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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 June 30, 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)
(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.
18,671,595 shares of Common Stock outstanding as of July 31, 2002.
CT COMMUNICATIONS, INC.
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--
June 30, 2002 and December 31, 2001 2
Consolidated Statements of Income--
Three and Six Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income--
Three and Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
1
PART I. Item 1. FINANCIAL INFORMATION
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,637,722 $ 8,396,860
Accounts receivable, net of
allowance for doubtful
accounts of $905,000 and $744,682 20,977,207 21,102,252
Other accounts receivable 133,694 439,022
Materials and supplies 4,422,571 4,519,718
Income tax receivable - 2,442,720
Deferred income taxes 293,103 293,103
Prepaid expenses and other assets 1,682,725 1,916,800
------------- -------------
Total current assets 34,147,022 39,110,475
------------- -------------
Investment securities 5,259,106 14,046,861
Other investments 184,363 184,363
Investments in unconsolidated companies 13,694,429 22,308,152
Property and equipment:
Land, buildings, and general equipment 84,940,584 55,493,878
Central office equipment 144,427,104 132,700,260
Poles, wires, cables and conduit 127,939,396 121,138,173
Construction in progress 5,927,709 26,812,559
------------- -------------
363,234,793 336,144,870
Less accumulated depreciation (149,932,126) (137,457,941)
------------- -------------
Net property and equipment 213,302,667 198,686,929
Goodwill, net 9,933,491 9,906,267
Other intangibles, net 52,711,115 22,264,535
Other assets 1,346,344 1,061,614
------------- -------------
TOTAL ASSETS $ 330,578,537 $307,569,196
============= =============
See accompanying notes to consolidated financial statements.
2
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
June 30, December 31,
2002 2001
------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Redeemable preferred stock $ -- $ 12,500
Accounts payable 7,354,304 10,233,035
Short-term borrowings 2,500,000 --
Customer deposits and advance billings 1,856,281 2,185,338
Accrued payroll 2,011,705 3,068,221
Income taxes payable 675,234 --
Accrued pension cost 2,399,296 2,446,730
Other accrued liabilities 3,765,289 2,061,487
------------- -------------
Total current liabilities 20,562,109 20,007,311
------------- -------------
Long-term debt 127,696,562 100,000,000
------------- -------------
Deferred credits and other liabilities:
Deferred income taxes 10,216,540 11,746,554
Investment tax credits 402,098 459,540
Post-retirement benefits other than
pension 10,955,927 10,817,927
Other 1,099,265 896,388
------------- -------------
Total deferred credits and other liabilities: 22,673,830 23,920,409
------------- -------------
Redeemable Preferred Stock:
4.8% series, $100 par value; 5,000
shares authorized; 1,000 shares issued
and outstanding in 2001 -- 87,500
------------- -------------
Total liabilities 170,932,501 144,015,220
------------- -------------
Stockholders' equity:
Preferred Stock not subject to
mandatory redemption:
5% series, $100 par value; 3,356
shares outstanding in 2002 and 200 335,600 335,600
4.5% series, $100 par value; 614
shares outstanding in 2002 and 200 61,400 61,400
Common Stock, 18,669,611 and 18,734,008
shares outstanding in 2002 and 2001,
respectively 39,737,111 40,846,672
Other capital 298,083 298,083
Unearned compensation (1,053,716) (653,693)
Other accumulated comprehensive income (exp (728,465) 4,786,104
Retained earnings 120,996,023 117,879,810
------------- -------------
Total stockholders' equity 159,646,036 163,553,976
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 330,578,537 $ 307,569,196
============= =============
See accompanying notes to consolidated financial statements.
3
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues $ 37,381,194 $ 31,724,387 $ 72,956,101 $ 62,809,945
Operating expenses 33,967,272 30,205,795 66,480,212 59,915,008
Restructuring charge -- -- -- 1,942,076
------------ ------------ ------------ ------------
Operating income 3,413,922 1,518,592 6,475,889 952,861
------------ ------------ ------------ ------------
Other income (expenses):
Equity in income of
unconsolidated companies, net 1,179,950 1,620,561 1,859,980 2,561,558
Interest, dividend income and gain
on sale of investments 1,844,349 4,025,292 4,787,688 7,153,347
Impairment of investments (170,724) -- (704,299) --
Other expenses, principally interest (1,572,102) (858,157) (2,985,188) (2,094,243)
------------ ------------ ------------ ------------
Total other income 1,281,473 4,787,696 2,958,181 7,620,662
------------ ------------ ------------ ------------
Income before income taxes 4,695,395 6,306,288 9,434,070 8,573,523
Income taxes 1,918,004 2,545,476 3,860,861 3,456,962
------------ ------------ ------------ ------------
Net income 2,777,391 3,760,812 5,573,209 5,116,561
Dividends on Preferred Stock 4,195 6,236 10,281 12,472
------------ ------------ ------------ ------------
Earnings for Common Stock $ 2,773,196 3,754,576 $ 5,562,928 5,104,089
============ ============ ============ ============
Basic earnings per common share:
Earnings per common share $ 0.15 $ 0.20 $ 0.30 $ 0.27
============ ============ ============ ============
Diluted earnings per common share:
Earnings per common share $ 0.15 $ 0.20 $ 0.30 $ 0.27
============ ============ ============ ============
Basic weighted average shares outstanding 18,734,756 18,848,149 18,746,997 18,852,698
============ ============ ============ ============
Diluted weighted average shares outstanding 18,774,592 18,889,365 18,790,135 18,895,277
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 5,573,209 $ 5,116,561
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,807,073 11,328,458
Postretirement benefits 138,000 77,488
