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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
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EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from _____ to
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 (IRS Employer Identification No.)
incorporation or organization)
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: 5,401,227 Common Shares,
$.01 par value, outstanding at August 19, 2004.
INDEX TO FORM 10Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and
December 31, 2003, as restated (Unaudited). 3
Consolidated Statements of Income for the three and six months
ended June 30, 2004 and 2003, as restated (Unaudited). 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003, as restated (Unaudited). 5
Notes to Consolidated Financial Statements (Unaudited). 6-13
Item. 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-19
Item. 3 Quantitative and Qualitative Disclosures about Market Risk. 19
Item. 4 Controls and Procedures. 19
PART II - OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K. 20-25
- 2 -
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands except share amounts)
JUNE 30, DECEMBER 31,
2004 2003
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(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,917 $ 5,717
Accounts receivable - net of reserve for uncollectibles-$127 and $508, respectively 3,618 3,420
Other accounts receivable 288 273
Materials and supplies 1,213 1,153
Prepaid expenses 525 681
Deferred income taxes 409 495
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Total Current Assets $ 13,970 $ 11,739
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Property, plant and equipment, net 41,059 41,322
Unamortized debt issuance costs 109 115
Intangible asset - pension 744 744
Other deferred charges 583 510
Investments 4,425 5,303
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TOTAL ASSETS $ 60,890 $ 59,733
======== ========
LIABILITIES
Current Liabilities:
Accounts payable $ 516 $ 1,559
Current portion of long term debt 669 223
Advance billing and payments 280 247
Customer deposits 123 135
Accrued taxes 657 506
Pension and post retirement benefit obligations 1,168 1,139
Accrued access billing 825 694
Other accrued expenses 851 1,252
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Total Current Liabilities $ 5,089 $ 5,755
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Long-term debt 6,480 6,926
Deferred income taxes 4,552 4,119
Other liabilities and deferred credits 521 536
Pension and post retirement benefit obligations 4,560 4,511
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TOTAL LIABILITIES $ 21,202 $ 21,847
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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 5,984,910 as of June 30, 2004 and 5,984,883 as of December 31, 2003
Treasury stock - $0.01 par value, 583,683 Common Shares as of June 30, 2004 (3,598) (3,598)
and December 31, 2003
Additional paid in capital 3,473 3,473
Accumulated other comprehensive income (765) (765)
Retained earnings 40,018 38,216
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Total Shareholders' Equity $ 39,688 $ 37,886
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,890 $ 59,733
======== ========
- 3 -
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ in thousands except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
Operating Revenues:
Local network service $ 1,012 $ 1,007 $ 2,026 $ 2,038
Network access service 2,032 2,392 4,226 4,670
Long distance services 1,035 921 1,972 1,877
Directory advertising 359 345 726 710
Online services 1,724 1,648 3,440 3,243
Other services and sales 766 829 1,535 1,702
----------- ----------- ----------- -----------
Total operating revenues 6,928 7,142 13,925 14,240
----------- ----------- ----------- -----------
Operating Expenses:
Plant specific 1,028 1,068 2,084 2,142
Plant non-specific:
Depreciation & amortization 1,332 1,237 2,670 2,401
Other 839 697 1,533 1,342
Customer operations 1,201 1,060 2,326 2,096
Corporate operations 1,210 1,203 2,557 2,330
Cost of services and sales 465 913 993 1,380
Property, revenue and payroll taxes 395 325 771 715
----------- ----------- ----------- -----------
Total operating expenses 6,470 6,503 12,934 12,406
----------- ----------- ----------- -----------
OPERATING INCOME 458 639 991 1,834
Other Income (Expense)
Interest income (expense), net of capitalized interest (70) (114) (137) (216)
Income from equity method investments 2,670 2,309 5,034 4,148
Other income (expense) (27) 28 22 (2)
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Total other income (expense) - net 2,573 2,223 4,919 3,930
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,031 2,862 5,910 5,764
Income Taxes 1,021 977 2,042 1,950
----------- ----------- ----------- -----------
NET INCOME 2,010 1,885 3,868 3,814
Preferred Dividends 7 7 13 13
----------- ----------- ----------- -----------
INCOME APPLICABLE TO COMMON STOCK $ 2,003 $ 1,878 $ 3,855 $ 3,801
=========== =========== =========== ===========
Basic & Diluted Earnings per Share of
Outstanding Common Stock $ 0.37 $ 0.35 $ 0.71 $ 0.70
=========== =========== =========== ===========
Weighted Average Shares of Common Stock
Outstanding 5,401,214 5,400,419 5,401,214 5,400,419
=========== =========== =========== ===========
Please see accompanying notes, which are an integral part of the consolidated
financial statements.
