SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1837282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Progress Place NE
P.O. Box 227, Concord, NC 28026-0227
(Address of principal executive offices) (Zip Code)
(704)722-2500
(Registrant's telephone number, including area code)
68 Cabarrus Avenue, East
Concord, NC 28025
(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 [ ]
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.
18,773,951 shares of Common Stock outstanding as of April 30, 2002.
CT COMMUNICATIONS, INC.
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--
March 31, 2002 and December 31, 2001 2
Consolidated Statements of Income--
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 2002 and 2001 5
Consolidated Statements of Comprehensive Income (Loss)--
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
1
PART I. Item 1. FINANCIAL INFORMATION
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2002 2001
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,670,129 $ 8,396,860
Accounts receivable, net of
allowance for doubtful
accounts of $519,732 and $744,682 21,771,315 21,102,252
Other accounts receivable 808,491 439,022
Materials and supplies 4,636,110 4,519,718
Income tax receivable 1,339,683 2,442,720
Deferred income taxes 293,103 293,103
Prepaid expenses and other assets 1,566,637 1,916,800
------------- -------------
Total current assets 36,085,468 39,110,475
------------- -------------
Investment securities 8,396,816 14,046,861
Other investments 184,363 184,363
Investments in unconsolidated companies 22,394,969 22,308,152
Property and equipment:
Land, buildings, and general equipment 81,941,417 55,493,878
Central office equipment 136,474,445 132,700,260
Poles, wires, cables and conduit 123,761,359 121,138,173
Construction in progress 6,112,183 26,812,559
------------- -------------
348,289,404 336,144,870
Less accumulated depreciation (143,677,215) (137,457,941)
------------- -------------
Net property and equipment 204,612,189 198,686,929
Intangible and other assets, net 33,107,338 33,232,416
------------- -------------
TOTAL ASSETS $ 304,781,143 $ 307,569,196
============= =============
See accompanying notes to consolidated financial statements.
2
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
March 31, December 31,
2002 2001
------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Redeemable preferred stock $ 12,500 $ 12,500
Accounts payable 6,953,216 10,233,035
Short-term borrowings 4,500,000 --
Customer deposits and advance billings 2,266,992 2,185,338
Accrued payroll 1,755,547 3,068,221
Accrued pension cost 2,315,919 2,446,730
Other accrued liabilities 2,445,183 2,061,487
------------- -------------
Total current liabilities 20,249,357 20,007,311
------------- -------------
Long-term debt 100,000,000 100,000,000
------------- -------------
Deferred credits and other liabilities:
Deferred income taxes 10,717,022 11,746,554
Investment tax credits 430,819 459,540
Post-retirement benefits other than pension 10,951,762 10,817,927
Other 733,286 896,388
------------- -------------
Total deferred credits and other liabilities: 22,832,889 23,920,409
------------- -------------
Redeemable Preferred Stock:
4.8% series, $100 par value; 5,000
shares authorized; 1,000 shares issued
and outstanding in 2002 and 2001 87,500 87,500
------------- -------------
Total liabilities 143,169,746 144,015,220
------------- -------------
Stockholders' equity:
Preferred Stock not subject to
mandatory redemption:
5% series, $100 par value; 3,356
shares outstanding in 2002 and 2001 335,600 335,600
4.5% series, $100 par value; 614
shares outstanding in 2002 and 2001 61,400 61,400
Common Stock
18,761,889 and 18,734,008 shares
outstanding in 2002 and 2001,
respectively 41,138,964 40,846,672
Other capital 298,083 298,083
Unearned compensation (1,208,057) (653,693)
Other accumulated comprehensive income 1,537,172 4,786,104
Retained earnings 119,448,235 117,879,810
------------- -------------
Total stockholders' equity 161,611,397 163,553,976
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 304,781,143 $ 307,569,196
============= =============
See accompanying notes to consolidated financial statements.
