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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11174
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WARWICK VALLEY TELEPHONE COMPANY
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(Exact name of registrant as specified in its charter)
New York 14-1160510
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
47 Main Street, Warwick, New York 10990
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 986-8080
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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
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Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO .
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 5,401,200 Common
Shares, $.01 par value, outstanding at May 3, 2004 adjusted for the stock split
that took place on October 6, 2003.
INDEX TO FORM 10Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003 (Unaudited). 3
Consolidated Statements of Income for the three months ended March 31, 2004 and 2003 (Unaudited). 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (Unaudited). 5
Notes to Consolidated Financial Statements (Unaudited). 6-9
Item. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13
Item. 3 Quantative and Qualitative Disclosures about Market Risk. 13
Item. 4 Controls and Procedures. 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders 13-14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K. 14
Exhibits -
31.1 Chief Executive Officer Certification
31.2 Chief Financial Officer Certification
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 signed by M. Lynn Pike-principal Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 signed by Philip A. Grybas-principal Financial Officer.
Reports on Form 8-K -
8-K filed on April 7, 2004, the Company issued a press release announcing that it will bring advanced broadband
communications services to 54 cities and surrounding communities in rural New York by leading a team of 13
telecommunications firms to organize the Empire State Independent Fiber Network LLC.
8-K filed on April 30, 2004, Lynn Pike, President of the Company discussed certain aspects of the Company's
business at its Annual Shareholders Meeting on April 30, 2004.
-2-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands except share amounts)
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
-------- --------
Current Assets:
Cash $ 5,942 $ 5,717
Accounts receivable - net of reserve for uncollectibles-$119 and
$508, respectively 3,407 3,420
Other receivables 322 273
Materials and supplies 1,533 1,153
Prepaid expenses 773 681
Deferred income taxes 119 255
-------- --------
Total Current Assets $ 12,096 $ 11,499
-------- --------
Property, plant and equipment, net 40,959 41,322
Unamortized debt issuance costs 112 115
Intangible asset - pension 744 744
Other deferred charges 542 510
Investments 6,255 5,303
-------- --------
TOTAL ASSETS $ 60,708 $ 59,493
======== ========
LIABILITIES
Current Liabilities
Accounts payable $ 949 $ 1,559
Advance billing and payments 224 247
Customer deposits 137 135
Accrued taxes 1,268 506
Pension and post retirement benefit obligations 876 1,139
Other accrued expenses 1,192 1,252
-------- --------
Total Current Liabilities $ 4,646 $ 4,838
-------- --------
Long-term debt 7,149 7,149
Deferred income taxes 4,333 4,119
Other liabilities and deferred credits 557 536
Pension and post retirement benefit obligations 4,815 4,511
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TOTAL LIABILITIES $ 21,500 $ 21,153
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Shareholders' Equity
Preferred Shares - $100 par value; authorized and
issued shares 5,000; $0.01 par value authorized and unissued shares
10,000,000; $ 500 $ 500
Common Shares - $0.01 par value; authorized shares 10,000,000 60 60
Issued 5,984,883 as of March 31, 2004 and December 31, 2003
Treasury stock - $0.01 par value, 583,683 Common Shares as of (3,598) (3,598)
March 31, 2004 and as of December 31, 2003
Additional paid in capital 3,473 3,473
Accumulated other comprehensive income (765) (765)
Retained earnings 39,538 38,670
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Total Shareholders' Equity $ 39,208 $ 38,340
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,708 $ 59,493
======== ========
Please see accompanying notes, which are an integral part of the consolidated
financial statements.