- 4 -
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
($ in thousands)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 2003
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(RESTATED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,868 $ 3,814
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,670 2,401
Deferred income tax 519 232
Interest charged to construction (5) (33)
Income from equity investments (5,034) (4,148)
Change in assets and liabilities:
(Increase) in accounts receivable (198) (168)
(Increase) in other receivables (15) (121)
(Increase) Decrease in materials and supplies (60) 32
Decrease (Increase) in prepaid expenses 156 (118)
(Increase) in deferred charges (73) (235)
(Decrease) in accounts payable (1,043) (328)
(Decrease) in customers' deposits (12) (7)
(Decrease) in advance billing and payments 33 (43)
Increase in accrued taxes 151 98
Increase in pension & post retirement benefit obligations 78 215
Increase in accrued access billing 132 112
(Decrease) Increase in other accrued expenses (418) 277
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Net cash provided by operating activities $ 749 $ 1,980
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CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (2,401) (2,297)
Interest charged to construction 5 33
Distribution from partnership 6,150 4,125
Investment contributions (238) 0
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Net cash provided by investing activities $ 3,516 $ 1,861
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CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) in notes payable 0 (5,000)
Proceeds from issuance of long term debt 0 3,149
Unamortized debt issuance 0 (119)
Dividends (Common) (2,052) (1,786)
Dividends (Preferred) (13) (13)
Sale of common stock 0 47
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Net cash used in financing activities $(2,065) $(3,722)
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Increase (Decrease) in cash and cash equivalents 2,200 119
Cash and cash equivalents at beginning of period 5,717 1,641
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Cash and cash equivalents at end of period $ 7,917 $ 1,760
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- 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 and six month periods ended June
30, 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: RESTATEMENT
On December 4, 1998, the New York Public Service Commission ("NYPSC")
issued Cases 94-C-0095 and 28425 ("Order"), which required the Company to reduce
traffic sensitive access charges to inter-exchange carriers. This Order was
effective from January 1, 1999 to present. The Company has determined that it
did not reduce traffic sensitive charges to inter-exchange carriers during the
period January 1, 1999 to March 31, 2004, as stipulated by the Order. As a
result, the Company recorded additional revenues from inter-exchange carriers in
the amount equal to the incremental difference between the rate charged and the
rate that would comply with the Order. The Company has restated its financial
statements for all prior periods affected as the cumulative impact for periods
prior to fiscal 2004 would have been material if recorded in the current period.
The Company has restated the prior periods to reduce revenue, accrue interest,
and record the related tax impact. The Company intends to file an amendment to
the Company's 2003 Annual Report on Form 10-K reflecting the impact of this
restatement. The following tables present the impact of the restatement.
The NYPSC has not made a final determination regarding the amount of the
Company's obligation and whether the Company will be required to make a refund,
the way any refund would be calculated or of the amount or timing of any
payments. Therefore, the ultimate amount of repayment may differ from the
current liability and such difference, if any, would be reflected in earnings in
the period of settlement.
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WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
The impact of the restatement on the consolidated statement of income for the
three months and six months ended June 30, 2003 was as follows:
Three months ended June 30, 2003 Six months ended June 30, 2003
------------------------------- ------------------------------
As Previously As Restated As Previously As Restated
Reported Reported
------------------------------- ------------------------------
Operating revenues $ 7,191 $ 7,142 $ 14,337 $ 14,240
Operating income $ 688 $ 639 $ 1,931 $ 1,834
Interest expense $ (106) $ (114) $ (201) $ (216)
Total other income (expense) $ 2,231 $ 2,223 $ 3,945 $ 3,930
Income before income taxes $ 2,919 $ 2,862 $ 5,876 $ 5,764
Income taxes $ 997 $ 977 $ 1,990 $ 1,950
Net income $ 1,922 $ 1,885 $ 3,886 $ 3,814
Basic & diluted earnings per share $ 0.35 $ 0.35 $ 0.71 $ 0.70
The impact of the restatement on net income and basic and diluted earnings per
share for the three months and six months ended June 30, 2003 were $37 and $.00,
respectively and $72 and $.01, respectively.