3
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Operating revenues $ 35,574,907 $ 31,085,558
Operating expenses 32,512,940 29,709,213
Restructuring charge -- 1,942,076
------------ ------------
Operating income (loss) 3,061,967 (565,731)
------------ ------------
Other income (expenses):
Equity in income of
unconsolidated companies, net 680,030 940,997
Interest, dividend income and gain
on sale of investments 2,943,339 3,128,055
Impairment of investments (533,575) --
Other expenses, principally interest (1,413,086) (1,236,086)
------------ ------------
Total other income 1,676,708 2,832,966
------------ ------------
Income before income taxes 4,738,675 2,267,235
Income taxes 1,942,857 911,486
------------ ------------
Net income 2,795,818 1,355,749
Dividends on Preferred Stock 6,086 6,236
------------ ------------
Earnings for Common Stock $ 2,789,732 $ 1,349,513
============ ============
Basic earnings per common share:
Earnings per common share $ 0.15 $ 0.07
============ ============
Diluted earnings per common share:
Earnings per common share $ 0.15 $ 0.07
============ ============
Basic weighted average shares outstanding 18,759,318 18,857,297
============ ============
Diluted weighted average shares outstanding 18,812,542 18,900,579
============ ============
See accompanying notes to consolidated financial statements.
4
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 2,795,818 $ 1,355,749
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 6,757,949 5,530,724
Postretirement benefits 133,835 47,250
Gain on sales of investment securities (2,850,064) (2,560,405)
Impairment of investments 533,575 --
Undistributed income of unconsolidated
companies (680,030) (940,997)
Deferred income taxes and tax credits 748,972 (28,721)
Changes in operating assets and
liabilities:
Accounts receivable (1,038,532) (635,202)
Materials & supplies (116,392) 73,354
Other assets 350,163 (142,495)
Accounts payable (3,279,819) (404,011)
Customer deposits and advance billings 81,654 116,584
Accrued liabilities (1,077,317) (455,797)
Income taxes receivable 1,103,037 585,007
------------ ------------
Net cash provided by operating activities 3,462,849 2,541,040
------------ ------------
Cash flows from investing activities:
Capital expenditures, net (12,286,043) (17,981,351)
Purchase of investments in unconsolidated companies (500,000) --
Purchase of investment securities (716,305) (943,018)
Proceeds from sale of investment securities 3,563,580 2,840,794
Capital distribution from unconsolidated companies 993,213 --
Purchase of wireless spectrum -- (2,397,840)
------------ ------------
Net cash used in investing activities (8,945,555) (18,481,415)
------------ ------------
Cash flows from financing activities:
Proceeds from credit facility 4,500,000 15,000,000
Dividends paid (1,227,393) (1,226,563)
Repurchase of Common Stock (618,313) (9,879)
Proceeds from Common Stock issuances 101,681 --
------------ ------------
Net cash provided by financing activities 2,755,975 13,763,558
------------ ------------
Net decrease in cash and cash equivalents (2,726,731) (2,176,817)
Cash and cash equivalents - beginning of period 8,396,860 8,060,015
------------ ------------
Cash and cash equivalents - end of period $ 5,670,129 $ 5,883,198
============ ============
See accompanying notes to consolidated financial statements.
5
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended
March 31,
---------------------------------
2002 2001
---- ----
Net income $ 2,795,818 $1,355,749
Other comprehensive income, net of tax:
Unrealized holding losses
on available-for-sale securities (1,578,948) (650,688)
Unrealized holding gains on
interest rate swaps 158,047 --
Less reclassification adjustment
for gains realized in net income (1,828,031) (1,642,244)
---------------------------------
Comprehensive loss $ (453,114) $ (937,183)
=================================
See accompanying notes to consolidated financial statements.
6
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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, 2002
and 2001, and the results of its operations and cash flows for the
three months then ended. These unaudited financial statements should be
read along with the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 and do not include all disclosures associated
with the Company's annual financial statements.
2. In certain instances, amounts previously reported in the 2001
consolidated financial statements have been reclassified to conform
with the 2002 consolidated financial statements presentation. 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, 2002 and
2001 are not necessarily indicative of the results to be expected for
the full year.
4. The following is a summary of common stock transactions during the
three months ended March 31, 2002.