-3-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ in thousands except per share amounts)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
----------- -----------
Operating Revenues:
Local network service $ 1,014 $ 1,031
Network access service 2,252 2,326
Long distance services 937 956
Directory advertising 367 365
Online services 1,716 1,595
Other services and sales 769 872
----------- -----------
Total operating revenues 7,055 7,145
----------- -----------
Operating Expenses:
Plant specific 1,056 1,074
Plant non-specific:
Depreciation & amortization 1,338 1,164
Other 694 645
Customer operations 1,125 1,036
Corporate operations 1,347 1,127
Cost of services and sales 528 467
Property, revenue and payroll taxes 376 389
----------- -----------
Total operating expenses 6,464 5,902
----------- -----------
OPERATING INCOME 591 1,243
Other Income (Expense)
Interest (expense), net of capitalized interest (59) (95)
Income from equity method investments 2,364 1,839
Other income (expense), net 49 (30)
----------- -----------
Total other income (expense) - net 2,354 1,714
----------- -----------
INCOME BEFORE INCOME TAXES 2,945 2,957
Income Taxes 1,044 993
----------- -----------
NET INCOME 1,901 1,964
Preferred Dividends 6 6
----------- -----------
INCOME APPLICABLE TO COMMON STOCK $ 1,895 $ 1,958
=========== ===========
Basic & Diluted Earnings per Share of
Outstanding Common Stock $ 0.35 $ 0.36
=========== ===========
Weighted Average Shares of Common Stock
Outstanding 5,401,200 5,399,555
=========== ===========
Please see accompanying notes, which are an integral part of the consolidated
financial statements.
-4-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,901 $ 1,964
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,338 1,164
Deferred income tax and investment tax credit 350 119
Interest charged to construction (3) (22)
Income from equity investments (2,364) (1,839)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable 13 496
(Increase) Decrease in other receivables (49) (294)
(Increase) Decrease in materials and supplies (380) 104
(Increase) Decrease in prepaid expenses (92) (34)
(Increase) Decrease in deferred charges (32) (108)
Increase (Decrease) in accounts payable (610) (1,069)
Increase (Decrease) in customers' deposits 2 7
Increase (Decrease) in advance billing and payments (23) (21)
Increase (Decrease) in accrued taxes 762 1,030
Increase (Decrease) in pension and post retirement benefits obligations 42 120
Increase (Decrease) in other accrued expenses (40) (443)
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Net cash provided by operating activities $ 815 $ 1,174
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CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (972) (1,230)
Interest charged to construction 3 22
Distribution from partnership 1,650 2,250
Investment contributions (238) 0
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Net cash provided by investing activities $ 443 $ 1,042
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CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) in notes payable 0 (2,500)
Proceeds from issuance of long term debt 0 3,149
Unamoritzed debt issuance 0 (123)
Dividends(Common & Preferred) (1,033) (870)
Sale of common stock 0 10
------- -------
Net cash used in financing activities $(1,033) $ (334)
------- -------
Increase (Decrease) in cash and cash equivalents 225 1,881
Cash and cash equivalents at beginning of period 5,717 1,641
------- -------
Cash and cash equivalents at end of period $ 5,942 $ 3,522
======= =======
Please see accompanying notes, which are an integral part of the consolidated
financial statements.
-5-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Warwick Valley Telephone Company (the "Company") provides communications
services to customers in the Towns of Warwick, Goshen, and Wallkill, New York
and the Townships of Vernon and West Milford, New Jersey. Its services include
providing local, toll telephone service to residential and business customers,
access and billing and collection services to interexchange carriers, Internet
access and Video service.
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of the Company and its subsidiaries have been prepared in accordance
with generally accepted accounting principles in the United States of America
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, all adjustments consisting only of
normal recurring adjustments considered necessary for fair presentation have
been included. Operating results for the three month period ended March 31, 2004
are not necessarily indicative of the results that may be expected for the
entire year.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in the consolidated financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and any
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates. The interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.
RECLASSIFICATIONS
Certain amounts previously reported for prior periods have been
reclassified to conform to the current year presentation in the accompanying
consolidated financial statements. Such reclassifications had no effect on the
results of operations or shareholders' equity as previously recorded.
NOTE 2: IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs.
The Company's rates are regulated by the Federal Communications
Commission ("FCC"), New York State Public Service Commission ("NYSPSC"), and New
Jersey Board of Public Utilities ("NJBPU") and therefore, the Company reflects
the effects of the rate making actions of these regulatory bodies in its
financial statements. On December 20, 2003, the FCC notified carriers by order
that it would not adopt SFAS No. 143 since the FCC concluded that SFAS No.143
conflicted with the FCC's current accounting rules that require telephone
companies to accrue for asset retirement obligations through prescribed
depreciation rates.
