UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to        

Commission file number 0-19179

CT COMMUNICATIONS, INC.

(704) 722-2500
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     18,879,041 shares of Common Stock outstanding as of October 28, 2004.

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX

1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements (unaudited).

2

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements (unaudited).

3

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements (unaudited).

4

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements (unaudited).

5

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.

In the opinion of management of CT Communications, Inc. (the “Company”), the accompanying unaudited financial statements contain all adjustments consisting of only normal recurring accruals necessary to present fairly the Company’s financial position as of September 30, 2004 and December 31, 2003, the results of its operations for the three and nine months ended September 30, 2004 and September 30, 2003 and its cash flows for the nine months ended September 30, 2004 and September 30, 2003. These unaudited financial statements do not include all disclosures associated with the Company’s annual financial statements and should be read along with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

2.

In certain instances, amounts previously reported in the 2003 consolidated financial statements have been reclassified to conform to the presentation of the 2004 consolidated financial statements. Such reclassifications have no effect on net income or retained earnings as previously reported.

3.

The results of operations for the nine months ended September 30, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.

4.

PROPERTY AND EQUIPMENT

Property and equipment is composed of the following (in thousands):

5.

DISCONTINUED OPERATIONS

On December 9, 2002, the Company discontinued its wireless broadband commercial trial operations in Fayetteville, North Carolina. These operations were provided by Wavetel, L.L.C. (“Wavetel”), a subsidiary of the Company. The Company ceased Wavetel’s operations due to significant operating losses, the limited coverage area provided by the technology available at the time and the inability to obtain outside investment. Complete disposal of the business through sale and disposal of assets was completed by June 30, 2003. As a result, Wavetel’s operations have been reflected as discontinued operations and as assets and liabilities held for sale in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In the second quarter of 2003, the Company re-evaluated the potential future liabilities related to the discontinued Wavetel operations and determined that the potential liabilities exceeded the remaining restructuring reserve. Therefore, the Company recorded an additional loss from discontinued operations, before income taxes, of $0.7 million in the second quarter of 2003. The additional loss relates to the Company’s inability to sublease certain facilities that were previously used in Wavetel’s operations. The adjustment is an estimate based on the current market condition and could be revised on a quarterly basis as new information becomes available. As of September 30, 2004, the Company believes that the reserve is adequate. The Company had no outstanding indebtedness directly related to the Wavetel operations; therefore, no interest expense was allocated to discontinued operations.

In connection with the discontinuance of operations, the Company recognized a loss of $4.4 million in 2002 to write down the related carrying amounts of assets to their fair values less cost to sell in accordance with SFAS No. 144 and recorded related liabilities for estimated severance costs, lease termination costs and other exit costs in accordance with Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring).” The liabilities of the discontinued operations at September 30, 2004 and December 31, 2003 consist of the following (in thousands):

6

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A summary of restructuring liability activity related to the discontinued operations for the nine months ended September 30, 2004 is as follows (in thousands):

6.

COMMON STOCK

The following is a summary of Common Stock transactions during the nine months ended September 30, 2004 (in thousands):

Outstanding options to purchase approximately 543,000 and 490,000 shares of Common Stock for the three and nine months ended September 30, 2004 and approximately 582,000 shares of Common Stock for the three and nine months ended September 30, 2003 were not included in the computation of diluted earnings per share and diluted weighted shares outstanding because the exercise price of these options was greater than the average market price of the Common Stock during the respective periods. At September 30, 2004 and September 30, 2003, the Company had total options outstanding of 1,325,000 and 849,000, respectively.

On April 22, 2004, the Board of Directors approved the continuation of the Company’s existing stock repurchase program. Under this program, the Company is authorized, subject to certain conditions, to repurchase up to 1,000,000 shares of its outstanding Common Stock during the twelve-month period from April 28, 2004 to April 27, 2005. There were no shares repurchased by the Company during the nine months ended September 30, 2004.

7

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7.

INVESTMENT SECURITIES

The amortized cost, gross unrealized holding gains and losses and fair value for the Company’s investments at September 30, 2004 and December 31, 2003 were as follows (in thousands):

The Company holds an investment in shares of convertible, redeemable preferred stock. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, this investment was reclassified as of September 30, 2004, as a held-to-maturity debt security. The preferred stock is subject to mandatory redemption in cash ten years after the issuance date, which was October 29, 2002. The shares may be converted into common stock at the option of the investee beginning three years after the issuance date. The investment is carried at the Company’s cost basis, as there is no readily determinable fair value for this security.

During the third quarter of 2004, the Company revised the classification of certain investments that were historically classified as investment securities. These investments will be accounted for under the cost method as there is no readily determinable market value. As a result of the change, $0.2 million of investment securities were reclassified as investments in unconsolidated companies on the Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004. This change did not affect gross unrealized holding gains or losses and had no impact on the Condensed Consolidated Statements of Income.

During the third quarter of 2004, the Company recognized an impairment loss of $1.2 million on an equity security investment due to a decline in fair value of the equity security that, in the opinion of management, was considered to be other than temporary. This impairment loss is included in the caption “Impairment of investments” on the Condensed Consolidated Statements of Income.

8

CT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Certain investments of the Company are and have been in continuous unrealized loss positions. The gross unrealized losses and fair value and length of time the securities have been in the continuous unrealized loss position at September 30, 2004 is as follows (in thousands):

The fair value and unrealized losses noted above that are greater than 12 months relate to three different investments, the largest of which is a mutual fund investment that is expected to recover as the economy improves and has been increasing in value. The Company will continue to evaluate these investments on a quarterly basis to determine if the unrealized loss is other-than-temporarily impaired at which time the impairment loss would be realized.

8.

OTHER INVESTMENTS

Other investments consist primarily of the Company’s investment in CoBank, ACB (“CoBank”). The Company receives patronage dividends from its investment in CoBank which is organized as a cooperative for federal income tax purposes. Patronage dividends represent cash distributions of CoBank’s earnings and notices of allocations of CoBank’s earnings to the Company. Non-cash allocations of earnings are included in the Company’s carrying value of the investment and are recognized as other income in the period earned.

During the third quarter of 2004, the Company revised the classification of one investment previously classified as an other investment. This investment was reclassified as an investment in unconsolidated companies and will be accounted for under the cost method, as there is no readily determinable market value. As a result of this change, $0.3 million of other investments were reclassified to investments in unconsolidated companies on the Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004. This change had no impact on the Condensed Consolidated Statements of Income.

9.

INVESTMENTS IN UNCONSOLIDATED COMPANIES

Investments in unconsolidated companies consist of the following (in thousands):