Gain on sales of investment securities (3,966,574) (6,200,984)
Gain on sales of investment in unconsolidated companies (656,679) --
Impairment of investments 704,299 --
Undistributed income of unconsolidated companies (1,859,980) (2,561,558)
Deferred income taxes and tax credits 1,507,147 (468,442)
Changes in operating assets and
liabilities, net of effects of acquisitions:
Accounts receivable 655,373 (2,616,432)
Income taxes receivable 3,117,954 1,273,381
Materials and supplies 97,147 (329,036)
Other assets (221,132) (768,776)
Accounts payable (3,592,329) (2,020,071)
Customer deposits and advance billings (329,057) (332,060)
Accrued liabilities 555,991 142,958
------------ ------------
Net cash provided by operating activities 15,530,442 2,641,487
------------ ------------
Cash flows from investing activities:
Capital expenditures, net (27,341,068) (36,009,414)
Investment in unconsolidated company (500,000) --
Purchase of investment securities (1,147,932) (1,272,925)
Proceeds from sale of investment securities 4,891,667 6,924,974
Proceeds from sale of investment in unconsolidated companies 818,360 --
Capital distribution from unconsolidated companies 1,986,426 1,986,426
Purchase of wireless spectrum (760,000) (2,397,840)
Acquisitions, net of cash (3,212,503) (19,325,309)
------------ ------------
Net cash used in investing activities (25,265,050) (50,094,088)
------------ ------------
Cash flows from financing activities:
Net proceeds from credit facilities 12,500,000 86,000,000
Repayment of credit facility -- (39,000,000)
Dividends paid (2,456,996) (2,466,463)
Repurchase of Common and Preferred Stock (2,394,787) (1,053,050)
Proceeds from Common Stock issuances 327,253 67,292
------------ ------------
Net cash provided by financing activities 7,975,470 43,547,779
------------ ------------
Net decrease in cash and cash equivalents (1,759,138) (3,904,822)
Cash and cash equivalents - beginning of period 8,396,860 8,060,015
------------ ------------
Cash and cash equivalents - end of period $ 6,637,722 $ 4,155,193
============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of note payable in connection with
acquisition of wireless spectrum $ 17,696,562 $ --
See accompanying notes to consolidated financial statements.
5
CT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 2,777,391 $ 3,760,812 $ 5,573,209 $ 5,116,561
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
on available-for-sale securities (906,897) 2,333,124 (2,485,845) 1,682,436
Unrealized holding losses on
interest rate swaps (221,417) -- (63,370) --
Less reclassification adjustment
for gains realized in net income (1,137,323) (2,335,067) (2,965,354) (3,977,311)
----------- ----------- ----------- -----------
Comprehensive income $ 511,754 $ 3,758,869 $ 58,640 $ 2,821,686
=========== =========== =========== ===========
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 June 30, 2002 and
2001, and the results of its operations and cash flows for the three
and six 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 six months ended June 30, 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 six
months ended June 30, 2002.
Shares Value
---------- -----------
Outstanding at December 31, 2001 ........................................... 18,734,008 $40,846,672
Purchase of Common Stock ................................................... (174,134) (2,758,539)
Issuance of Common Stock ................................................... 109,737 1,648,978
---------- -----------
Outstanding at June 30, 2002 ............................................... 18,669,611 $39,737,111
========== ===========
Basic Diluted
---------- ----------
Weighted average shares outstanding for the
six months ended June 30, 2002 .................................... 18,746,997 18,790,135
Weighted average shares outstanding for the
six months ended June 30, 2001 .................................... 18,852,698 18,895,277
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. In April 2002, the Board of Directors
approved the continuation of the stock repurchase program through March
2003. As of June 30, 2002, 317,950 shares had been repurchased at a
cost of approximately $4.7 million, including 156,500 shares at a cost
of $2.3 million repurchased during the six months ended June 30, 2002.
Under the repurchase program, the Company is authorized to repurchase
up to 797,550 shares of Common Stock over the next nine months.
Outstanding options to purchase approximately 674,000 shares of Common
Stock for the three and six months ended June 30, 2002 and
approximately 441,000 shares of Common Stock for the three and six
months ended June 30, 2001 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.
In June 2002, the Company secured approval from the North Carolina
Utilities Commission and accelerated the redemption of the remaining
1,000 outstanding shares of 4.8% redeemable preferred stock of The
Concord Telephone Company, a subsidiary of the Company, for $95,000.
7
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 June 30, 2002 and December 31, 2001 were as
follows:
Equity Securities Amortized Gross Unrealized Gross Unrealized Fair
Available-for-Sale Cost Holding Gains Holding Losses Value
- ------------------ ---- ------------- -------------- -----
June 30, 2002 $5,803,145 $ 114,750 $ (658,789) $ 5,259,106
========== ================ =============== ============
December 31, 2001 $6,184,604 $ 8,236,285 $ (374,028) $ 14,046,861
========== ================ =============== ============
During the six months ended June 30, 2002, the Company sold 218,092 shares of
VeriSign, Inc. ("VeriSign") common stock and 222,182 shares of ITC-DeltaCom,
Inc. ("ITC-DeltaCom") common stock. As of June 30, 2002, the Company has no
remaining shares of VeriSign common stock. During the six months ended June 30,
2002, the Company wrote down $0.7 million for impaired investment securities,
including $0.5 million related to shares of ITC-DeltaCom common stock.