The Company has concluded that it does not have an asset retirement
obligation as defined by SFAS No.143, as of March 31, 2004 or December 31, 2003.
The Company historically recorded cost of removals through depreciation rates
and accumulated depreciation. In conjunction with the adoption of SFAS No.143,
the Company has reclassified $526 and $505 as of March 31, 2004 and December 31,
2003, respectively, from accumulated depreciation to a regulatory liability for
the cost of removal that the Company has recorded through its historical
depreciation rates.
-6-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 3: EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of actual shares outstanding of 5,401,200 and 5,399,555 for the three
month periods ended March 31, 2004 and 2003, respectively. Share amounts have
been restated for the three-for-one stock split (see Note 10).
The Company did not have any common stock equivalents as of March 31,
2004 and 2003.
NOTE 4: COMPREHENSIVE INCOME
Comprehensive income is equivalent to net income for the three month
periods ended March 31, 2004 and 2003, respectively.
NOTE 5: SEGMENT INFORMATION
The Company's segments are strategic business units that offer different
products and services and are managed as telephone and online services. We
evaluate segment performance based upon factors such as revenue growth, expense
containment, market share and operating income.
The telephone segment provides landline telecommunications services,
including local, network access, long distance services and messaging, and sells
customer premise equipment, private business exchange equipment and yellow and
white pages advertising and electronic publishing.
The online segment provides high speed and dial up Internet services,
help desk operations, and Video over VDSL.
Segment balance sheet information as of March 31, 2004 and December 31,
2003 is set forth below:
March 31, December 31,
2004 2003
-------------------------
Assets
Telephone $ 65,633 $ 62,585
Online 10,201 9,883
Elimination (15,126) (12,975)
----------------------
Total assets $ 60,708 $ 59,493
======================
Segment income statement information for the three months ended March 31, 2004
and 2003 is set forth below:
2004 2003
----------------------
Revenues
Telephone $ 5,847 $ 5,990
Online 1,716 1,595
Eliminations (508) (440)
--------------------
Total revenues $ 7,055 $ 7,145
Operating income
Telephone 614 1,118
Online (23) 125
--------------------
Total operating income $ 591 $ 1,243
Interest expense and income (59) (95)
Income from equity method investments 2,364 1,839
Other income (expense) 49 (30)
--------------------
Income before taxes $ 2,945 $ 2,957
-7-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 6: MATERIAL AND SUPPLIES
Material and supplies are carried at average cost except that specific
costs are used in the case of large individual items. As of March 31, 2004 and
December 31, 2003, the material and supplies inventory consisted of the
following:
2004 2003
------------------------------------------
Inventory for outside plant $ 205 $ 231
Inventory for inside plant 973 472
Inventory for online plant 103 90
Inventory of video equipment 107 283
Inventory of equipment held for sale or lease 145 77
------------------------------------------
$ 1,533 $ 1,153
==========================================
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
Plant in service, at cost, consisted of the following as of March 31,
2004 and December 31, 2003:
2004 2003
-----------------------------------
Land, buildings, furniture and other support equipment $ 7,527 $ 7,518
Network and communications plant 27,603 27,273
Telephone plant 23,929 23,747
Online plant 9,947 9,513
-----------------------------------
Plant in service $ 69,006 $ 68,051
Plant under construction 1,512 1,467
-----------------------------------
70,518 69,518
Less: Accumulated depreciation 29,559 28,196
----------------------------------
Property, plant and equipment, net $ 40,959 $ 41,322
===================================
NOTE 8: INVESTMENTS
The Company is a limited partner in Orange County-Poughkeepsie Limited
Partnership (O-P) and has a 7.5% investment interest which is accounted for
under the equity method of accounting. The majority owner and general partner is
Verizon Wireless of the East L.P. The following summarizes O-P's income
statement for the three months ended March 31:
(Unaudited)
2004 2003
----------------------------
Net sales $ 37,441 $ 31,687
Cellular service cost 3,518 5,436
Operating expenses 1,988 602
----------------------------
Net operating income 31,935 25,649
Other income 268 616
----------------------------
Net income $ 32,203 $ 26,265
============================
The Company also owns 17% of Zefcom, LLC, d.b.a. Telispire, a consortium
of small telephone companies that resells Sprint PCS under private label. Prior
to the fourth quarter of 2003, this investment had historically been recorded on