Shares Value
------ -----
Outstanding at December 31, 2001 18,734,008 $ 40,846,672
Purchase of Common Stock (55,051) (970,448)
Issuance of Common Stock 82,932 1,262,740
---------- ------------
Outstanding at March 31, 2002 18,761,889 $ 41,138,964
========== ============
Basic Diluted
----- -------
Weighted average shares outstanding for
the three months ended March 31, 2002 18,759,318 18,812,542
Weighted average shares outstanding for
the three months ended March 31, 2001 18,857,297 18,900,579
The Company began a stock repurchase program in March 2001 to
repurchase up to 1,000,000 shares of its outstanding common stock
periodically through March 2002. As of March 31, 2002, 202,450 shares
had been repurchased at a cost of approximately $3.0 million. In April
2002, the Board of Directors approved the continuation of the stock
repurchase program through March 2003 allowing repurchase of up to
797,550 shares over the next twelve months.
5. SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for the Company's investments by major
security type and class of security at March 31, 2002 and December 31,
2001 were as follows:
March 31, 2002
--------------
Securities Amortized Gross Unrealized Gross Unrealized Fair
Available-for-Sale Cost Holding Gains Holding Losses Value
- ------------------ ---- ------------- -------------- -----
Equity securities $ 5,753,818 $ 3,016,106 $ (373,108) $ 8,396,816
=========== ============ ============ ===========
7
December 31, 2001
-----------------
Securities Amortized Gross Unrealized Gross Unrealized Fair
Available-for-Sale Cost Holding Gains Holding Losses Value
- ------------------ ---- ------------- -------------- -----
Equity securities $ 6,184,604 $ 8,236,285 $ (374,028) $14,046,861
=========== ============ ============ ===========
During the three months ended March 31, 2002, the Company sold 102,000 shares of
VeriSign, Inc. ("VeriSign") common stock and 222,182 shares of ITC-DeltaCom,
Inc. ("ITC-DeltaCom"). As of March 31, 2002, the Company owned over 116,000
shares of VeriSign common stock with a market value of approximately $3.1
million and 600,000 shares of ITC-DeltaCom common stock with a market value of
approximately $0.2 million. During the three months ended March 31, 2002, the
Company wrote down $0.5 million in impaired investment securities, including
$0.3 million related to ITC-DeltaCom.
6. INVESTMENTS IN UNCONSOLIDATED COMPANIES
March 31, 2002 December 31, 2001
-------------- -----------------
Equity Method:
Palmetto MobileNet, L.P. $ 9,515,726 $ 9,808,915
Wireless One of North Carolina, L.L.C 8,721,151 8,762,090
Other 133,364 112,418
Cost Method:
ITC Holding Company 2,215,534 2,215,534
Maxcom Telecomunicaciones, S.A. de C.V 1,238,476 1,238,476
Other 570,718 170,719
----------- -----------
TOTAL $22,394,969 $22,308,152
=========== ===========
On September 14, 2001, the Company's wholly owned subsidiary, CT Wireless Cable,
Inc. ("CTWC"), and Wireless One of North Carolina, L.L.C. ("WONC"), entered into
a Limited Liability Company Interest Purchase Agreement with Wireless One, Inc.
and Worldcom Broadband Solutions, Inc. pursuant to which WONC will purchase from
Wireless One, Inc. its entire 50% interest in WONC. As a result of the purchase,
including all payments discussed below, CTWC will own more than 99% of the
equity interest in WONC. The FCC approved this transaction on March 28, 2002 and
the transaction was closed on April 5, 2002.
The total purchase price for Wireless One, Inc.'s interest in WONC was
approximately $20.7 million, $3 million of which was paid in cash at the closing
and the remainder was paid in the form of an interest bearing promissory note of
WONC. The promissory note is payable over the ten year period following the
closing, with a $7 million payment due in one year (which payment may be
deferred for up to an additional two years) and the remainder payable in equal
annual installments beginning after six years. In the event the $7 million
payment is not made when due, either CTWC or Wireless One, Inc. may cause WONC
to transfer certain of its licensed frequencies to Wireless One, Inc. in payment
of the outstanding principal amount of the promissory note. The promissory note
is secured by a pledge of WONC's channel rights.