The impact of the restatement on the consolidated statement of cash flows for
the six months ended June 30, 2003 was as follows:
Six months ended June 30, 2003
-----------------------------
As Previously As Restated
Reported
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Net income $ 3,886 $ 3,814
Deferred income tax $ 272 $ 232
Increase in accrued access billing $ -- $ 112
The impact of the restatement on the consolidated balance sheet as of December
31, 2003 and 2002 was as follows:
2003 2002
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As Previously As Restated As Previously As Restated
Reported Reported
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Deferred income taxes $ 255 $ 495 $ 60 $ 221
Total current assets $ 11,499 $ 11,739 $ 7,454 $ 7,615
Total Assets $ 59,493 $ 59,733 $ 54,809 $ 54,970
Accrued access billing $ -- $ 694 $ -- $ 466
Total current liabilities $ 4,838 $ 5,755 $ 13,124 $ 13,590
Total Liabilities $ 21,153 $ 21,847 $ 20,098 $ 20,564
Retained earnings $ 38,670 $ 38,216 $ 34,597 $ 34,292
Total Shareholders' Equity $ 38,340 $ 37,886 $ 34,711 $ 34,406
Total Liabilities and Shareholders' Equity $ 59,493 $ 59,733 $ 54,809 $ 54,970
- 7 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
The impact of the restatement on the consolidated statement of income for the
years ended December 31, 2003, 2002 and 2001 was as follows:
2003 2002 2001
-------------------------- -------------------------- --------------------------
As Previously As Restated As Previously As Restated As Previously As Restated
Reported Reported Reported
-------------------------- -------------------------- --------------------------
Operating revenues $ 28,843 $ 28,649 $ 27,703 $ 27,547 $ 27,538 $ 27,418
Operating income $ 3,371 $ 3,177 $ 5,267 $ 5,111 $ 6,746 $ 6,626
Interest expense $ (380) $ (414) $ (318) $ (344) $ (355) $ (372)
Total other income (expense) $ 8,460 $ 8,426 $ 6,335 $ 6,309 $ 4,243 $ 4,226
Income before income taxes $ 11,831 $ 11,603 $ 11,602 $ 11,421 $ 10,989 $ 10,852
Income taxes $ 3,952 $ 3,873 $ 3,851 $ 3,788 $ 3,665 $ 3,618
Net income $ 7,879 $ 7,730 $ 7,751 $ 7,632 $ 7,324 $ 7,234
Basic & diluted earnings
per share $ 1.45 $ 1.43 $ 1.43 $ 1.41 $ 1.34 $ 1.33
NOTE 3: IMPACT OF 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 June 30, 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.
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"), NYPSC, and New Jersey Board of Public Utilities ("NJBPU"); 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 did not have an asset retirement
obligation as defined by SFAS No. 143, as of June 30, 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 $543 and $505 as of June 30, 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.
NOTE 4: EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of actual shares outstanding of 5,401,214 and 5,400,419 for the three and
six month periods ended June 30, 2004 and 2003, respectively. Share amounts have
been restated for the three-for-one stock split (see Note 11).
The Company did not have any common stock equivalents as of June 30, 2004
and 2003.
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WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 5: COMPREHENSIVE INCOME
Comprehensive income is equivalent to net income for the three and six
month periods ended June 30, 2004 and 2003.