the cost method of accounting. Zefcom formed an Executive Operating Committee
(the "Operating Committee") consisting of representatives from three of the
investors in Zefcom. The Operating Committee's responsibilities are to assist
management, as necessary, in relations with consultants and prospective
investors and in matters of finance. The Company's Chief Executive Officer was
elected to this committee, and accordingly, the Company, through its
representation on this Operating
-8-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
Committee, began exerting significant influence over the financial and operating
decisions of Zefcom in the fourth quarter of 2003. As a result of this change,
the Company changed its accounting for the Zefcom investment from the cost
method to the equity method of accounting. In accordance with generally accepted
accounting principles, the Company has adjusted its prior period financial
results to record its 17% investment in Zefcom as if it had been accounted for
under the equity method of accounting. The Company's percentage of Zefcom's
losses have been reflected in "Other Income" in the Income Statement for the
three-month periods ended March 31, 2004 and 2003. The impact to Net Income for
the three month period ended March 31, 2003 was $32, earnings per share also
decreased by $0.01.
On March 2004, the Company made an initial capital contribution of $238
cash to Empire State Independent Fiber Network, LLC ("EsiNet"). The Company is
committed to contribute a total of $950 in four payments over the next twelve
months which then will result in a 25% interest in the venture. EsiNet's
operations are anticipated to begin in the third quarter of 2004.
NOTE 9: PENSION AND POST RETIREMENT OBLIGATIONS
The components of net periodic cost for the three months ended March 31:
Pension Benefits Post Retirement Benefits
2004 2003 2004 2003
-------------------------- -------------------------
Service Cost $ 63 $ 80 $ 47 $ 32
Interest Cost 203 166 77 56
Expected Return On Plan Assets (162) (153) (30) (21)
Amortization Of Prior Service Cost 22 32 8 8
Amortization Of Net (Gain) Loss 35 35 52 45
Special Termination Benefits -- 150 -- --
-------------------------- ---------------------------
Net Periodic Benefit Cost $ 161 $ 310 $ 154 $ 120
========================== ============================
The Company has previously disclosed in its financial statements for the
year ended December 31, 2003 that it expected to contribute $918 to its pension
plan and $222 to its post retirement plan, respectively in 2004. As of March 31,
2004, the Company has contributed $208 to its pension plan and $55 to its post
retirement plan.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a
prescription drug benefit under Medicare ("Medicare Part D") as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D, the Company
is impacted by the Act since its sponsors a postretirement health care plan that
provides prescription drug benefits. The Company has elected to defer
recognition of the Act in accordance with Financial Accounting Standards Board
Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003." As a
result, any measures of net periodic postretirement benefit cost do not reflect
the effects of the Act on the plan. Specific authoritative guidance on
accounting for the federal subsidy is pending and that guidance, when issued,
could require the Company to change previously reported information.
NOTE 10: SHAREHOLDERS' EQUITY
The Company has 10,000,000 authorized Common Shares at $0.01 Par value;
5,000 authorized Preferred Shares at $100 par value; and 10,000,000 authorized
Preferred Shares at $0.01 par value.
On April 25, 2003, the Company announced a three-for-one stock split of
the Company's Common Shares. Approval for the stock split was received by both
the New York State Public Service Commission and the New Jersey Board of Public
Utilities on October 6, 2003, and the shares were made available on October 13,
2003. Also, par value, equal to one cent per share, was established for the
Common Shares. As a result, earnings per-share amounts for the three-month
period ended March 31, 2003 have been restated for the stock split.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates in the communications services industry and
provides telephone, directory advertising services, Internet, Video and other
services to its customers. The Company's basic business strategy is directed
towards retaining as much of the traditional telecommunications business as
possible, while using its existing network to develop and grow its Internet,
data and entertainment products. The information below reflects all of these
factors and efforts.
You should read this discussion in conjunction with the consolidated
financial statements and the accompanying notes. The presentation of dollar
amounts in this discussion is in thousands.
