys efforts
to stabilize operating margins in the ILEC. The Company has licenses and other rights to certain wireless spectrum, including
Multichannel Multipoint Distribution Service (MMDS) and Instructional Television Fixed
Service (ITFS). In April 2003, the Federal Communications Commission (FCC) initiated a
proposed rulemaking to comprehensively examine its rules regarding MMDS and ITFS spectrum.
This proceeding is still pending before the FCC. In October 2003, the Company received income tax assessments from the North Carolina
Department of Revenue related to certain state tax returns filed for the years ended
December 31, 1998, 1999 and 2000. The Company intends to vigorously appeal these
assessments. The Company believes that it has meritorious defenses to the assessments and
the ultimate outcome is not expected to result in a material impact on the Companys
consolidated financial statements. 23




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##### 



ILEC(in thousands, except lines) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating revenue
    
    $
    23,699
    
    
    $
    23,566Total operating expense
    
    
    15,455
    
    
    
    15,786Operating income
    
    $
    8,244
    
    
    $
    7,780Depreciation
    
    $
    4,714
    
    
    $
    4,816Capital expenditures
    
    
    1,988
    
    
    
    3,308Total assets
    
    
    167,557
    
    
    
    171,429Ending business access lines
    
    
    29,130
    
    
    
    29,750Ending residential access lines
    
    
    86,191
    
    
    
    88,259Ending total access lines
    
    
    115,321
    
    
    
    118,009Ending long distance lines
    
    
    84,811
    
    
    
    84,233
 Operating revenue for the ILEC increased $0.1 million or 0.6% for three months ended March
31, 2004 compared to the three months ended March 31, 2003. The increase in revenue
consists of a $0.1 million increase in subscriber line charge revenue and an increase in
revenue related to our bundled product offerings. These increases were partially offset by
a $0.2 million decrease in long distance revenue and a decrease in local revenue due to the
decrease in access lines. During the first quarter of 2004, the Company recognized revenue
of approximately $0.3 million related to the collection of previously disputed access
charges. Without this non-recurring revenue stream, access and interconnection revenue
would have declined approximately $0.4 million in the three months ended March 31, 2004
compared to the three months ended March 31, 2003. Access lines at March 31, 2004 declined
2.3% from March 31, 2003. We believe the decrease in access lines is due in part to an
increase in broadband Internet adoption that has led customers to cancel second lines
previously used for dial-up Internet service as well as increased competition from wireless
and other competitive providers. Wireless interconnection revenue is likely to decline going forward as the Company has been
required to develop direct billing relationships with wireless carriers for termination of
wireless traffic on our network. This decline is due to migration of this traffic to direct
billing arrangements subject to negotiated interconnection rates that are lower than rates
previously realized for termination of this traffic. However, this rate decline will be
somewhat offset as wireless traffic terminated on our network increases. Operating expense in the ILEC decreased $0.3 million or 2.1% for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. The primary drivers of
this decrease were lower sales commission expense. Operating expenses decreased and
operating revenue increased resulting in an increase in operating margin from 33.0% for the
three months ended March 31, 2003 to 34.8% for the three months ended March 31, 2004. The
Company will continue to focus on gaining operational efficiencies. Capital expenditures for the three months ended March 31, 2004 were 8.4% of ILEC operating
revenue compared to 14.0% of operating revenue for the three months ended March 31, 2003. For the three months ended March 31, 2004, ILEC access lines subscribing to our long
distance service increased slightly despite a 2.3% access line loss. At March 31, 2004,
73.5% of ILEC access lines subscribed to our long distance service, up from 71.4% at March
31, 2003. Despite the increase in ILEC customers subscribing to our long distance service,
long distance revenue has declined. Long distance minutes of use increased significantly in
the three months ended March 31, 2004 compared to the three months ended March 31, 2003.
However, increased competition has forced rates per minute down and as a result, long
distance revenue has declined despite an increase in minutes-of-use; this trend is expected
to continue. Certain of the Companys interstate network access revenue is based on tariffed access
charges prescribed by the FCC. The remainder of such interstate revenue is derived from
revenue pooling arrangements with 24