NOTE 6: SEGMENT INFORMATION
The Company's segments are strategic business units that offer different
products and services and are managed as telephone and online services. The
Company evaluates 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 June 30, 2004 and December 31,
2003 is set forth below:
June 30, December 31,
2004 2003
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Assets
Telephone $ 65,875 $ 62,825
Online 10,815 9,883
Elimination (15,800) (12,975)
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Total assets $ 60,890 $ 59,733
========= ========
Segment income statement information for the six months ended June 30,
2004 and 2003 is set forth below:
2004 2003
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Revenues
Telephone $ 11,532 $ 11,964
Online 3,440 3,243
Eliminations (1,047) (967)
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Total revenues $ 13,925 $ 14,240
Operating income
Telephone 1,097 2,067
Online (106) (233)
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Total operating income $ 991 $ 1,834
Interest expense and income (137) (216)
Income from equity method investments 5,034 4,148
Other income (expense) 22 (2)
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Income before taxes $ 5,910 $ 5,764
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WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
Segment income statement information for the three months ended June 30,
2004 and 2003 is set forth below:
2004 2003
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Revenues
Telephone $ 5,743 $ 6,021
Online 1,724 1,648
Eliminations (539) (527)
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Total revenues $ 6,928 $ 7,142
Operating income
Telephone 541 997
Online (83) (358)
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Total operating income $ 458 $ 639
Interest expense and income (70) (114)
Income from equity method investments 2,670 2,309
Other income (expense) (27) 28
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Income before taxes $ 3,031 $ 2,862
NOTE 7: 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 June 30, 2004
and December 31, 2003, the material and supplies inventory consisted of the
following:
2004 2003
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Inventory for outside plant $ 269 $ 231
Inventory for inside plant 700 472
Inventory for online plant 89 90
Inventory of video equipment 27 283
Inventory of equipment held for sale or lease 128 77
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$1,213 $1,153
====== ======
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Plant in service, at cost, consisted of the following as of June 30, 2004
and December 31, 2003:
2004 2003
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Land, buildings, furniture and other support equipment $ 7,527 $ 7,518
Network and communications plant 28,132 27,273
Telephone plant 24,323 23,747
Online plant 10,177 9,513
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Plant in service $70,159 $68,051
Plant under construction 1,690 1,467
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71,849 69,518
Less: Accumulated depreciation 30,790 28,196
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Property, plant and equipment, net $41,059 $41,322
======= =======
- 10 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 9: 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 six months ended June 30:
(Unaudited)
2004 2003
-------- --------
Net sales $ 79,634 $ 67,973
Cellular service cost 7,811 8,805
Operating expenses 3,706 2,746
-------- --------
Net operating income 68,117 56,422
Other income 470 914
-------- --------
Net income $ 68,587 $ 57,336
======== ========
The following summarizes O-P's income statement for the three months ended
June 30:
(Unaudited)
2004 2003
-------- --------
Net sales $ 42,193 $ 36,286
Cellular service cost 4,293 3,369
Operating expenses 1,718 2,144
-------- --------
Net operating income 36,182 30,773
Other income 202 298
-------- --------
Net income $ 36,384 $ 31,071
======== ========
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.
Accordingly the Company, through the representation of this Operating Committee
began exerting significant influence on 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 August 2004, the Company's Chief Financial
Officer was elected to this committee replacing the Chief Executive Officer.
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 share of Zefcom's losses has been reflected in "Other Income" in
the Income Statement for the three and six month periods ended June 30, 2004 and
2003. The impact to net income for the six month period ended June 30, 2003 was
a decrease of $72. Earnings per share also decreased by $0.01.
In March 2004, the Company made an initial capital contribution of $238 in
cash to Empire State Independent Fiber Network, LLC ("EsiNet"). The Company
committed to contribute a total of $950 in four payments over the succeeding
twelve months in connection with the Company's 25% interest in the venture. Two
of these payments have already been made. The remaining payments of
approximately $238 each are scheduled for, December 1, 2004 and April 1, 2005,
respectively. EsiNet's operations are anticipated to begin in the fourth quarter
of 2004.