OVERVIEW: RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
2003 -
OPERATING REVENUES
Operating revenues decreased by $90 (or 1%) to $7,055 for the three-month period
ended March 31, 2004 as compared to an increase of $560 (or 9%) to $7,145 for
the corresponding period of 2003. Network access service revenues decreased $74
(or 3%) primarily due to lower local switching support revenues received from
the Universal Service Administration Corporation.
Long distance service revenues declined $19 (or 2%) primarily due the
continued decline in interstate interLATA call volume. Online service revenues
increased $121 (or 8%) due to increases of $196 (or 41%) in DSL revenues and
$194 in Video revenues, resulting from the continued expansion of our customer
base for these products. These increases were offset by a decrease of $268 (or
28%) in dial up services due to customers primarily outside of our service
territory migrating to other high speed Internet connections. A decrease of $103
(or 12%) in other service and sales revenue was the result of lower rates that
were mandated by the FCC for reciprocal compensation and overall decreases in
the sale of other non-regulated ancillary services.
OPERATING EXPENSES
Total operating expenses increased $562 (or 10%) for the three-month
period ended March 31, 2004 as compared to an increase of $648 (or 12%) for the
same period in 2003. An increase in depreciation expense of $174 (or 15%)
reflects ongoing plant upgrades to accommodate the growing DSL business as well
as the cost of the Video equipment to expand the number of Video service
subscribers. Other plant specific expenses increased $49 (or 8%) primarily due
to Video content costs for our growing Video subscriber base. Customer
operations expenses increased $89 (or 9%) due to labor costs resulting from
reorganization of some staff. Corporate operations increased $220 (or 20%) as
the result of increased professional fees and the continued rise in commercial
insurance premiums. The increase of $61 (or 13%) in other services and sales was
primarily due to increased network capacity requirements for trunklines.
OTHER INCOME (EXPENSE)
Other income (expense) increased by $640 or (38%) for the three-month
period ended March 31, 2004 from $1,714 in the corresponding period of 2003
primarily due to the increase in income from O-P. The partnership's earnings
increased 27% over the comparable period last year. Continuing strong O-P call
volume remains the primary factor behind the increase.
Interest expense decreased by $36 or 38% for the three month period
ended March 31, 2004 from $95 in the corresponding period of 2003 due to lower
interest rates from refinancing.
INVESTMENT IN ZEFCOM
The Company has a 17% ownership interest in Zefcom, LLC ("Zefcom"). This
investment had historically been recorded on the cost method of accounting.
Zefcom formed an Executive Operating Committee consisting of representatives
from three of the investors in Zefcom. The Operating Committee's
responsibilities are to assist management as necessary in relations with
consultants and prospective investors, and in matters of finance.
In the fourth quarter of 2003, the Company's Chief Executive Officer was
elected to this committee, and accordingly, the Company, through its
representation on this Operating Committee, began exerting significant influence
on the financial and operating decisions of Zefcom. As a result of this change,
the Company changed its accounting for the Zefcom investment from the cost
method to the equity method of accounting in 2003.
In accordance with generally accepted accounting principles, the Company
has adjusted its prior period financial results to record its 17% investment in
Zefcom as if it had been accounted for under the equity method of accounting.
The Company's percentage of Zefcom's losses have been reflected in the "Other
Income" in the Income Statement for the three month
-10-
periods ended March 31, 2004 and 2003. The impact to Net Income for the
three-month period ended March 31, 2003 was $32, earnings per share also
decreased by $0.01.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5,942 of cash and cash equivalents available at March
31, 2004. The Company has a $4,000 line of credit with a bank, of which the
entire amount remained unused at March 31, 2004. Interest is at a variable rate
and borrowings are on a demand basis without restrictions. In addition, on
February 18, 2003, the Company closed a commitment with CoBank, ACB with respect
to an $18,475 unsecured term credit facility at a variable rate. As of March 31,
2004, the Company has currently used $7 million of the CoBank, ACB term credit.