6. INVESTMENTS IN UNCONSOLIDATED COMPANIES
June 30, 2002 December 31, 2001
------------- -----------------
Equity Method:
Palmetto MobileNet, L.P. $ 9,717,869 $ 9,808,915
Wireless One of North Carolina, L.L.C. -- 8,762,090
Other 113,512 112,418
Cost Method:
ITC Holding Company 2,124,572 2,215,534
Maxcom
Telecomunicaciones, S.A. de C.V. 1,238,476 1,238,476
Other 500,000 170,719
--------------- --------------------
TOTAL $ 13,694,429 $ 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 (the "Purchase
Agreement") with Wireless One, Inc., a subsidiary of WorldCom, Inc. ("Wireless
One"), and Worldcom Broadband Solutions, Inc. pursuant to which WONC would
purchase from Wireless One its entire 50% interest in WONC. The FCC approved
this transaction on March 28, 2002 and the transaction was closed on April 5,
2002, resulting in CTWC owning 100% of the equity interest in WONC. This
transaction has been accounted for using the purchase method of accounting. As a
result, the results of WONC have been consolidated with the Company's results
from the beginning of the second quarter 2002. Pro forma results for WONC are
not material to the Company's consolidated financial statements.
The total purchase price for Wireless One's interest in WONC was $20,696,562,
$3.0 million of which was paid in cash at the closing and the remainder of which
was paid in the form of an interest bearing promissory note of WONC. The
promissory note is payable over the 10 year period following the closing, with a
$7.0 million payment due by 12 months from the closing date (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 $7.0
million payment is not made when due, either CTWC or Wireless One may cause WONC
to transfer certain of its licensed frequencies to Wireless One 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
The total purchase price of $20.7 million was allocated as follows:
Current assets $ 277,957
Intangibles and licenses 20,725,918
Equipment 412,367
Accounts payable (719,680)
-------------
Total purchase price $ 20,696,562
=============
On July 19, 2002, the Company delivered a "Split-Up Notice" to Wireless One
pursuant to the Purchase Agreement. This "Split-Up Notice" sets into motion a
process under the Purchase Agreement pursuant to which WONC will transfer to
Wireless One certain of WONC's licensed frequencies and a payment of all accrued
interest in satisfaction of WONC's $17.7 million promissory note to Wireless
One. The dates on which these transactions will be effected have not yet been
determined, but are expected to occur no later than the second quarter of fiscal
year 2003.
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 June 30, 2002 relates primarily to pension obligations of
approximately $1.0 million and the remaining Raleigh lease liability. A summary
of restructuring liability activity for the six months ended June 30, 2002 is as
follows:
Balance at December 31, 2001 $ 1,210,181
Raleigh lease payments (63,940)
---------------
Balance at June 30, 2002 $ 1,146,241
===============
In November 2001, the Company recorded restructuring charges of $1,521,511 in
connection with ceasing 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 10 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 six months ended June 30,
2002 is as follows:
Balance at December 31, 2001 $ 222,509
Severance costs (7,509)
Cell-site lease termination costs (52,500)
-----------------
Balance at June 30, 2002 $ 162,500
=================
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 June 30, 2002 was 3.11%. The credit facility provides for
quarterly payments of interest until maturity on March 31, 2006. As of June 30,
2002, $60.0 million was outstanding
9
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 June 30, 2002. The Company also has an additional line of
credit for $10.0 million at one month LIBOR plus 1.25%. As of June 30, 2002, the
Company had $2.5 million outstanding under this credit line at an interest rate
of 3.09%.
The Company has a $17.7 million note payable that bears interest at 9% annually
with principal payments due over the 10 year period ending March 2012. A $7.0
million principal payment is due by March 2003 (which payment may be deferred
until March 2005 with the payment of accrued interest) and the remainder payable
in equal annual installments beginning in March 2008. $0.4 million of interest
incurred has been capitalized during the six months ended June 30, 2002 to ready
the use of wireless spectrum.
The Company has three interest rate swap transactions to fix $10.0 million, $5.0
million, and $5.0 million of the amounts outstanding under the $90.0 million
revolving line of credit at rates of 5.9%, 4.53%, and 3.81%, respectively, plus
a current spread of 1.25%. The fair value of each of the swaps as of June 30,
2002 was ($513,468), ($59,550), and ($54,131), respectively.
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 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 purchase price 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 Cingular Wireless, 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
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 June 30, 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 June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income:
As reported $ 2,777,391 $ 3,760,812 $ 5,573,209 $ 5,116,561
Goodwill amortization
(net of tax) -- 225,425 -- 695,175
------------- ------------- ------------- -------------
Adjusted net income $ 2,777,391 $ 3,986,237 $ 5,573,209 $ 5,811,736
============= ============= ============= =============
Basic earnings per share:
As reported $ 0.15 $ 0.20 $ 0.30 $ 0.27
============= ============= ============= =============
As adjusted $ 0.15 $ 0.21 $ 0.30 $ 0.31
============= ============= ============= =============
Diluted earnings per share:
As reported $ 0.15 $ 0.20 $ 0.30 $ 0.27
============= ============= ============= =============
As adjusted $ 0.15 $ 0.21 $ 0.30 $ 0.31
============= ============= ============= =============
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.
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 ended June 30, 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.
11
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
The Company has five reportable 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 single
family and mixed-use developments outside the ILEC's operating area, and the
internet and data service provider ("ISP") which provides dial-up and high-speed
internet access, web design, web hosting and other data related services.