---



##### 



other local exchange carriers (LECs) administered by the National Exchange Carrier
Association (NECA), a quasi-governmental non-profit organization formed by the FCC in 1983
for such purpose. The Companys ILEC participates in the NECA Carrier Common Line pool and
is the recipient of long-term support. In addition, the ILEC receives Interstate Common
Line Support (ICLS) funds, which are administered by NECA. The ICLS support mechanism was
implemented in July 2002. NECAs pooling arrangements are based on nationwide average costs that are applied to
certain projected demand quantities, and therefore revenues are initially recorded based on
estimates. These estimates involve a variety of complex calculations, and the ultimate
amount realized from the pools may differ from our estimates. Management periodically
reviews these estimates and makes adjustments as applicable. Certain interstate rates charged by the Company are regulated by the FCC and are subject to
potential over-earnings claims if the Companys interstate rates result in earnings over the
FCCs prescribed rate of return. The Company maintains a reserve related to over-earnings
based on managements estimate of potential liability for the Company. Management
periodically assesses the Companys potential liability and makes adjustments as applicable.
Changes in managements estimate could result from changes in current and future
legislation, regulatory filings and FCC rulings, as well as any other factors that may
impact managements estimate. The FCC required wireline companies in the top 100 metropolitan statistical areas (MSAs)
to begin intermodal porting (from wireline to wireless) beginning November 24, 2003. In
areas of the country below the top 100 MSAs, wireline to wireless porting is scheduled to
begin May 24, 2004. Local number portability (LNP) could result in increased customer
churn over time, but has not yet had any significant impact on our business. In North Carolina, legislation was enacted in 2003 that deregulated intraLATA long distance
service, interLATA long distance service and long distance operator services and provided
other regulatory flexibility. This legislation has provided our ILEC greater flexibility in
offering service bundles and promotions. On January 2, 2004, the North Carolina Utilities
Commission (NCUC) released an order that detailed its findings regarding the legislation
and implementation requirements. The Company is now in the process of analyzing and
implementing the requirements of the NCUC order. CLEC(in thousands, except lines) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating revenue
    
    $
    5,038
    
    
    $
    4,471Total operating expense
    
    
    5,024
    
    
    
    5,222Operating income (loss)
    
    $
    14
    
    
    $
    (751
    )Depreciation
    
    $
    635
    
    
    $
    454Capital expenditures
    
    
    211
    
    
    
    256Total assets
    
    
    16,407
    
    
    
    13,024Ending access lines
    
    
    30,415
    
    
    
    27,300Ending long distance lines
    
    
    15,832
    
    
    
    14,485
 CLEC operating revenue was $5.0 million for the three months ended March 31, 2004,
representing a $0.6 million or 12.7% increase over the three months ended March 31, 2003.
The $0.6 million increase consists primarily of a $0.2 million increase in recurring line
revenue and a $0.3 million increase in access revenue. The increase in recurring line
revenue is primarily attributable to an 11.4% increase in access lines for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. The $0.3 million
increase in access revenue was due primarily to the collection of approximately $0.2 million
in previously disputed access fees and an increase in minutes of use. In 2001, the FCC adopted rules that set interstate switched access charges at declining
rates. Effective June 20, 2003, the FCC directed that switched access rates charged by
CLECs to long distance companies for 25