8
7. RESTRUCTURING LIABILITY
In 2001, the Company recorded restructuring charges of $1,942,076 in connection
with an early retirement plan and the closing of competitive local exchange
carrier operations in Raleigh, North Carolina. The related liabilities are
included in other accrued liabilities and accrued pension cost in the
accompanying consolidated balance sheets and were established to accrue for
estimated retirement and severance costs related to 17 employees primarily
within the network department, lease termination costs, Raleigh transport costs
and other costs associated with the restructuring action. The remaining
liability at March 31, 2002 relates primarily to pension obligations and the
remaining Raleigh lease liability. A summary of restructuring liability activity
for the three months ended March 31, 2002 is as follows:
Balance at December 31, 2001 $ 1,210,181
Raleigh lease payments (31,970)
-------------
Balance at March 31, 2002 $ 1,178,211
=============
In November 2001, the Company recorded restructuring charges of $1,521,511 in
connection with stopping the expansion of the operations of the Company's
WaveTel, LLC ("WaveTel") subsidiary into the Raleigh, Durham, and Charlotte,
North Carolina markets. The related liabilities are included in other accrued
liabilities in the accompanying consolidated balance sheets and were established
to accrue for remaining severance costs related to ten WaveTel employees, cell
site lease termination costs, design and engineering costs, and other costs
associated with the restructuring action. A summary of restructuring liability
activity related to the WaveTel restructuring for the three months ended March
31, 2002 is as follows:
Balance at December 31, 2001 $ 222,509
Severance costs (7,509)
Cell-site lease termination costs (26,250)
-------------
Balance at March 31, 2002 $ 188,750
=============
8. LONG-TERM DEBT
Long-term debt consists of the following:
The Company has a $90.0 million revolving five year line of credit with interest
at LIBOR plus a spread based on various financial ratios, currently 1.25%. The
interest rate on March 31, 2002 was 3.28%. The credit facility provides for
quarterly payments of interest until maturity on March 31, 2006. As of March 31,
2002, $50.0 million was outstanding under the revolving credit agreement. 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, 2002.
The Company has three interest rate swap transactions to fix $10.0 million, $5.0
million, and $5.0 million of the outstanding revolving line of credit at rates
of 5.9%, 4.53%, and 3.81%, respectively, plus a spread of 1.25%. The fair value
of each of the swaps as of March 31, 2002 was ($467,024), $133,814, and $72,040,
respectively. The Company also has an additional line of credit for $10.0
million. As of March 31, 2002, the Company had $4.5 million outstanding under
this credit line at an interest rate of 3.13%.
9. PARTITIONING
The Company effected the partitioning of its portion of the Cingular DCS Network
on June 1, 2001. As a result, the Company acquired 47 cell sites, approximately
13,000 additional subscribers and a license for spectrum for Cabarrus, Rowan and
Stanly Counties in North Carolina and the southern portion of Iredell County,
North Carolina. This
9
partitioned area contains a population of approximately 440,000 people. This
transaction has been accounted for under the purchase method of accounting. The
total purchase price was $23.2 million. The Company paid $19.3 million in June
2001 and $3.9 million in September 2001. Allocation of the transaction is
summarized below:
Property and equipment $ 4,635,875
Intangible and other assets 18,724,559
Liabilities (150,000)
---------------
Total purchase price $ 23,210,434
===============
While the Company has ownership of the assets and customer accounts within its
partitioned area, the Company will continue to purchase pre-defined services
from the Cingular DCS Partnership, such as switching, and will remain subject to
certain conditions including certain branding requirements, offering partnership
service plans and adherence to partnership technical and customer care
standards.
10. GOODWILL
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("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 $10.3 million as
of March 31, 2002, and was unchanged for the quarter then ended. The following
table presents net income on a comparable basis, after adjustment for goodwill
amortization:
Three Months Ended March 31,
2002 2001
---- ----
Net income:
As reported $ 2,795,818 $ 1,355,749
Goodwill amortization (net of tax) -- 225,425
------------ ------------
Adjusted net income $ 2,795,818 $ 1,581,174
============ ============
Basic earnings per share:
As reported $ 0.15 $ 0.07
============ ============
As adjusted $ 0.15 $ 0.08
============ ============
Diluted earnings per share:
As reported $ 0.15 $ 0.07
============ ============
As adjusted $ 0.15 $ 0.08
============ ============
11. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Company adopted SFAS No. 141, "Business Combinations." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also specifies
the criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
10
SFAS No. 141 required the Company to evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and to make
any necessary reclassifications in order to conform with the new criteria in
SFAS No. 141 for recognition apart from goodwill. SFAS No. 142 required the
Company to reassess the useful lives and residual values of all intangible
assets acquired in purchase business combinations, and to make any necessary
amortization period adjustments. In addition, for those intangible assets the
Company identified as having an indefinite useful life, the Company tested the
intangible asset for impairment in accordance with the provisions of SFAS No.