- 11 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 10: PENSION AND POST RETIREMENT OBLIGATIONS
The components of net periodic cost for the three months ended June 30:
Post Retirement
Pension Benefits Benefits
2004 2003 2004 2003
---------------- ----------------
Service Cost $ 63 $ 105 $ 47 $ 40
Interest Cost 203 216 77 69
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 169
----- ----- ----- -----
Net Periodic Benefit Cost $ 161 $ 404 $ 154 $ 141
===== ===== ===== =====
The components of net periodic cost for the six months ended June 30:
Post Retirement
Pension Benefits Benefits
2004 2003 2004 2003
---------------- ----------------
Service Cost $ 126 $ 210 $ 94 $ 80
Interest Cost 406 431 154 139
Expected Return On Plan Assets (325) (306) (60) (42)
Amortization Of Prior Service Cost 44 64 16 16
Amortization Of Net (Gain) Loss 71 71 104 89
Special Termination Benefits 338
----- ----- ----- -----
Net Periodic Benefit Cost $ 322 $ 808 $ 308 $ 282
===== ===== ===== =====
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. During the six
months ended June 30, 2004, the Company has contributed $445 to its pension plan
and $111 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 it sponsors a postretirement health care plan that
provides prescription drug benefits
In May 2004, the Financial Accounting Standards Board released FASB Staff
Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP
106-2"). FSP 106-2 states that if a company concludes that its single-employer
defined benefit postretirement health care plan provides a drug benefit that is
actuarially equivalent to the Medicare Part D benefit, the employer should
recognize the subsidy in the measurement of the accumulated postretirement
benefit obligation (APBO) under FAS 106, and should account for this reduction
in the APBO as an actuarial gain. If an employer amends its plan to achieve
actuarially equivalent drug benefits, therefore making the employer eligible for
the subsidy, the employer is required to consider the combined effect that the
amendment and the subsidy have on the APBO. If the combined effect is a decrease
in the APBO, the net reduction is accounted for as an actuarial gain. If the
combined effect is an increase in the APBO, the net increase is accounted for as
a plan amendment.
The provisions of FSP 106-2 are effective for the first interim or annual
period beginning after June 15, 2004 for all public companies. If the effects of
FSP 106-2, including the subsidy, changes in participation rates, and changes in
per capita claims costs, lead the employer to conclude that the enactment of FSP
106-2 was not a "significant event" for its plan, the effects should be
incorporated in the valuation performed at the next measurement date required by
FAS 106. The Company is currently assessing the impact of FSP 106-2.
- 12 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 11: 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 from both
the New York State Public Service Commission and the New Jersey Board of Public
Utilities on October 6, 2003, and the additional shares resulting from the split
were made available on October 13, 2003. Also, a par value of one cent per share
was established for the Common Shares. As a result, earnings-per-share amounts
for the three and six month periods ended June 30, 2003 have been restated to
reflect the stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's critical and primary operations are in the communications
services industry and the Company 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 Company's
non-operating investments are in telecommunication service businesses in an
effort to obtain future revenue generation or expense savings. 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.
RESTATEMENT:
On December 4, 1998, the New York Public Service Commission ("NYPSC")
issued Cases 94-C-0095 and 28425 ("Order"), which required the Company to reduce
traffic sensitive access charges to inter-exchange carriers. This Order was
effective from January 1, 1999 to present. The Company has determined that it
did not reduce traffic sensitive charges to inter-exchange carriers during the
period January 1, 1999 to March 31, 2004, as stipulated by the Order. As a
result, the Company recorded additional revenues from inter-exchange carriers in
the amount equal to the incremental difference between the rate charged and the
rate that would comply with the Order. The Company has restated its financial
statements for all prior periods affected as the cumulative impact for periods
prior to fiscal 2004 would have been material if recorded in the current period.
The Company has restated the prior periods to reduce revenue, accrue interest,
and record the related tax impact. The Company intends to file an amendment to
the Company's 2003 Annual Report on Form 10-K reflecting the impact of this
restatement. The following tables present the impact of the restatement.
The NYPSC has not made a final determination regarding the amount of the
Company's obligation and whether the Company will be required to make a refund,
the way any refund would be calculated or of the amount or timing of any
payments. Therefore, the ultimate amount of repayment may differ from the
current liability and such difference, if any, would be reflected in earnings in
the period of settlement.
-13-
Restatement (cont'd):
The impact of the restatement on the consolidated statement of income for the
three months and six months ended June 30, 2003 was as follows:
Three months ended June 30, 2003 Six months ended June 30, 2003
-------------------------------- ------------------------------
As Previously As Restated As Previously As Restated
Reported Reported
-------------------------------- ------------------------------
Operating revenues $ 7,191 $ 7,142 $ 14,337 $ 14,240
Operating income $ 688 $ 639 $ 1,931 $ 1,834
Interest expense $ (106) $ (114) $ (201) $ (216)
Total other income (expense) $ 2,231 $ 2,223 $ 3,945 $ 3,930
Income before income taxes $ 2,919 $ 2,862 $ 5,876 $ 5,764
Income taxes $ 997 $ 977 $ 1,990 $ 1,950
Net income $ 1,922 $ 1,885 $ 3,886 $ 3,814
Basic & diluted earnings
per share $ 0.35 $ 0.35 $ 0.71 $ 0.70
The impact of the restatement on net income and basic and diluted earnings per
share for the three months and six months ended June 30, 2003 were $37 and $.00,
respectively and $72 and $.01, respectively.