---



##### 



interstate traffic be reduced from $0.018 per minute to $0.012 per minute. The next rate
reduction is scheduled to be effective June 20, 2004, at which time the rate will be reduced
from $0.012 to the rate of the competing ILEC. Although the switched access rates will
decline, there is an expected certainty of payment by interexchange carriers; however,
certain interexchange carriers, such as AT&T, have been deploying VoIP technology in an
effort to avoid payment of access charges. This issue is currently before the FCC. On
April 21, 2004, the FCC announced that AT&T would be responsible for payment of access
charges even if VoIP technology is used in transporting long distance calls. It is expected
that this issue will continue to receive significant attention by the FCC in 2004. CLEC operating expense was $5.0 million and $5.2 million for the three months ended March
31, 2004 and the three months ended March 31, 2003, respectively. Operating expense
decreased slightly despite revenue growth of 12.7%. As a result, operating margin increased
to 0.3% for the three months ended March 31, 2004 compared to (16.8%) for the three months
ended March 31, 2003. The improvement in operating margin was due primarily to the increase
in access lines, a $0.4 million reduction in personnel expenses and the collection of $0.2
million of previously disputed access fee revenue. We expect margins to continue to be
positively impacted as we leverage existing transport infrastructure with new customers. We did not enter any new markets in the first quarter of 2004 or 2003, electing instead to
focus on market penetration in our current markets and leverage existing transport
infrastructure where possible. Our CLEC focuses on the metropolitan areas and communities
immediately surrounding our ILEC territory. In August 2003, the FCC released its Triennial Review Order addressing the obligations of
incumbent local exchange carriers to provide unbundled network elements (UNEs) to
competitive local exchange carriers. The FCCs order eliminated unbundling requirements for
broadband services provided over fiber facilities, but retained unbundled access to
mass-market narrowband loops. The FCC also held that incumbent local exchange carriers are
not required to unbundle packet switching services or, subject to state review, local
switching that serves business customers on high-capacity loops. In addition, the FCC
ordered a three-year phase out of the unbundling of the high frequency portion of the loop.
For mass market customers served by narrowband loops, the FCC set out specific criteria for
states to use in determining whether switching should continue to be made available as an
UNE. If a state found that such switching should be eliminated as an UNE, then the FCC
required a three-year transition period for Unbundled Network Element Platform (UNE-P),
which is a service that bundles UNE switching with other UNEs such as UNE loop, so that the
competitive local exchange carrier can provide an entire local service platform. In March 2004, the U. S. Court of Appeals for the District of Columbia issued a decision
that upheld the FCCs elimination of unbundling requirements for broadband loops and
phase-out of unbundling requirements for the high frequency portion of the loop. However,
the court vacated and remanded a number of the FCCs determinations, including the FCCs
finding that competitive local exchange carriers were impaired without access to certain
network elements such as local switching. In addition, the court vacated the FCCs
delegation to the state commissions determinations related to mass-market switching and
dedicated transport elements. This decision is currently scheduled to become effective on
June 15, 2004. The Company is currently evaluating this decision and its impact on its
operations. While the Company believes that the impact to its ILEC from these regulatory developments
will be minimal, its CLEC relies significantly on network elements, including UNE-P and
dedicated transport, supplied by the applicable incumbent local carrier. As a result, if
access to network elements, including UNE-P or dedicated transport, is ultimately restricted
or made more expensive, then the Companys CLEC operations will likely be adversely
impacted. 26




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##### 



Greenfield(in thousands, except lines and signed agreements) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating revenue
    
    $
    1,945
    
    
    $
    1,312Total operating expense
    
    
    2,939
    
    
    
    2,686Operating income (loss)
    
    $
    (994
    )
    
    $
    (1,374
    )Depreciation
    
    $
    720
    
    
    $
    758Capital expenditures
    
    
    742
    
    
    
    1,146Total assets
    
    
    24,739
    
    
    
    22,800Ending access lines
    
    
    10,674
    
    
    
    7,089Ending long distance lines
    
    
    5,130
    
    
    
    2,878Total signed provider agreements
    
    
    97
    
    
    