CASH FROM OPERATING ACTIVITIES
During 2004 the Company's primary source of funds continues to be cash
generated from operations. For the period ended March 31, 2004, net cash from
operating activities was less than our capital expenditures due to the Company's
continuing growth of the Video business.
CASH FROM INVESTING ACTIVITIES
Capital expenditures totaled $972 during the three-month period ended
March 31, 2004 as compared to $1,230 for the corresponding period of 2003 since
less investment is required as the rollout of the Video business continues
towards completion.
The Company's cash distribution from O-P for the Company's share of
O-P's earnings was $1,650 for the three months ended March 31, 2004 versus
$2,250 for the comparable period last year. The decrease is due to more cash
being retained in the business.
In March 2004, the Company made a capital contribution of $238 to
EsiNet. The Company is committed to contribute a total of $950 in four payments
over the next twelve months.
CASH FROM FINANCING ACTIVITIES
Dividends declared by the Board of Directors of Warwick Valley Telephone
Company were $0.19 per share for the three-month period ended March 31, 2004,
compared to $0.16 for the corresponding period in 2003. The total dividends paid
for the first quarter of 2004 for common stock by Warwick Valley Telephone
Company were $1,028, compared to $865 for the same period in 2003. In February
2003, the Company used $3,149 of its unsecured credit facility with CoBank to
repay existing debt and pay costs associated with closing the commitment with
CoBank.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company adopted FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46") in 2003. FIN 46, which is an
interpretation of ARB No. 51, "Consolidated Financial Statements", addresses the
consolidation of investments made by a business enterprise, structured in a way
that, although the enterprise may have less than a majority interest in the
voting rights, the investment exhibits other characteristics making the
enterprise the primary beneficiary of the investment, absorbing the majority of
the losses, receiving the majority of the expected residual returns, and thereby
requiring consolidation by the business enterprise. As of March 31, 2004 FIN 46
did not significantly impact the Company's operating results or financial
position. The Company will continue to monitor the impact of FIN 46 on an
ongoing basis.
OTHER FACTORS:
COMPETITION
The Telecommunications Act of 1996 (the "Act") created a nationwide
structure in which competition is allowed and encouraged between local exchange
carriers, interexchange carriers, competitive access providers, cable TV
companies and other entities. The first markets of the Company that were
affected were those in which regional toll service is provided in both states.
Regional toll competition reduced the Company's revenues. The Company itself can
provide competitive local exchange telephone service outside its franchised
territory.
The Company currently provides access to the national and international
calling markets as well as intrastate calling markets through all interested
inter-exchange carriers, including the Company's wholly owned subsidiary Warwick
Valley Long Distance Company ("WVLD"). Equal access ("one-plus") service to all
toll carriers has been available to the Company's customers since August 1,
1991. Access to the remainder of the intrastate calling markets is provided by
the Company as well as other exchange carriers. WVLD, as an inter-exchange
carrier, competes
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against all such other carriers, including accelerating wireless competition,
providing full toll services to its customers at discounted rates.
The Company's territory is surrounded by the territories of Verizon
Communications, Inc., Frontier - A Citizen's Communications Company and Sprint
Telephone, all of which offer residential and business telephone services and
equipment. There are also several competitive telephone companies located within
a 30-mile radius of Warwick, New York and Voice Over Internet Protocol ("VOIP")
providers are beginning to offer limited service. The Company's residential
customers can purchase telephone sets (including cellular sets) and equipment at
other retail outlets inside and outside the Company's territory and not
affiliated with the Company.
The Company is currently competing with Frontier - A Citizen's
Communications Company - in the Middletown, New York area as well as with Sprint
Telephone in the Vernon, New Jersey area for local service through access lines.
The Company is reviewing plans to provide limited service in other surrounding
areas in both New York and New Jersey. There can be no assurances that the
Company will affect any such additional plans, or that other companies will not
begin providing competitive local exchange telephone service in the Company's
franchise territory. Cablevision is currently rolling out a VOIP product in
Bethpage, New York and has launched a VOIP product in New Jersey.