The impact of the restatement on the consolidated statement of cash flows for
the six months ended June 30, 2003 was as follows:
Six months ended June 30, 2003
------------------------------
As Previously As Restated
Reported
------------------------------
Net income $3,886 $3,814
Deferred income tax $ 272 $ 232
Increase in accrued access billing $ -- $ 112
The impact of the restatement on the consolidated balance sheet as of December
31, 2003 was as follows:
2003
--------------------------
As Previously As Restated
Reported
--------------------------
Deferred income taxes $ 255 $ 495
Total current assets $11,499 $11,739
Total Assets $59,493 $59,733
Accrued access billing $ -- $ 694
Total current liabilities $ 4,838 $ 5,755
Total Liabilities $21,153 $21,847
Retained earnings $38,670 $38,216
Total Shareholders' Equity $38,340 $37,886
Total Liabilities and Shareholders' Equity $59,493 $59,733
-14-
The impact of the restatement on the consolidated balance sheet and statement of
income for the years ended December 31, 2003, 2002, 2001, 2000, 1999 was as
follows:
2003 2002 2001 2000 1999
------------------- ------------------- ------------------- ------------------- ------------------
As As As As As As As As As As
Previously Restated Previously Restated Previously Restated Previously Restated Previously Restated
Reported Reported Reported Reported Reported
------------------- ------------------- ------------------- ------------------- ------------------
Operating revenues $ 28,843 $ 28,649 $ 27,703 $ 27,547 $ 27,538 $27,418 $26,691 $26,606 $23,186 $ 23,134
Operating income $ 3,371 $ 3,177 $ 5,267 $ 5,111 $ 6,746 $ 6,626 $ 7,637 $ 7,552 $ 6,059 $ 6,007
Interest expense $ (380) $ (414) $ (318) $ (344) $ (355) $ (372) $ (588) $ (595) $ (594) $ (596)
Total other income (expense) $ 8,460 $ 8,426 $ 6,335 $ 6,309 $ 4,243 $ 4,226 $ 2,811 $ 2,803 $ 1,891 $ 1,889
Income before income taxes $ 11,831 $ 11,603 $ 11,602 $ 11,421 $ 10,989 $10,852 $10,448 $10,354 $ 7,950 $ 7,896
Income taxes $ 3,952 $ 3,873 $ 3,851 $ 3,788 $ 3,665 $ 3,618 $ 3,430 $ 3,398 $ 2,368 $ 2,350
Net income $ 7,879 $ 7,730 $ 7,751 $ 7,632 $ 7,324 $ 7,234 $ 7,018 $ 6,956 $ 5,582 $ 5,546
Basic & diluted $ 1.45 $ 1.43 $ 1.43 $ 1.41 $ 1.34 $ 1.33 $ 1.29 $ 1.28 $ 1.02 $ 1.01
earnings per share
Total assets $ 59,493 $ 59,733 $ 54,809 $ 54,970 $ 48,058 $48,157 $42,423 $42,474 $37,349 $ 37,368
Total liabilities $ 21,153 $ 21,847 $ 20,098 $ 20,564 $ 17,410 $17,694 $16,029 $16,176 $14,619 $ 14,674
Total shareholders' equity $ 38,340 $ 37,886 $ 34,711 $ 34,406 $ 30,648 $30,463 $26,394 $26,298 $22,730 $ 22,694
Total liabilities and
shareholders' equity $ 59,493 $ 59,733 $ 54,809 $ 54,970 $ 48,058 $48,157 $42,423 $42,474 $37,349 $ 37,368
OVERVIEW: RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND
2003 -
OPERATING REVENUES
Operating revenues decreased by $214 (or 3%) for the three-month period
ended June 30, 2004. The decrease was due primarily to a reduction of network
access services revenue of $360 (or 15%) which resulted largely from lower local
switching support revenues received from the Universal Service Administration
Corporation, and to a lesser degree from the implementation of the
aforementioned Order under Restatement. Long Distance service revenues increased
$114 (or 12%) for the three month period ended June 30, 2004 due to an increase
in revenues from wireless carriers. Online service revenues increased $76 (or
5%) due to increases of $168 (or 32%) in DSL revenues and $184 in Video
revenues, resulting from the continued expansion of our customer base for these
products. These increases were offset by a decrease of $279 (or 29%) in dial up
services due to customers primarily outside of our service territory migrating
to other high speed Internet connections.