    77
 Greenfield revenue increased $0.6 million for the three months ended March 31, 2004 to $1.9
million compared to $1.3 million for the three months ended March 31, 2003. This revenue
increase is primarily attributable to a 50.6% increase in access lines related to the
filling of 97 developments covered by signed telecommunications provider agreements. In
addition, access revenue increased approximately $0.2 million primarily due to the
collection of $0.2 million in previously disputed access fees in 2004. Our Greenfield
business added three provider agreements in the first quarter of 2004, bringing the total
number of signed agreements to 97. These agreements currently represent a potential 48,000
access lines once these developments have been completely built out. The expected
residential/business line mix of these 97 projects is expected to be 90% residential and 10%
business. Operating expense increased 9.4% for the three months ended March 31, 2004 to $2.9 million,
related primarily to the 50.6% increase in access lines. The increase in access lines and
related minutes-of-use on the Companys network has resulted in a $0.2 million increase in
combined access and transport expenses. Capital expenditures for the three months ended
March 31, 2004 decreased $0.4 million compared to the three months ended March 31, 2003, as
the Company continues its strategy of targeting new developments with the most efficient
capital deployments. At March 31, 2004, 48.1% of Greenfield access lines also subscribed to our long distance
service, up from 40.6% at March 31, 2003. This increase is mainly due to the fact that many
of the early Greenfield access lines were business lines located in mall projects. Business
customers historically do not elect our long distance service as frequently as residential
customers since many retail businesses have national long distance contracts. As the
residential percentage of Greenfield access lines increases we have seen our long distance
penetration rates increase. In June 2003, the NCUC initiated a general inquiry involving all certificated
telecommunications providers regarding preferred provider contracts. The Company has
telecommunications provider contracts through its Greenfield operations. The NCUC is
examining all telecommunications preferred provider contracts filed by CLECs and ILECs with
the NCUC and hearings were held in late January 2004. Proposed orders are to be filed by
interested parties by May 7, 2004. It is not known when the NCUC will issue a decision. At
this time, the impact of this inquiry on the Companys Greenfield operations cannot be
determined. The Greenfield segment is also subject to the switched access rates reduction affecting the
Companys CLEC. The impact on Greenfield is expected to be minimal and should be offset by
increased levels of traffic as the Company continues to build out its projects. 27




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##### 



Digital Wireless(in thousands, except subscribers) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating revenue
    
    $
    7,122
    
    
    $
    6,922Total operating expense
    
    
    6,775
    
    
    
    6,072Operating income
    
    $
    347
    
    
    $
    850Depreciation
    
    $
    469
    
    
    $
    369Capital expenditures
    
    
    382
    
    
    
    59Total assets
    
    
    30,788
    
    
    
    30,753Ending post-pay subscribers
    
    
    39,250
    
    
    
    33,984
 Digital Wireless revenue grew $0.2 million or 2.9% for the three months ended March 31, 2004
compared to the three months ended March 31, 2003. Post-pay wireless subscribers increased
15.5% compared to the three months ended March 31, 2004. Despite this acceleration of
customer growth, the average revenue per subscriber decreased and therefore, recurring
revenue increased only $0.3 million for the three months ended March 31, 2004 compared to
the three months ended March 31, 2003. Also contributing to the increase in revenue was
increased settlement revenue of $0.1 million related to a 27.9% increase in the minutes of
use on our wireless network during the three months ended March 31, 2004 compared to the
three months ended March 31, 2003. Operating expense increased 11.6% for the three months ended March 31, 2004 to $6.8 million
compared to $6.1 million for the three months ended March 31, 2003. The primary drivers of
the increase in operating expense are increases in settlement expenses of $0.2 million,
depreciation expense of $0.1 million and other corporate related expenses. Settlement
expenses increased primarily due to the increase in post-pay customers and the related
increase in minutes-of-use on our network. Operating margins decreased to 4.9% for the three months ended March 31, 2004 compared to
12.3% for the three months ended March 31, 2003. This decrease is primarily due to a
decrease in average revenue per subscriber and an increase in settlement expenses, corporate
expenses and an increase in depreciation expense. Capital expenditures were $0.4 million for the three months ended March 31, 2004, primarily
related to the addition of one new cell site in our territory and the addition of capacity
on selected other cell sites. In November 2003, the FCC mandated that wireless carriers implement LNP. There are several
operational issues that were recently addressed by the FCC. It is expected that wireless
LNP could result in increased rates of customer churn. In addition, the FCC also required
wireline companies to begin intermodal porting (from wireline to wireless) on the same date.
In areas of the country below the top 100 MSAs, wireless to wireless and wireline to
wireless porting is scheduled to begin May 24, 2004. LNP could result in increased customer
churn over time, but has not yet had any significant impact on our business. Cingular recently announced its plan to merge with AT&T Wireless, which has cellsites in our
partitioned area. At this time, we are unable to determine how this will affect the
Company. Wireless service carriers are required by FCC rules to provide enhanced 911 emergency
service (E-911) in a two-phase approach. Phase one has been completed and involves
delivery of the callers number and the location of the cell site serving the customer to
the Public Safety Answering Point (PSAP). Phase two will involve triangulation to allow
PSAPs the ability to more accurately locate a calling party. Because of our affiliation
with Cingular, they have responsibility for directing the implementation of E-911. We have
been working with Cingular as well as applicable PSAPs in the roll out of E-911. We have
included approximately $2 million in our 2004 capital budget for this deployment. 28