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. 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, income taxes, depreciation, and amortization
("Operating EBITDA") and segment operating profit/(loss). Select data by
business segment for the three and six months ended June 30, 2002 and 2001, is
as follows:
12
THREE MONTHS ENDED JUNE 30, 2002
ILEC DCS CLEC GREENFIELD
---- --- ---- ----------
External revenues $ 23,982,140 6,133,614 3,873,013 902,043
Intersegment revenues 1,725,487 32,854 260,015 15,474
External expenses 11,156,917 5,055,042 4,959,083 1,707,980
Intersegment expenses 1,926,558 332,488 749,381 427,102
Operating EBITDA * 12,825,223 1,078,572 (1,086,070) (805,937)
Depreciation and
amortization 4,928,686 277,989 546,904 478,897
-------------------------------------------------------------------------
Segment operating
profit (loss) 7,896,537 800,583 (1,632,974) (1,284,834)
-------------------------------------------------------------------------
Segment Assets 159,486,372 29,521,461 17,510,926 18,253,263
THREE MONTHS ENDED JUNE 30, 2001
ILEC DCS CLEC GREENFIELD
---- --- ---- ----------
External revenues $ 23,278,153 3,278,004 2,568,958 358,443
Intersegment revenues 1,793,068 18,915 -- --
External expenses 11,848,080 2,628,864 4,269,570 1,164,790
Intersegment expenses 868,885 23,238 137,060 2,523
Operating EBITDA * 11,430,073 649,140 (1,700,612) (806,347)
Depreciation and
amortization 4,440,304 21,157 478,191 205,767
-------------------------------------------------------------------------
Segment operating
profit (loss) 6,989,769 627,983 (2,178,803) (1,012,114)
-------------------------------------------------------------------------
Segment Assets 169,658,996 21,304,926 13,931,339 9,733,253
SIX MONTHS ENDED JUNE 30, 2002
ILEC DCS CLEC GREENFIELD
---- --- ---- ----------
External revenues $ 47,177,200 11,888,611 7,320,146 1,701,924
Intersegment revenues 3,343,097 56,654 470,128 18,167
External expenses 22,073,874 9,732,332 9,475,765 3,347,802
Intersegment expenses 3,072,160 396,341 990,416 455,240
Operating EBITDA * 25,103,326 2,156,279 (2,155,619) (1,645,878)
Depreciation and
amortization 9,847,147 477,622 1,062,248 898,434
-------------------------------------------------------------------------
Segment operating
profit (loss) 15,256,179 1,678,657 (3,217,867) (2,544,312)
-------------------------------------------------------------------------
Segment Assets 159,486,372 29,521,461 17,510,926 18,253,263
SIX MONTHS ENDED JUNE 30, 2001
ILEC DCS CLEC GREENFIELD
---- --- ---- ----------
External revenues $ 47,454,944 5,727,121 4,424,077 649,549
Intersegment revenues 3,443,900 39,189 -- --
External expenses 25,417,651 5,861,371 8,676,084 2,285,177
Intersegment expenses 1,708,659 58,017 240,134 4,472
Operating EBITDA * 22,037,293 (134,250) (4,252,007) (1,635,628)
Depreciation and
amortization 8,796,335 37,527 922,869 320,465
------------------------------------------------------------------------
Segment operating
profit (loss) 13,240,958 (171,777) (5,174,876) (1,956,093)
------------------------------------------------------------------------
Segment Assets 169,658,996 21,304,926 13,931,339 9,733,253
THREE MONTHS ENDED JUNE 30, 2002
ISP OTHER TOTAL
--- ----- -----
External revenues 2,444,000 46,384 37,381,194
Intersegment revenues 65 2,566,470 4,600,365
External expenses 2,567,215 1,471,910 26,918,147
Intersegment expenses 1,085,170 79,666 4,600,365
Operating EBITDA * (123,215) (1,425,526) 10,463,047
Depreciation and
amortization 347,950 468,699 7,049,125
-----------------------------------------------
Segment operating
profit (loss) (471,165) (1,894,225) 3,413,922
-----------------------------------------------
Segment Assets 15,561,648 90,244,867 330,578,537
THREE MONTHS ENDED JUNE 30, 2001
ISP OTHER TOTAL
--- ----- -----
External revenues 2,240,568 261 31,724,387
Intersegment revenues -- -- 1,811,983
External expenses 2,469,706 2,027,049 24,408,059
Intersegment expenses 731,263 49,014 1,811,983
Operating EBITDA * (229,138) (2,026,788) 7,316,328
Depreciation and
amortization 567,372 84,945 5,797,736
-----------------------------------------------
profit (loss) (796,510) (2,111,733) 1,518,592
Segment operating
-----------------------------------------------
Segment Assets 15,420,162 34,743,797 264,792,473
SIX MONTHS ENDED JUNE 30, 2002
ISP OTHER TOTAL
--- ----- -----
External revenues 4,786,633 81,587 72,956,101
Intersegment revenues 369 2,986,830 6,875,245
External expenses 5,284,287 2,759,079 52,673,139
Intersegment expenses 1,874,973 86,115 6,875,245
Operating EBITDA * (497,654) (2,677,492) 20,282,962
Depreciation and
amortization 791,435 730,187 13,807,073
-----------------------------------------------
Segment operating
profit (loss) (1,289,089) (3,407,679) 6,475,889
-----------------------------------------------
Segment Assets 15,561,648 90,244,867 330,578,537
SIX MONTHS ENDED JUNE 30, 2001
ISP OTHER TOTAL
--- ----- -----
External revenues 4,553,993 261 62,809,945
Intersegment revenues -- -- 3,483,089
External expenses 4,613,741 3,674,600 50,528,624
Intersegment expenses 1,415,424 56,383 3,483,089
Operating EBITDA * (59,748) (3,674,339) 12,281,321
Depreciation and
amortization 1,090,139 161,125 11,328,460
-----------------------------------------------
Segment operating
profit (loss) (1,149,887) (3,835,464) 952,861
-----------------------------------------------
Segment Assets 15,420,162 34,743,797 264,792,473
* Management believes that investors may use this data to analyze and compare
other communications companies with the Company in terms of operating
performance and liquidity. Operating EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
construed as a substitute for consolidated net income as a measure of
performance,
13
or for cash flow as a measure of liquidity. Operating EBITDA, as calculated by
the Company, is not necessarily comparable to similarly captioned amounts of
other companies.