OPERATING EXPENSES
Total operating expenses decreased $33 (or 1%) for the three month period
ended June 30, 2004. An increase in depreciation expense of $95 (or 8%) reflects
ongoing plant upgrades to accommodate the growing DSL business as well as the
cost of the Video equipment installed to expand the number of Video service
subscribers. Other plant non-specific expenses increased $142 (or 20%) due
primarily to Video content costs for our growing Video subscriber base. Customer
operations expenses increased $141 (or 13%) due to labor costs resulting from
reorganization of some staff. The decrease of $448 (or 49%) in costs of services
and sales was due primarily to lower trunk line costs with interconnection
companies in 2004.
OTHER INCOME (EXPENSE)
Other income (expense) increased by $350 (or 16%) for the three month
period ended June 30, 2004 from $2,223 in the corresponding period of 2003 due
primarily to an increase in income from O-P. The partnership's earnings
increased 17% over the comparable period last year. Continuing strong O-P call
volume remains the primary factor behind the increase.
Interest expense (net) decreased by $44 (or 39%) for the three month
period ended June 30, 2004 from $114 in the corresponding period of 2003 due to
lower interest rates from refinancing.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 -
OPERATING REVENUES
Operating revenues decreased by $315 (or 2%) to $13,925 for the six-month
period ended June 30, 2004. This decrease was due primarily to a decrease in
network access revenues of $444 (or 10%), resulted largely from lower local
switching support revenues received from the Universal Service Administration
Corporation, and to a lesser degree from the implementation of the
aforementioned Order under Restatement. Long distance service revenues increased
$95 (or 5%) due primarily to an increase in revenues from wireless carriers.
Online service revenues increased $197 (or 6%) due to increases of $364 (or 36%)
in DSL revenues and $379 in Video revenues, resulting from the continued
expansion of our customer base for these products. These increases were offset
by a decrease of $548 (or 28%) in dialup services due to the migration of
customers (primarily outside of our service territory) to other high speed
Internet connections. A decrease of $167 (or 10%) in other services 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.
-15-
OPERATING EXPENSES
Total operating expenses increased $528 (or 4%) for the six month period
ended June 30, 2004. The increase in depreciation expense of $269 (or 11%)
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 non-specific expenses increased $191 (or 14%) due
primarily to Video content costs for our growing Video subscriber base. Customer
operations expenses increased $230 (or 11%) due to labor costs resulting from
reorganization of some staff. Corporate operations increased $227 (or 10%) as
the result of increased professional fees. The decrease of $387 (or 28%) in cost
of services and sales was due primarily to lower trunk line costs with
interconnection companies in 2004.
OTHER INCOME (EXPENSE)
Other income (expense) increased by $989 (or 25%) for the six month period
ended June 30, 2004 from $3,930 in the corresponding period of 2003 due
primarily to an increase in income from O-P. The partnership's earnings
increased 20% over the comparable period last year. Continuing strong O-P call
volume remains the primary factor behind the increase.
Interest expense (net) decreased by $79 (or 37%) for the six month period
ended June 30, 2004 from $216 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.
The Company's Chief Executive Officer was elected to this committee.
Accordingly the Company, through its representation of this Operating Committee
began exerting significant influence on 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 August 2004, the Company's Chief Financial
Officer was elected to this committee replacing the Chief Executive Officer.