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##### 



In accordance with the Companys joint operating agreement with Cingular, the Company will
be required to adopt Cingulars network specifications for the delivery of higher speed data
products and services. The investment required to implement these products and services is
expected to approximate $2.5 million Internet and Data Services (IDS)(in thousands, except lines and accounts) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating revenue
    
    $
    2,760
    
    
    $
    2,508Total operating expense
    
    
    2,852
    
    
    
    2,762Operating income (loss)
    
    $
    (92
    )
    
    $
    (254
    )Depreciation
    
    $
    516
    
    
    $
    366Capital expenditures
    
    
    297
    
    
    
    838Total assets
    
    
    15,103
    
    
    
    15,477Ending DSL lines
    
    
    10,987
    
    
    
    7,755Ending dial-up accounts
    
    
    10,484
    
    
    
    12,263Ending high-speed accounts
    
    
    565
    
    
    
    580
 IDS operating revenue grew 10.0% for the three months ended March 31, 2004 to $2.8 million
compared to $2.5 million for the three months ended March 31, 2003. During the three months
ended March 31, 2004, the total number of DSL lines increased 41.7%, which resulted in
revenue from DSL service increasing $0.4 million. This increase is partially offset by
decreases in dial-up and high-speed revenue of $0.2 million combined. IDS operating expense increased 3.3% to $2.9 million for the three months ended March 31,
2004 compared to the three months ended March 31, 2003, while operating revenue increased
10.0%. As a result, operating margins improved to (3.3%) for the three months ended March
31, 2004 compared to (10.1%) for the three months ended March 31, 2003. This improvement is
primarily due to the growth in DSL accounts. DSL customers increased 41.7% for the three months ended March 31, 2004 to a total of
10,987. This represents a penetration rate of 8.7% of combined Greenfield and ILEC access
lines. Other(in thousands) Three months ended March 31,2004
    
    
    2003(Restated)
    
    
    (Restated)Total operating expense
    
    $
    588
    
    
    $
    1,170Operating income (loss)
    
    $
    (588
    )
    
    $
    (1,170
    )Depreciation
    
    $
    371
    
    
    $
    128Capital expenditures
    
    
    293
    
    
    
    551Total assets
    
    
    66,802
    
    
    
    84,804
 Operating expense for the Companys other business units decreased $0.6 million for the
three months ended March 31, 2004 to $0.6 million. This decrease was related primarily to a
decrease in corporate related expenses attributable to the other operating segments. 29




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##### 



Other Income Other income (expense) for the three months ended March 31, 2004 increased $0.5 million
compared to the three months ended March 31, 2003. This increase relates to a $0.3 million
increase in equity in income of unconsolidated companies and a $0.1 million decrease in
interest expense. The increase in equity income of unconsolidated companies relates to the
Companys investment in Palmetto MobileNet, L.P. Interest expense decreased due primarily
to lower debt levels in 2004. Liquidity and Capital Resources Cash provided by operating activities decreased $0.6 million to $9.4 million for the three
months ended March 31, 2004. The decrease primarily related to decreases in accrued
liabilities, partially offset by an increase in deferred income taxes and net income. Cash used in investing activities decreased to $3.9 million during the three months ended
March 31, 2004 compared with $5.0 million for the three months ended March 31, 2003.
Capital expenditures decreased $2.2 million during the three months ended March 31, 2004
compared with the three months ended March 31, 2003. Net cash used in financing activities was $3.7 million during the three months ended March
31, 2004 compared with $1.2 million during the three months ended March 31, 2003. During
the three months ended March 31, 2004, the Company repaid $2.5 million in long-term debt. At March 31, 2004, the fair market value of the Companys marketable investment securities
was $7.0 million, all of which could be pledged to secure additional borrowing, or sold, if
needed for liquidity purposes. The Company has a $90.0 million revolving five year line of
credit with interest at three month LIBOR plus a spread based on various financial ratios,
that is currently 1.25%. The interest rate on March 31, 2004 was 2.44%. The credit
facility provides for quarterly payments of interest until maturity on March 31, 2006. As
of March 31, 2004, $27.5 million was outstanding under the revolving credit facility. The
Company also has a 7.32% fixed rate $50.0 million term loan that matures on December 31,
2014. All $50.0 million was outstanding as of March 31, 2004. The term loan requires
quarterly payments of interest until maturity on December 31, 2014. Payments of principal
are due beginning on March 31, 2005 and quarterly thereafter through December 31, 2014 in
equal quarterly amounts of $1.25 million. The Company also has an additional line of credit
for $10.0 million at one month LIBOR plus 1.25%. As of March 31, 2004, the Company had no
amounts outstanding under this credit line. The following table discloses aggregate information about our contractual obligations and
the periods in which payments are due (in thousands): Payments due by yearLess than
    