Reconciliation to Net Income Before Tax
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Segment operating profit $3,413,922 $1,518,592
Total other income 1,281,473 4,787,696
---------- ----------
Income before income taxes $4,695,395 $6,306,288
========== ==========
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Segment operating profit $6,475,889 $ 952,861
Total other income 2,958,181 7,620,662
---------- ----------
Income before income taxes $9,434,070 $8,573,523
========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended June 30, 2002 and June 30, 2001
CONSOLIDATED
Operating revenues increased $5.7 million or 17.8% to $37.4 million for
the three months ended June 30, 2002 when compared to the three months ended
June 30, 2001. The increase in revenues is primarily due to increases in the
revenues of DCS, CLEC, ILEC and Greenfield. See the discussions by business unit
below for additional detail and analysis.
Operating expenses, exclusive of depreciation and amortization,
increased $2.5 million or 10.3% to $26.9 million for the three months ended June
30, 2002 when compared to the three months ended June 30, 2001. Substantially
all of this increase is a result of additional DCS expenses attributable to the
partitioning of the Company's portion of the Cingular Wireless digital network
completed in June 2001.
Depreciation and amortization expense increased $1.3 million or 21.6%
to $7.0 million for the three months ended June 30, 2002 when compared to the
three months ended June 30, 2001. This increase reflects the significant
increase in depreciable assets over the last 12 months, including additions in
DCS assets from the partitioning of the Cingular DCS partnership, Greenfield
assets from continued growth and construction of facilities, and certain other
business unit assets such as WaveTel's wireless broadband trial market and the
new corporate center. This increase also reflects $0.2 million in reduced
amortization due to a change in accounting rules for goodwill and other
intangibles.
Other income (expenses) decreased $3.5 million for the three months
ended June 30, 2002 when compared to the three months ended June 30, 2001.
Equity in income of unconsolidated companies decreased $0.4 million due to lower
income from the equity interest in Palmetto MobileNet, L.P. Interest, dividends
and gain on sale of investments reflected $2.2 million lower gains on marketable
security sales during the three months ended June 30, 2002 when compared to the
three months ended June 30, 2001. Interest expense increased $0.7 million as a
result of the Company's increased level of
14
indebtedness. During the three months ended June 30, 2002, the Company wrote
down the carrying value of security investments by $0.2 million for impairment.
Income taxes decreased $0.6 million or 24.7% to $1.9 million for the
three months ended June 30, 2002 compared with the three months ended June 30,
2001 due primarily to the decrease in taxable income of $1.6 million.
Net income decreased $1.0 million or 26.1% to $2.8 million for the
three months ended June 30, 2002 compared to the three months ended June 30,
2001.
ILEC
Excluding intersegment revenues, ILEC revenue was $24.0 million for the
three months ended June 30, 2002, a $0.7 million or 3.0% increase from the three
months ended June 30, 2001. This increase is primarily due to higher line charge
and calling feature revenues of $0.6 million. During the three months ended June
30, 2002, the Company recorded a $0.3 million provision for bad debts related to
WorldCom's bankruptcy filing. At June 30, 2002, the total number of local access
lines in the ILEC's three-county service area equaled approximately 123,321. The
Company is currently a party to six interconnection agreements 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 $11.2
million for the three months ended June 30, 2002, which is $0.7 million less
than operating expenses for the three months ended June 30, 2001. Such decreased
operating expenses were primarily attributable to lower interconnection expense
of $0.2, lower settlement expense of $0.2 million, decreased franchise taxes of
$0.2 million due to changes in North Carolina tax laws, and a $0.1 million
reduction in marketing expense.
DIGITAL WIRELESS
DCS revenue was $6.1 million for the three months ended June 30, 2002,
a $2.9 million or 87.1% increase over the three months ended June 30, 2001. This
increase was primarily attributable to monthly recurring revenue due to the
addition of the approximately 13,000 subscribers acquired from Cingular Wireless
in the partitioning since June 30, 2001. The total number of post-pay
subscribers is approximately 32,100. With the increase in customers, the DCS
business unit began showing an operating profit during the third quarter of
2001. Offsetting some of the revenue increases were decreases in paging revenues
and prepaid card sales.
DCS operating expenses were $5.1 million for the three months ended
June 30, 2002, a $2.4 million or 92.3% increase over the three months ended June
30, 2001. This increase was primarily due to the increase in DCS subscribers and
the costs associated with subscriber 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 $3.9 million for the three months ended June 30, 2002,
a $1.3 million or 50.8% increase over the three months ended June 30, 2001. This
increase was primarily due to an increase in local revenues of $0.9 million and
access revenue of $0.5 million based on the addition of 9,121 access lines since
June 30, 2001. As of June 30, 2002, CLEC had 24,605 total lines in service. This
increase reflects growth in facilities-based services for the Charlotte, North
Carolina and the Greensboro, North Carolina markets.