142 during the period ending March 31, 2002.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. Adoption of
SFAS No. 144 did not have a material effect on the Company's financial position,
results of operations or cash flows.
The Financial Accounting Standards Board issued SFAS No. 143, "Accounting For
Asset Retirement Obligations," which is effective January 1, 2003. This
statement requires, among other things, the accounting and reporting of legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The Company has not yet determined the impact of the adoption of this
standard on its financial position, results of operations and cash flows.
Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires the recognition of all derivative financial instruments as either
assets or liabilities in the statement of financial condition and measurement of
those instruments at fair value. Changes in the fair value of those derivatives
will be reported in earnings or other comprehensive income depending on the use
of the derivative and whether it qualifies for hedge accounting. We have
identified the interest rate swap agreements as our only derivative instruments.
12. SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Effective January 1,
2002, the Company stopped managing results of the long distance services unit as
a separate business unit and began reporting long distance as a product offering
within the remaining business segments. Results for previous quarters have been
restated for comparability. As a result of the reorganization of internal
reporting, the Company has defined and reports five segments as follows: the
incumbent local exchange carrier ("ILEC") which provides local telephone
service, the digital wireless group ("DCS") 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 segment ("Greenfield") which provides
telecommunications services to new mixed-use developments outside the ILEC's
operating area, and the internet service provider ("ISP") which provides dial-up
and high-speed internet access, web design, web hosting and other data related
services. 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, 2001. The Company evaluates
performance based on operating profit before other income/(expenses) and income
taxes. Intersegment revenues and expenses are excluded for purposes of
calculating operating earnings before interest, taxes, depreciation, and
amortization ("Operating EBITDA") and segment operating profit/(loss). Selected
data by business segment for the three months ended March 31, 2002 and 2001, is
as follows:
11
Three Months ended March 31, 2002
ILEC DCS CLEC Greenfield ISP OTHER TOTAL
---- --- ---- ---------- --- ----- -----
External revenues $ 23,195,060 5,754,997 3,447,133 799,881 2,342,633 35,203 35,574,907
Intersegment revenues 1,617,610 23,800 210,113 2,693 304 420,360 2,274,880
External expenses 10,916,435 4,677,290 4,516,682 1,639,822 2,717,072 1,287,689 25,754,991
Intersegment expenses 1,145,602 63,854 241,034 28,138 789,802 6,451 2,274,880
Operating EBITDA 12,278,625 1,077,706 (1,069,549) (839,941) (374,439) (1,252,486) 9,819,916
Depreciation and amortization 4,918,461 199,633 515,343 419,537 443,485 261,490 6,757,949
-----------------------------------------------------------------------------------------------
Segment operating profit (loss) 7,360,164 878,073 (1,584,892) (1,259,478) (817,924) (1,513,976) 3,061,967
-----------------------------------------------------------------------------------------------
Segment Assets 178,722,540 28,308,245 16,388,691 16,004,636 15,394,940 49,962,091 304,781,143
Three Months ended March 31, 2001
ILEC DCS CLEC Greenfield ISP OTHER TOTAL
---- --- ---- ---------- --- ----- -----
External revenues $ 24,176,790 2,449,117 1,855,119 291,107 2,313,425 -- 31,085,558
Intersegment revenues 1,650,832 20,274 -- -- -- -- 1,671,106
External expenses 13,569,571 3,232,507 4,406,514 1,120,387 2,144,035 1,647,551 26,120,565
Intersegment expenses 839,774 34,779 103,074 1,949 684,161 7,369 1,671,106
Operating EBITDA 10,607,219 (783,390) (2,551,395) (829,280) 169,390 (1,647,551) 4,964,993
Depreciation and amortization 4,356,031 16,370 444,678 114,698 522,767 76,180 5,530,724
-----------------------------------------------------------------------------------------------
Segment operating profit (loss) 6,251,188 (799,760) (2,996,073) (943,978) (353,377) (1,723,731) (565,731)
-----------------------------------------------------------------------------------------------
Segment Assets 156,295,719 770,376 19,151,528 2,502,730 15,517,889 76,917,694 271,155,936
Reconciliation to Net Income Before Tax
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Segment operating profit $ 3,061,967 $ (565,731)
Total other income 1,676,708 2,832,966
--------------- --------------
Income before income taxes $ 4,738,675 $ 2,267,235
=============== ==============
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Three Months Ended March 31, 2002 and March 31, 2001
- ----------------------------------------------------
Consolidated
------------
Operating revenues increased $4.5 million or 14.4% to $35.6 million for
the three months ended March 31, 2002 when compared to the three months ended
March 31, 2001. The increase in revenues is primarily due to increases in DCS,
CLEC and Greenfield. See the discussions by business unit below for additional
detail and analysis.