    
    
    
    
    
    
    
    
    
    After 5Total
    
    
    one year
    
    
    1-3 years
    
    
    4 -5 years
    
    
    yearsContractual obligations:Line of credit
    
    $
    27,500
    
    
    $
    
    
    
    $
    27,500
    
    
    $
    
    
    
    $
    Term loan
    
    
    50,000
    
    
    
    1,250
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    23,750Operating leases (Restated)
    
    
    15,058
    
    
    
    3,340
    
    
    
    6,521
    
    
    
    2,830
    
    
    
    2,367Capital leases

    
    
    1,702
    
    
    
    552
    
    
    
    1,150
    
    
    
    
    
    
    
    $
    94,260
    
    
    $
    5,142
    
    
    $
    50,171
    
    
    $
    12,830
    
    
    $
    26,117
 The Company anticipates that it has adequate resources to meet its currently foreseeable
obligations and capital requirements associated with continued growth in the CLEC,
Greenfield, Digital Wireless and IDS units, as well as its operations, payments associated
with long-term debt and investments as summarized above. 30




---



##### 



Cautionary Note Regarding Forward-Looking Statements The foregoing discussion contains forward-looking statements, as defined in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), that are based on the beliefs of management, as well as
assumptions made by, and information currently available to, management. Management has
based these forward-looking statements on its current expectations and projections about
future events and trends affecting the financial condition and operations of the Companys
business. These forward-looking statements are subject to certain risks, uncertainties and
assumptions about us that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that may cause actual results to differ materially from these forward-looking
statements include:  
    our ability to respond effectively to the issues surrounding the telecommunications
industry caused by state and federal legislation and regulations,
    the impact of economic conditions related to the financial performance of customers,
business partners, competitors and peers within the telecommunications industry,
    our ability to recover the substantial costs incurred over the past few years in
connection with our expansion into new businesses,
    our ability to attract and retain key personnel,
    our ability to retain our existing customer base against wireless competition and
cable telephony in all areas of the business including local and long distance and
internet and data services,
    our ability to control pricing and product offerings in a highly competitive industry,
    the performance of our investments,
    our ability to effectively manage rapid changes in technology and control capital
expenditures related to those technologies, and
    the impact of economic and political events on the Companys business, operating
regions and customers, including terrorist attacks. In some cases, these forward-looking statements can be identified by the use of words such
as may, will, should, expect, intend, plan, anticipate, believe, estimate,
predict, project or potential or the negative of these words or other comparable
words. In making forward-looking statements, the Company claims the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995. The Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Readers are
also directed to consider the risks, uncertainties and other factors discussed in documents
filed by us with the SEC, including those matters summarized under the caption Risk
Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
All forward-looking statements should be viewed with caution. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company has a $90.0 million revolving five year line of credit with interest at three
month LIBOR plus a spread based on various financial ratios, that is currently 1.25%. The
interest rate on March 31, 2004 was 2.44%. The credit facility provides for quarterly
payments of interest until maturity on March 31, 2006. As of March 31, 2004, $27.5 million
was outstanding under the revolving credit facility. The Company also has a 7.32% fixed
rate $50.0 million term loan that matures on December 31, 2014. All $50.0 million was
outstanding as of March 31, 2004. In addition, the Company has another line of credit for
$10.0 million at one month LIBOR plus 1.25%. As of March 31, 2004, the Company had no
amounts outstanding under this credit line. The Company has two interest rate swap agreements to fix $5.0 million and $5.0 million of
the amounts outstanding under the $90.0 million revolving line of credit at rates of 3.81%
and 4.53%, respectively. The fair value of the swap agreements as of March 31, 2004 and
December 31, 2003 was $(0.4) million and 31