Online competes both on the basis of service and price. There are
numerous competitors throughout Online's market area whose services are
available to customers. During the first quarter of 2004 the Company's DSL
product, Ultralink increased its penetration level to 29.9% of establishments
passed. Conversely, the number of customers for Online's dial-up product
decreased 24.5% due to the migration of customers to high speed Internet
provided not only by the Company itself but also by the competition primarily
outside of our service territory. Whether customer and pricing levels can be
maintained depends, in part, on the actions of existing competitors, the
possible entry into the market of new competitors, the rate of technological
change and the level of demand for services.
Our Video product was launched in April of 2002 and is competing against
entrenched cable companies including Service Electric Company ("SEC"),
Cablevision and satellite TV companies such as Direct TV and Dish Network.
On November 10, 2003 the FCC issued an order requiring intermodal
portability (wireline to wireless) in the top one hundred Metropolitan Service
Areas ("MSA") by November 23, 2004 where the requesting wireless carrier's
"coverage area" overlaps that of the local exchange carrier. The Company must
provide intermodal Local Number Portability ("LNP") by May 24, 2004. LNP may
assist a competitor in obtaining our customers because customers can keep their
current telephone number, even when they switch their telephone service from the
Company to another carrier. As of March 31, 2004, LNP had not posed a
significant competitive risk within the Company's service territory.
REGULATION
The Company's New York telephone service operations are subject to the
jurisdiction of the NYSPSC, and the Company's New Jersey telephone service
operations to the jurisdiction of the NJBPU. These two bodies have regulatory
authority over the Company with respect to rates, facilities, services, reports,
issuance of securities and other matters such as corporate restructuring. As a
result, the Company's ability to respond quickly to changing market conditions
or to implement a new business organization can be limited by the necessity of
obtaining regulatory reviews or responding to interrogatories which can slow
down or even prevent the desired transaction. Interstate toll and access
services are subject to the jurisdiction of the FCC. The Company receives
reimbursement from carriers in the form of charges for providing carriers access
to and from the Company's local network. Video operations are also under the
jurisdiction of the NYSPSC, the NJBPU, and the FCC as well as the municipalities
where the Company provides services.
In the Company's two New Jersey exchanges, intrastate toll revenues are
retained by toll carriers, of which the Company is one. The associated access
charges are retained by the Company. Revenues resulting from traffic between the
Company, Verizon and Sprint are reconciled through charges payable to each
company for terminating traffic.
In addition to charging for access to and from the Company's local
network, the Company bills and collects charges for most interstate and
intrastate toll messages carried on its facilities. Interstate billing and
collection services provided by the Company are not regulated. They are provided
under contract by the Company. Intrastate billing and collection remain partly
regulated in New York and fully regulated in New Jersey. The regulated services
are provided under tariff. Some carriers provide their own billing and
collection services.
The Company has filed a petition with the NYSPSC seeking approval to
reorganize its corporate structure in order to create a holding company that
would separate its regulated local exchange operations from its deregulated
operations. Under this reorganization plan, corporate management and
administrative functions would remain at Warwick Valley Telephone Company,
proposed to be renamed WVT Communications Inc., which would become the
unregulated holding company of a regulated local exchange subsidiary (proposed
to be named Warwick Valley Telephone Company) and other, unregulated
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subsidiaries. Before the Company may complete this proposed reorganization plan,
it must first obtain the approval of the NYSPSC, the NJBPU and its shareholders.
The Company is actively pursuing the resolution of this petition before the two
public service commissions.
The FCC has pending decisions regarding the USF and inter-carrier
compensation issues. The sustainability of the USF and the requirement that VOIP
providers participate in funding Rural Carriers will affect and influence
decisions to invest in new facilities. The same considerations apply to the
continuation of inter-carrier compensation, or access charges, which is another
element in the financial health of rural telephone companies. The FCC will be
acting on these issues in 2004.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others the
following: general economic and business conditions, both nationally and in the
geographic regions in which the Company operates; industry capacity; demographic
changes; existing governmental regulations and changes in or the failure to
comply with, governmental regulations; legislative proposals relating to the
businesses in which the Company operates; competition; technological changes;
and the loss of any significant ability to attract and retain qualified
personnel. Given these uncertainties, current and prospective investors should
be cautioned in their reliance on such forward-looking statements. The Company
disclaims any obligations to update any such factors or to publicly announce the
results of any revision to any of the forward-looking statements contained
herein to reflect future events or developments.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold or issue derivative instruments for any
purposes or other financial instruments for trading purposes. The Company's only
assets exposed to market risk are its interest bearing bank accounts, into which
the Company deposits its excess operating funds on a daily basis. The Company
has the option of choosing the following rate options from CoBank: Weekly Quoted
Variable Rate, Long-Term Fixed Quote and a Libor Option. The Company does not
believe that its exposure to interest rate risk is material.