Operating expenses, exclusive of depreciation and amortization,
decreased $0.4 million or 1.4% to $25.8 million for the three months ended March
31, 2002 when compared to the three months ended March 31, 2001. Most of this
reduction is a result of the $1.9 million restructuring expense incurred during
the first quarter of 2001 offset by operating expenses associated with increased
access lines in several business units.
Depreciation and amortization expense increased $1.2 million or 22.2%
to $6.8 million for the three months ended March 31, 2002 when compared to the
three months ended March 31, 2001. This increase reflects the significant
increase in depreciable assets over the last 12 months including additions in
DCS from the partitioning of the Cingular DCS partnership, Greenfield from
continued growth and construction of facilities, and certain other business
units including WaveTel's wireless broadband trial market.
Income taxes increased $1.0 million or 113.2% to $1.9 million for the
three months ended March 31, 2002 compared with the three months ended March 31,
2001 due primarily to the increase in taxable income of $2.5 million.
Net income increased $1.4 million or 106.2% to $2.8 million for the
three months ended March 31, 2002 compared to the three months ended March 31,
2001.
ILEC
----
Excluding intersegment revenues, ILEC revenue was $23.2 million for the
three months ended March 31, 2002, a $1.0 million or 4.1% decrease from the
three months ended March 31, 2001. This decrease is primarily due to lower
equipment sales of $0.3 million, lower interstate and intrastate access and toll
revenue of $0.8 million, and a decrease in long distance revenue of $0.6
million. These decreases are partially offset by higher local line revenues. At
March 31, 2002, the total number of local access lines in the ILEC's
three-county service area equaled approximately 123,820. The Company is
currently a party to two interconnection agreements and one resale agreement
that provide other CLECs access to the Company's local telephone service market.
Other CLECs may request interconnection agreements in the future. Additional
interconnection agreements would be expected to provide increased competition to
the ILEC.
Excluding intersegment expenses, ILEC operating expenses were $10.9
million for the three months ended March 31, 2002, which is $2.7 million less
than operating expenses for the three months ended March 31, 2001. $1.2 million
of this decrease is attributable to restructuring charges incurred for an early
retirement plan in the first quarter of 2001. Other specific decreases included
$0.2 million for the cost of materials associated with lower equipment sales,
$0.2 million in lower contracted services, decreased franchise taxes of $0.2
million due to changes in North Carolina tax laws, and a $0.1 million reduction
in marketing expense.
13
Digital Wireless
----------------
DCS revenue was $5.8 million for the three months ended March 31, 2002,
a $3.3 million or 135.0% increase over the three months ended March 31, 2001.
This increase was attributable to monthly recurring revenue due to the addition
of approximately 15,846 subscribers since March 31, 2001, bringing the total
number of post pay subscribers to approximately 31,436. This increase includes
approximately 13,000 subscribers added as a result of the partitioning of the
predefined area of the Cingular Wireless digital network completed in June 2001.
With the increase in customers, the DCS business unit began showing an operating
profit during the last half of 2001. Offsetting some of the revenue increases
were decreases in handset and accessory sales and prepaid card sales.
DCS operating expenses were $4.7 million for the three months ended
March 31, 2002, a $1.4 million or 44.7% increase over the three months ended
March 31, 2001. This increase was primarily due to the increase in DCS
subscribers and the costs associated with customer acquisition. Additionally,
DCS recognized increased employee expenses of $0.2 million from the opening of
two new wireless stores and higher property taxes of $0.1 million attributable
to assets acquired in the partitioning.