---



##### 



$(0.5) million, respectively and are recorded in other long-term liabilities. The interest
rate swaps are intended to protect the Company against an upward movement in interest rates
but subject the Company to above market interest costs if interest rates decline. The swaps
mature on November 3, 2004 and November 3, 2006, respectively. Management believes that reasonably foreseeable movements in interest rates will not have a
material adverse effect on the Companys financial condition or operations. Item 4. Controls and Procedures.  (a) Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed by the Company in the reports it files under the
Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that such information is accumulated and
communicated to management, including the Companys Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. As a result, management
was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. At the time the Companys original Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004 was prepared and filed, the Companys management, under the supervision
and with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, carried out an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of March 31, 2004. Based upon that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer originally
concluded that the Companys disclosure controls and procedures were effective as of March
31, 2004 in timely alerting them to material information relating to the Company, including
its consolidated subsidiaries, required to be included in the Companys Exchange Act
reports. In conjunction with the Companys decision to restate its financial statements for the
period ended March 31, 2004 (as further described in Note 4 of the Notes to Condensed
Consolidated Financial Statements), the Company identified the below-described material
weaknesses in its internal control over financial reporting. As a result of such findings,
our Chief Executive Officer and Chief Financial Officer re-evaluated the Companys
disclosure controls and procedures and concluded those disclosure controls and procedures
were not effective as of March 31, 2004 because of the material weaknesses in our internal
controls over financial reporting as described below. (b) Internal Control Over Financial Reporting Beginning with the year ended December 31, 2004, Section 404 of the Sarbanes-Oxley Act of
2002 requires us to provide an annual internal controls report of management. This report
must contain (i) a statement of managements responsibility for establishing and maintaining
adequate internal controls over financial reporting for the Company, (ii) a statement
identifying the framework used by management to conduct the required evaluation of the
effectiveness of the Companys internal control over financial reporting, (iii) managements
assessment of the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, and (iv) a statement that the Companys registered public
accounting firm has issued an attestation report on managements assessment of our internal
controls over financial reporting. Section 404 of the Sarbanes-Oxley Act of 2002 also
requires that the Companys registered public accounting firm attest to and report on
managements assessment of the Companys internal controls over financial reporting. In accordance with the SECs November 30, 2004, Order Under Section 36 of the Securities
Exchange Act of 1934 Granting an Exemption from Specified Provisions of Exchange Act Rules
13a-1 and 15d-1 (Release No. 34-50754), which granted an extension to certain accelerated
filers with a public equity float of less than $700 million, the Company did not file in its
original Annual Report on Form 10-K for the year ended 32