15
CLEC operating expenses were $4.3 million for the three months ended
June 30, 2002, a $0.7 million or 16.1% increase over the three months ended June
30, 2001. Costs of providing services, including transport and access expense,
increased $0.3 million due to the increase in access lines. In addition, costs
associated with services provided by centralized corporate units increased.
GREENFIELD
Greenfield revenue for the three months ended June 30, 2002 was $0.9
million, a $0.5 million or 151.7% increase over the three months ended June 30,
2001. Revenue growth is primarily associated with lines located at malls served
by the Greenfield unit, as well as single family and multi-dwelling unit
developments. Line revenue increased $0.3 million and access revenue increased
$0.2 million in the three months ended June 30, 2002 compared to the three
months ended June 30, 2001. In total, 4,386 access lines were in service in 45
developments as of June 30, 2002. The Greenfield unit has entered into preferred
provider agreements with a total of 65 residential and business developments and
projects located primarily in the Charlotte and Raleigh, North Carolina markets
as of June 30, 2002. Revenues from these projects are expected to grow as access
lines are placed in service.
Greenfield expenses were $1.7 million for the three months ended June
30, 2002, a $0.5 million or 46.6% increase over the three months ended June 30,
2001. These expenses are associated with the existing 4,386 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 $2.4 million for the three months ended June 30, 2002,
a $0.2 million or 9.1% increase over the three months ended June 30, 2001.
Revenues from dial-up accounts decreased by $0.1 million and web development and
programming were lower than last year. DSL revenues increased $0.3 million.
While traditional dial-up customers have decreased in number by approximately
1,100 during the last 12 months, over 2,700 DSL subscribers and dedicated high
speed customers have been added since June 30, 2001.
ISP operating expenses were $2.6 million for the three months ended
June 30, 2002, consistent with the three months ended June 30, 2001. Increases
in network expense were offset by decreases in various selling, general and
administrative expenses as the unit continues to focus on cost control.
OTHER BUSINESS UNITS
Other operating unit expenses were $1.5 million for the three months
ended June 30, 2002 compared to $2.0 million for the three months ended June 30,
2001. This decrease reflects lower expenses associated with the broadband
wireless trial market operated in Fayetteville, North Carolina by WaveTel as a
result of the November 2001 decision to cease expansion of WaveTel's operations
into the Raleigh, Durham and Charlotte, North Carolina markets. WaveTel provides
broadband data and second-line voice service to its customers.
Six Months Ended June 30, 2002 and June 30, 2001
CONSOLIDATED
Operating revenues increased $10.1 million or 16.2% to $73.0 million
for the six months ended June 30, 2002 when compared to the six months ended
June 30, 2001. The increase in revenues is due to increases in the revenues of
DCS, CLEC and Greenfield. See the discussions by business unit below for
additional detail and analysis.
16
Operating expenses, exclusive of depreciation and amortization,
increased $2.1 million or 4.2% to $52.7 million for the six months ended June
30, 2002 when compared to the six months ended June 30, 2001. This increase
results from increased access lines in several business units, including DCS,
Greenfield and CLEC. The operating expense increase was offset by a $1.9 million
restructuring charge expensed during the six months ended June 30, 2001.
Depreciation and amortization expense increased $2.5 million or 21.9%
to $13.8 million for the six months ended June 30, 2002 when compared to the six
months ended June 30, 2001. This increase reflects the significant increase in
depreciable assets over the last 12 months, including additions in DCS assets
from the partitioning of the Cingular DCS partnership, the new corporate center
and Greenfield assets from continued growth and construction of facilities. This
increase also reflects $0.7 million in reduced amortization due to a change in
accounting rules for goodwill and other intangibles.
Other income (expenses) decreased $4.7 million for the six months ended
June 30, 2002 when compared to the six months ended June 30, 2001. Equity in
income of unconsolidated companies decreased $0.7 million due to lower income
from the equity interest in Palmetto MobileNet, L.P. Interest, dividends and
gain on sale of investments reflected $2.4 million lower gains on marketable
security sales during the six months ended June 30, 2002 when compared to the
six months ended June 30, 2001. Interest expense increased $0.9 million as a
result of the Company's increased level of indebtedness. During the six months
ended June 30, 2002, the Company wrote down the carrying value of security
investments by $0.7 million for impairment.
Income taxes increased $0.4 million or 11.7% to $3.9 million for the
six months ended June 30, 2002 compared with the six months ended June 30, 2001
due primarily to the increase in taxable income of $0.9 million.
Net income increased $0.4 million or 8.2% to $5.6 million for the six
months ended June 30, 2002 compared to the six months ended June 30, 2001.