CLEC
----
CLEC revenue was $3.4 million for the three months ended March 31,
2002, a $1.6 million or 85.8% increase over the three months ended March 31,
2001. This increase was primarily caused by an increase in local revenues of
$0.9 million and access revenue of $0.6 million based on the addition of 8,837
access lines since March 31, 2001. As of March 31, 2002, CLEC had 22,184 total
lines in service. This increase reflects growth in facilities-based services for
the northern Charlotte, North Carolina market and the Greensboro, North Carolina
region.
CLEC operating expenses were $4.5 million for the three months ended
March 31, 2002, a $0.1 million or 2.5% increase over the three months ended
March 31, 2001. Costs of providing services increased $0.4 million with the
increase in access lines. The increased cost of service was offset by a $0.2
million decrease in marketing expense and $0.7 million decrease as a result of
restructuring charges expensed during the three months ended March 31, 2001.
Greenfield
----------
Greenfield revenue for the three months ended March 31, 2002 was $0.8
million, a $0.5 million or 174.8% increase over the same period in 2001. Revenue
is primarily associated with lines located at Concord Mills Mall in Concord,
North Carolina and at Discover Mills Mall outside Atlanta, Georgia. In total,
3,633 access lines were in service in more than 40 developments as of March 31,
2002. The Greenfield unit has entered into preferred provider agreements with a
total of more than 60 residential and business developments and projects located
primarily in Charlotte and Raleigh, North Carolina as of March 31, 2002.
Revenues from these projects are expected to grow as access lines are placed in
service; however, the Company does not expect to receive significant revenues
from these agreements until late 2002 at the earliest.
Greenfield expenses were $1.6 million for the three months ended March
31, 2002, a $0.5 million or 46.4% increase over the same period last year. These
expenses are associated with the existing 3,633 lines in service, as well as the
growth of the business unit due to continued work on new developer agreements.
Internet and Data Services
--------------------------
ISP revenue was $2.3 million for the three months ended March 31, 2002,
consistent with revenue during the same period last year. Revenues from dial-up
accounts decreased by $0.1 and web development and programming were lower than
last year. DSL revenues have increased $0.2 million. While traditional dial-up
customers have decreased in number by
14
approximately 1,000 during the last 12 months, almost 2,200 DSL subscribers and
dedicated high speed customers have been added since March 31, 2001.
ISP operating expenses were $2.7 million for the three months ended
March 31, 2002, a $0.6 million or 26.7% increase over the same period last year.
The majority of the increase is associated with increased expense and costs of
operating the DSL network due to the increase in DSL customers.
Other Business Units
--------------------
Other operating unit expenses were $1.3 million for the three months
ended March 31, 2002 compared to $1.6 million for the three months ended March
31, 2001. This decrease reflects lower expenses associated with the broadband
wireless trial market operated in Fayetteville, North Carolina by WaveTel.
WaveTel provides broadband data and second-line voice service to its customers.
In November 2001, the Company stopped the expansion of the operations of WaveTel
into the Raleigh, Durham, and Charlotte, North Carolina markets.
Other Income
------------
Other income (expenses) decreased $1.2 million for the three months
ended March 31, 2002 when compared to the three months ended March 31, 2001.
Equity in income of unconsolidated companies decreased $0.3 million due to lower
income from the equity interest in Palmetto MobileNet, L.P. Interest, dividends
and gain on sale of investments reflected $0.2 million lower gains on marketable
security sales during the three months ended March 31, 2002 when compared to the
three months ended March 31, 2001. Interest expense increased $0.2 million as a
result of the Company's increased level of indebtedness. During the three months
ended March 31, 2002, the Company wrote down the carrying value of security
investments by $0.5 million for impairment.
Liquidity and Capital Resources
- -------------------------------
The liquidity of the Company decreased during the three-month period
ended March 31, 2002. Current assets exceeded current liabilities by $15.8
million at March 31, 2002. In comparison, current assets exceeded current
liabilities by $19.1 million at December 31, 2001.
Current assets decreased by $3.0 million when compared to December 31,
2001. This decrease is primarily the result of a decrease in income tax
receivable of $1.1 million and a decrease in cash of $2.7 million offset by an
increase in accounts receivable of $0.7 million due to increases in sales
volume.
Current liabilities increased by $0.2 million from December 31, 2001 to
March 31, 2002. This increase is attributable to increased short-term borrowings
of $4.5 million offset by decreases in accounts payable of $3.3 million caused
by timing of expenditures and accrued payroll of $1.3 million due to payment of
incentive compensation.