---



##### 



December 31, 2004 managements annual report on the Companys internal control over
financial reporting required by Item 308(a) of Regulation S-K and the related attestation
report of our registered public accounting firm required by Item 308(b) of Regulation S-K.
The Company expects to file these reports in an amendment to such Annual Report on Form 10-K
to be filed on or before May 2, 2005. In 2004, the Company undertook efforts to support managements evaluation of the Companys
internal control over financial reporting as of December 31, 2004. Although the Company has
not yet completed its evaluation, the following material weaknesses (as defined by the
Public Company Accounting Oversight Boards Auditing Standard No. 2) in internal control
over financial reporting as of December 31, 2004 have been identified:  
    The Company identified a deficiency related to accounting for its phone system
sales. The deficiency resulted from the lack of a subsidiary ledger for phone
system sales, which prevented the Companys finance personnel from performing, on a
timely basis, the reconciliation of accounts receivable for phone system sales to
detail records. This deficiency resulted in an adjustment to correct an
overstatement of accounts receivable and revenue for phone system sales.
    The Company identified a deficiency related to calculating depreciation expense.
The deficiency resulted from a lack of controls over the preparation and review of
electronic spreadsheets designed to ensure depreciation expense is accurately
calculated. This deficiency resulted in an adjustment to correct an overstatement
of depreciation expense.
    The Company identified a deficiency related to accounting for derivative
financial instruments under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133).
The deficiency resulted from a lack of controls designed to ensure that the
documentation required by generally accepted accounting principles at the inception
of a derivative transaction is properly maintained for the term of the respective
derivative instrument. This deficiency resulted in adjustments that were required
to properly reflect changes in the estimated fair value of certain derivative
financial instruments as a component of earnings in the period of change in
estimated fair value. The errors caused by these deficiencies resulted in a restatement of the Companys
consolidated financial statements included in this Quarterly Report on Form 10-Q/A. Although the Company has not completed its evaluation of internal control over financial
reporting, the Company expects to conclude it did not, as of December 31, 2004, maintain
effective internal control over financial reporting. Furthermore, management expects that
its independent registered public accounting firm will conclude that the Companys internal
control over financial reporting was not effective as of December 31, 2004. There can be no
assurance that, as a result of the Companys ongoing evaluation of internal control over
financial reporting, additional material weaknesses or significant deficiencies will not be
identified or that any deficiencies identified, either alone or in combination with others,
will not be considered additional material weaknesses. (c) Changes in Internal Control Over Financial Reporting During the fiscal quarter ended March 31, 2004, there were no changes in the Companys
internal control over financial reporting that materially affected, or that are reasonably
likely to materially affect, the Companys internal control over financial reporting. The Company disclosed in its Annual Report on Form 10-K for the year-ended December 31,
2004, that, in response to the material weaknesses noted above, the Company initiated the
following corrective actions to remediate the material weaknesses described above:  
    The Company is in the process of implementing additional policies and
procedures associated with the Companys accounting for phone system sales,
including the utilization of a subledger that provides details of accounts
receivable associated with such arrangements. The Company believes 33




---



##### 



that these changes will provide adequate controls in periods after December 31, 2004
over the reporting of accounts receivable and revenue for phone system sales.
    The Company completed the installation of a new fixed asset reporting
system in the fourth quarter of 2004 and, as of January 1, 2005, implemented this
new system to track and report fixed assets and accumulated depreciation, and to
calculate depreciation expense. The Company believes its new policies and
procedures relating to fixed assets will provide adequate controls over the
reporting of fixed assets, accumulated depreciation and depreciation expense in
periods after December 31, 2004.
    The Company is in the process of implementing additional policies and
procedures to ensure proper accounting for its derivative financial instruments
under SFAS No. 133, including controls over the maintenance of documentation
required at each reporting period. PART II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None 34




---



##### 



Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No.
    
    Description of Exhibit10*
    
    CT Communications, Inc. Amended and Restated 2001 Stock Incentive Plan11
    
    Computation of Earnings Per Share.31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. 1350.
   *
    
    Previously filed. (b) Reports on Form 8-K On February 13, 2004, the Company filed a Current Report on Form 8-K announcing that
on February 13, 2004, the Company declared a quarterly cash dividend on its common
stock of $0.065 per share to all shareholders of record at the close of business on
March 1, 2004. On February 25, 2004, the Company filed a Current Report on Form 8-K announcing the
Companys consolidated financial results for the fourth quarter and year-end 2003. 35




---



##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CT COMMUNICATIONS, INC.(Registrant)/s/ Ronald A. MarinoRonald A. Marino
Vice President Finance and
Chief Accounting OfficerApril 27, 2005Date
 (The above signatory has dual responsibility as a duly authorized officer and chief
accounting officer of the Registrant.) 36




---



##### 



EXHIBIT INDEX Exhibit No.
    
    Description of Exhibit10*
    
    CT Communications, Inc.
Amended and Restated 2001 Stock Incentive Plan11
    
    Computation of Earnings Per
Share.31.1
    
    Certification of Chief
Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.31.2
    
    Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.32
    
    Certification of Chief
Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(b) under the Securities Exchange Act of 1934
and 18 U.S.C. 1350.
   *
    
    Previously filed. 37