ITEM 4. CONTROLS AND PROCEDURES
1. Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act). These rules refer to the controls and other procedures
of a company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange
Act is recorded, processed, summarized and reported within required time
periods. Our Chief Executive Officer and our Chief Financial Officer
have evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report, and they
have concluded that such controls and procedures were effective at
ensuring that required information will be disclosed on a timely basis
in our reports filed under the Exchange Act.
2. Changes in internal controls over financial reporting
We maintain a system of internal accounting controls that are designed
to provide reasonable assurance that our books and records accurately
reflect our transactions and that our established policies and
procedures are followed for financial reporting purposes as they relate
to disclosures and procedures. For the quarter ended March 31, 2004,
there were no changes in our disclosure controls or in other factors
that materially affected or were reasonably likely to materially affect
such controls.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's 2004 Annual Meeting of Common Shareholders held on
April 30, 2004, Wisner H. Buckbee, Joseph E. DeLuca, M.D. and Fred M. Knipp,
were elected as directors for three-year terms in Class II. The terms of M. Lynn
Pike, Rafael Collado, Philip S. Demarest, Robert J. DeValentino, Corrina S.
Lewis, and Herbert Gareiss, Jr. continued after the meeting.
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Matters voted on at the meeting and the results of each vote are as follows:
Proposal I. For Against Abstain
- --------------------------------------------------------------------------------------------
Set the number of directors at nine until the
next annual meeting: 4,515,363 17,160 24,626
- --------------------------------------------------------------------------------------------
Proposal II. For Withhold
- --------------------------------------------------------------------------------------------
To elect three (3) directors to Class I:
Wisner H. Buckbee 4,503,667 53,482
Joseph E. DeLuca, M.D. 4,498,030 59,119
Fred M. Knipp 4,169,956 387,193
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ITEM 5. OTHER INFORMATION
a) Election of Officers
At its reorganizational meeting on April 30, 2004, the Board of
Directors elected the following persons to the positions set forth
opposite their names:
Wisner H. Buckbee Chairman of the Board
Fred M. Knipp Vice Chairman of the Board
M. Lynn Pike President, Chief Executive Officer
Philip A. Grybas Vice President, Chief Financial Officer, Treasurer
Herbert Gareiss, Jr. Vice President, Secretary
Larry Drake Vice President
Brenda A. Schadt Vice President
Colleen M. Shannon Assistant Secretary
SHAREHOLDERS IN 401(k) PLAN
As of March 31, 2004 3% of the Company's outstanding Common Shares were
held by employees in the Company's 401(k) plan. These percentages fluctuate
quarterly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
31.1 Chief Executive Officer Certification
31.2 Chief Financial Officer Certification
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by
M. Lynn Pike-principal Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by
Philip A. Grybas-principal Financial Officer.
b) Reports on Form 8-K -
On April 7, 2004, the Company issued a press release announcing that it
will bring advanced broadband communications services to 54 cities and
surrounding communities in rural New York by leading a team of 13
telecommunications firms to organize the Empire State Independent Fiber
Network LLC.
On April 30, 2004 Lynn Pike, the President of Warwick Valley Telephone
Company ("the Company") discussed certain aspects of the Company's
business at its Annual Shareholders Meeting on April 30, 2004. The text
of his presentation, as presented is in Exhibit Item 20.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Warwick Valley Telephone Company
Registrant
Date 5/10/04 /s/ M. Lynn Pike
M. Lynn Pike, President
(Chief Executive Officer)
Date 5/10/04 /s/Philip A. Grybas
Philip A. Grybas, Vice President, Treasurer
(Principal Financial and Chief Accounting Officer)
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