The Company's principal sources of liquidity were cash provided by
operations of $3.5 million, proceeds from the sale of investment securities of
$3.6 million, partnership capital distributions of $1.0 million, and proceeds
from short-term credit facilities of $4.5 million.
Uses of cash during the three months ended March 31, 2002 included net
capital expenditures of $12.3 million, purchases of investment securities of
$0.7 million, investments in unconsolidated companies of $0.5 million, payment
of dividends of $1.2 million, and the repurchase of Common Stock of the Company
of $0.6 million. During March 2002, the Company completed construction of its
new corporate headquarters in Concord, North Carolina.
15
At March 31, 2002, the fair market value of the Company's investment
securities was $8.4 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 LIBOR plus a spread
based on various financial ratios, currently 1.25%. The interest rate on March
31, 2002 was 3.28%. The credit facility provides for quarterly payments of
interest until maturity on March 31, 2006. As of March 31, 2002, $50.0 million
was outstanding under the revolving credit agreement. 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, 2002. The Company also has an
additional line of credit for $10.0 million. As of March 31, 2002, the Company
had $4.5 million outstanding under this credit line at an interest rate of
3.13%.
The Company anticipates that all of the capital requirements in 2002
associated with its construction program, operations, payments associated with
long-term debt and investments as summarized above will be provided by cash
flows from operations, existing cash, cash equivalents and short-term
investments, sales of investment securities, and the available lines of credit.
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, 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 are (1) the Company's ability to respond effectively
to the sweeping changes in industry conditions caused by the Telecommunications
Act of 1996, and related state and federal legislation and regulations, (2) the
Company's ability to recover the substantial costs to be incurred in connection
with the implementation of its various new businesses, (3) the Company's ability
to retain its existing customer base against local and long distance service
competition, and to market such services to new customers, (4) the performance
of the Company's investments, (5) the Company's ability to effectively manage
rapid changes in technology, and (6) the Company's ability to effectively
respond to the actions of its competitors.
In some cases, these forward-looking statements can be identified by
the use of words such as "may," "will," "should," "expect," "intend," "plan,"
"anticipate," "believe," "estimate," "predict," "project" or "potential" or the
negative of these words or other comparable words. In making forward-looking
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Readers are also directed to consider the risks,
uncertainties and other factors discussed in documents filed by us with the
Securities and Exchange Commission, including those matters summarized under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. All forward-looking statements should be viewed with
caution.
16
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 LIBOR plus a spread based on various financial ratios, currently
1.25%. The interest rate on March 31, 2002 was 3.28%. The credit facility
provides for quarterly payments of interest until maturity on March 31, 2006. As
of March 31, 2002, $50.0 million was outstanding under the revolving credit
agreement. 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,
2002. The Company also has an additional line of credit for $10.0 million. As of
March 31, 2002, the Company had $4.5 million outstanding under this credit line
at an interest rate of 3.13%.
The Company has three interest rate swap transactions to fix $10.0
million, $5.0 million and $5.0 million of the outstanding revolving line of
credit at rates of 5.9%, 4.53%, and 3.81%, respectively, plus a spread. The fair
value of each of the swaps as of March 31, 2002 were ($467,024), $133,814, and
$72,040, respectively. The interest rate swaps are intended to protect the
Company against an upward movement in interest rates, but subject the Company to
above market interest costs if interest rates decline. Management believes that
reasonably foreseeable movements in interest rates will not have a material
adverse effect on the Company's financial condition or operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
11 Computation of Earnings per Share
17
(b) Reports on Form 8-K
On January 2, 2002 the Company filed a Current Report on Form
8-K announcing that the Company would substantially write-down
its investment in Maxcom Telecommunications, S.A. de C.V. as
of December 31, 2001.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CT COMMUNICATIONS, INC.
- ------------------------------------
(Company)
/s/ Amy M. Justis
- ------------------------------------
Amy M. Justis
Vice President and
Chief Accounting Officer
May 13, 2002
- ------------------------------------
Date
(The above signatory has dual responsibility as a duly authorized officer and
chief accounting officer of the Registrant.)
19
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
11 Computation of Earnings per Share
20