ILEC
Excluding intersegment revenues, ILEC revenue was $47.2 million for the
six months ended June 30, 2002, a $0.3 million or 0.6% decrease from the six
months ended June 30, 2001. This decrease is primarily due to lower long
distance revenues of $1.2 million associated with a combination of decreases in
revenue per minute and minutes of use. Offsetting this decrease were increases
in local and feature revenues of $0.2 million and higher access revenues. During
the six months ended June 30, 2002, the Company recorded a $0.3 million
provision for bad debts related to WorldCom's bankruptcy filing. At June 30,
2002, the total number of local access lines in the ILEC's three-county service
area equaled approximately 123,321. The Company is currently a party to six
interconnection agreements that provide 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 $22.1
million for the six months ended June 30, 2002, which is $3.3 million less than
operating expenses for the six months ended June 30, 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 in
operating expenses included $0.3 million for the cost of materials associated
with lower equipment sales, $0.3 million in lower contracted services, decreased
settlement expense of $0.3 million, decreased franchise taxes of $0.3 million
due to changes in North Carolina tax laws, and a $0.2 million reduction in
marketing expense.
17
DIGITAL WIRELESS
DCS revenue was $11.9 million for the six months ended June 30, 2002, a
$6.2 million or 107.6% increase over the six months ended June 30, 2001. This
increase was primarily attributable to monthly recurring revenue due to the
addition of the approximately 13,000 subscribers acquired from Cingular Wireless
in the partitioning since June 30, 2001. The total number of post-pay
subscribers is approximately 32,100. 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 prepaid card sales of
$0.4 million, paging revenues of $0.1 million and an increase in bad debts due
to partitioned customers.
DCS operating expenses were $9.7 million for the six months ended June
30, 2002, a $3.9 million or 66.0% increase over the six months ended June 30,
2001. This increase was primarily due to the increase in DCS subscribers and the
costs associated with subscriber acquisition. Additionally, DCS recognized
increased employee expenses of $0.3 million from the opening of two new wireless
stores, higher marketing expense of $0.1 million and higher property taxes of
$0.1 million attributable to assets acquired in the partitioning.
CLEC
CLEC revenue was $7.3 million for the six months ended June 30, 2002, a
$2.9 million or 65.5% increase over the six months ended June 30, 2001. This
increase was primarily due to increases in local revenues of $1.8 million and
access revenues of $1.0 million based on the addition of 9,121 access lines
since June 30, 2001. In addition, long distance revenues increased by $0.9
million due to customer growth and the resulting increase in minutes of use. As
of June 30, 2002, CLEC had 24,605 total lines in service. This increase reflects
growth in facilities-based services for the Charlotte, North Carolina and the
Greensboro, North Carolina markets.
CLEC operating expenses were $9.5 million for the six months ended June
30, 2002, a $0.8 million or 9.2% increase over the six months ended June 30,
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 six months ended June 30, 2001.
GREENFIELD
Greenfield revenue for the six months ended June 30, 2002 was $1.7
million, a $1.1 million or 162.0% increase over the six months ended June 30,
2001. Local revenues increased $0.6 million, access revenues increased $0.3
million, and long distance revenues increased $0.1 million over the six months
ended June 30, 2001. In total, 4,386 access lines were in service as of June 30,
2002. The Greenfield unit has entered into preferred provider agreements with a
total of 65 residential and business developments and projects located primarily
in the Charlotte and Raleigh, North Carolina markets as of June 30, 2002.
Revenues from these projects are expected to grow as access lines are placed in
service.
Greenfield expenses were $3.3 million for the six months ended June 30,
2002, a $1.1 million or 46.5% increase over the six months ended June 30, 2001.
Cost of providing services to the existing 4,386 lines in service increased $0.3
million. The remainder of the increased expenses are associated with the growth
of the business unit due to continued work on new developer agreements.
18
INTERNET AND DATA SERVICES
ISP revenue was $4.8 million for the six months ended June 30, 2002, a
$0.2 million or 5.1% increase over the six months ended June 30, 2001. Revenues
from dial-up accounts decreased by $0.2 million and web development and
programming were lower than last year. DSL revenues have increased $0.5 million.
While traditional dial-up customers have decreased in number by approximately
1,100 during the last 12 months, over 2,700 DSL subscribers and dedicated high
speed customers have been added since June 30, 2001.
ISP operating expenses were $5.3 million for the six months ended June
30, 2002, a $0.7 million or 14.5% increase over the six months ended June 30,
2001. The majority of the increase is associated with increased costs of
operating the DSL network due to the increase in DSL customers.
OTHER BUSINESS UNITS
Other operating unit expenses were $2.8 million for the six months
ended June 30, 2002 compared to $3.7 million for the six months ended June 30,
2001. This decrease reflects lower expenses associated with the broadband
wireless trial market operated in Fayetteville, North Carolina by WaveTel as a
result of the November 2001 decision to cease expansion of WaveTel's operations
into the Raleigh, Durham and Charlotte, North Carolina markets. WaveTel provides
broadband data and second-line voice service to its customers.
Liquidity and Capital Resources
The liquidity of the Company decreased during the six-month period
ended June 30, 2002. Current assets exceeded current liabilities by $13.6
million at June 30, 2002. In comparison, current assets exceeded current
liabilities by $19.1 million at December 31, 2001.
Current assets decreased by $5.0 million when compared to December 31,
2001. This decrease is primarily the result of a decrease in income tax
receivable of $2.4 million caused by recording the current year tax liability
and a decrease in cash of $1.8 million. In addition, other accounts receivable
decreased related to amounts eliminated due to the consolidation of WONC during
the quarter as a result of the WONC acquisition and prepaid assets decreased
caused by timing of directory, rent and insurance payments.
Current liabilities increased by $0.6 million from December 31, 2001 to
June 30, 2002. This increase is attributable to increased short-term borrowings
of $2.5 million, increased income taxes payable of $0.7 million for the current
year tax liability and higher other accrued liabilities of $1.7 million,
primarily related to property and other taxes. These increases were offset by
decreases in accounts payable of $2.9 million caused by timing of expenditures,
accrued payroll of $1.1 million due to payment of incentive compensation and
advance billings of $0.3 million due to timing of directory revenues.
The Company's principal sources of liquidity were cash provided by
operations of $15.5 million, proceeds from the sale of investment securities of
$4.9 million, partnership capital distributions of $2.0 million, and proceeds
from credit facilities of $12.5 million.
Uses of cash during the six months ended June 30, 2002 included net
capital expenditures of $27.3 million, acquisition of additional ownership
interest in WONC of $3.2 million, purchases of investment securities of $1.1
million, investment in unconsolidated companies of $0.5 million, payment of
dividends of $2.5 million, and the repurchase of Common Stock of the Company and
redemption of 4.8% preferred stock of the Concord Telephone Company of $2.4
million. During March 2002, the Company completed construction of its new
corporate headquarters in Concord, North Carolina.
19
At June 30, 2002, the fair market value of the Company's investment
securities was $5.3 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 June
30, 2002 was 3.11%. The credit facility provides for quarterly payments of
interest until maturity on March 31, 2006. As of June 30, 2002, $60.0 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 June 30, 2002. The Company also has an
additional line of credit for $10.0 million at one month LIBOR plus 1.25%. As of
June 30, 2002, the Company had $2.5 million outstanding under this credit line
at an interest rate of 3.09%.
Payments Due by Year
--------------------
Remainder 2003 to 2006 to 2008 and
Total of 2002 2005 2007 after
---- ------- ---- ---- -----
Contractual Obligations
Short-term debt 2,500,000 -- 2,500,000 -- --
Long-term debt 127,696,562 -- 7,000,000 60,000,000 60,696,562
Operating leases 5,721,534 901,239 4,232,793 539,934 47,568
-------------------------------------------------------------------------------------------
135,918,096 901,239 13,732,793 60,539,934 60,744,130
===========================================================================================
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 Internet and Data
Service units, as well as its operations, payments associated with long-term
debt and investments as summarized above.
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 expansion of existing businesses and the implementation of its various
new business projects, (3) the Company's ability to retain its existing customer
base against local, wireless, internet and data 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, (6) the financial stability of the Company's
customers and business partners, (7) the impact of economic and political events
on the Company's business, operating regions, and customers and (8) the
Company's ability to effectively respond to the actions of its competitors.
20
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.
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 that is currently 1.25%, based on various
financial ratios. The interest rate on June 30, 2002 was 3.11%. The credit
facility provides for quarterly payments of interest until maturity on March 31,
2006. As of June 30, 2002, $60.0 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
June 30, 2002. In addition, the Company has another line of credit for $10.0
million at one month LIBOR plus 1.25%. As of June 30, 2002, the Company had $2.5
million outstanding under this credit line at an interest rate of 3.09%.
The Company has a $17.7 million note payable that bears interest at 9%
annually with principal payments due over the 10 year period ending March 2012.
A $7.0 million principal payment is due by March 2003 (which payment may be
deferred until March 2005 with the payment of accrued interest) and the
remainder payable in equal annual installments beginning in March 2008.
The Company has three interest rate swap transactions to fix $10.0
million, $5.0 million and $5.0 million of the amounts outstanding under the
$90.0 million revolving line of credit at rates of 5.9%, 4.53%, and 3.81%,
respectively, plus a spread. The fair value of each swap as of June 30, 2002 was
($513,468), ($59,550), and ($54,131), 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
21
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders was held on April 25, 2002. All
directors were re-elected for the terms set forth below.
Proxies were solicited for the following matters:
(1) To elect a Board of Directors
Three Directors for a three-year term expiring in 2005
For Withheld
O. Charlie Chewning, Jr. 16,607,136 69,546
Michael R. Coltrane 16,635,091 41,591
Raymond C. Groth 16,576,237 100,445
One Director for a one-year term expiring in 2003
For Withheld
Phil W. Widenhouse 16,619,467 57,215
(2) To ratify the action of the Board of Directors in the
appointment of KPMG LLP as independent public accountants to
audit the books of the Company for the 2002 fiscal year.
For Against Abstain Broker Non-Votes
16,586,586 27,303 62,793 --
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Employment Agreement, dated as of April 15, 2002, between CT
Communications and James E. Hausman.
10.2 Employment Agreement, dated as of May 15, 2002, between CT
Communications and Matthew J. Dowd.
10.3 Change in Control Agreement, dated as of May 20, 2002 between
CT Communications and James E. Hausman.
11 Computation of Earnings per Share
99.1 Written statement of Chief Executive Officer and Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
22
(b) Reports on Form 8-K
On May 6, 2002, the Company filed a Current Report on
Form 8-K announcing that its Board of Directors
approved the continuance of its stock repurchase
program until March 2003.
On May 30, 2002, the Company filed a Current Report
on Form 8-K announcing the reassignment of duties
among its current executive team and the addition of
a new executive.
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
August 14, 2002
- ------------------------------------
Date
(The above signatory has dual responsibility as a duly authorized officer and
chief accounting officer of the Registrant.)
23
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Employment Agreement, dated as of April 15, 2002, between CT
Communications and James E. Hausman.
10.2 Employment Agreement, dated as of May 15, 2002, between CT
Communications and Matthew J. Dowd.
10.3 Change in Control Agreement, dated as of May 20, 2002 between
CT Communications and James E. Hausman.
11 Computation of Earnings per Share
99.1 Written statement of Chief Executive Officer and Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
24