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 and six month periods ended June
30, 2004 and 2003. The impact to net income for the three and six month periods
ended June 30, 2003 was a loss of $41 and $72, respectively. Earnings per share
for 2003 also decreased by $0.01 and $0.01, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $7,917 of cash and cash equivalents available at June 30,
2004. The Company has a $4,000 line of credit with a bank, of which the entire
amount remained unused at June 30, 2004. Interest is at a variable rate and
borrowings are on a demand basis without restrictions. In addition the Company
has an $18,475 unsecured term credit facility with CoBank, ACB at a variable
rate (approximately 3.2% for the period January 1, through June 30, 2004). As of
June 30, 2004, the Company had utilized $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 six month
-16-
period ended June 30, 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 operating activities decreased $1,231 as compared to the
corresponding period in 2003 mainly due to the timing of payments associated
with fourth quarter 2003 liabilities.
CASH FROM INVESTING ACTIVITIES
Capital expenditures totaled $2,401 during the six month period ended June
30, 2004 as compared to $2,297 for the corresponding period of 2003, reflecting
a leveling off of investment required for the rollout of the Video business as
it moves towards completion.
The Company's cash distribution from O-P for the Company's share of O-P's
earnings was $6,150 for the six months ended June 30, 2004 versus $4,125 for the
comparable period last year. Strong O-P call volume is the primary factor for
the increase.
In March 2004, the Company made a capital contribution of $238 to EsiNet.
An additional capital contribution of $238 was made on August 1, 2004. The
Company is committed to contribute a total of $950. The balance will be remitted
in two payments of approximately $238 each on December 1, 2004 and April 1,
2005, respectively.
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 June 30, 2004,
compared to $0.16 for the corresponding period in 2003. The total dividends paid
for the six months ended June 30, 2004 for common stock by Warwick Valley
Telephone Company were $2,052, compared to $1,786 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 June 30, 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.
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"), NYPSC, and New Jersey Board of Public Utilities ("NJBPU"); 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 did not have an asset retirement
obligation as defined by SFAS No. 143, as of June 30, 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 $543 and $505 as of June 30, 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.
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 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. Voice Over Internet Protocol ("VOIP")
providers are also beginning to offer limited service within the Company's local
service area. 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
United 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
-17-
be no assurances that the Company will effect any such additional plans, or that
other companies will not begin providing competitive local exchange telephone
service in the Company's franchise territory. Cablevision has launched a VOIP
product in the New York Metro area that also includes their West Milford, New
Jersey franchise area. West Milford Township in New Jersey includes Upper
Greenwood Lake, which is part of the Company's existing local service area.
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 second quarter of 2004 the Company's DSL product,
Ultralink, increased its penetration level to 30.9% of establishments passed.
Conversely, the number of customers for Online's dial-up product decreased 15.4%
due to the migration of customers to high speed Internet provided by the Company
and by the competition. Switches to competing service providers occurred
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 did
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 June 30, 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 NYPSC, 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, all of which can
slow down or even prevent a desired transaction or change. 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 NYPSC, 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 NYPSC 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
subsidiaries. Before the Company may complete this proposed reorganization plan,
it must first obtain the approval of the NYPSC, 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. Whether the USF can be sustained and whether VOIP providers
will be required to participate in funding Rural Carriers will affect and
influence decisions to invest in new facilities. The FCC is expected to act 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-
-18-
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. QUANTITATIVE 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 not effective since the material
weakness described below was identified. Our Chief Executive Officer and
our Chief Financial Officer believe that such controls and procedures
have now been rendered effective because of the changes described below.
2. Changes in internal controls over financial reporting
During the second quarter of 2004 it was discovered that a material
weakness existed in internal controls related to the Company's N.Y.
Intrastate access tariff filings. The identified deficiency was that the
Company inadvertently did not monitor a New York Public Service Commission
(NYPSC) order regarding the implementation of N.Y. Intrastate Access
rates. As a result of the findings, the Company has assigned a designated
contact for all written correspondence from regulatory agencies. This
contact will be responsible for summarizing, recording and analyzing all
material received from regulatory agencies and disseminating all such
material to the proper department. If any department receives information
directly from a regulatory agency they are instructed to forward it to the
designated contact for the Company. In addition, the Company's
Controller's Group will review all such correspondence from regulatory
agencies and will document the related accounting and financial reporting
issues. The evaluation process will be reviewed by the Chief Financial
Officer and periodically by the Company's Audit Committee. Finally, the
process will be subject to random and periodic reviews by senior
management to verify that regulatory information has been distributed
appropriately, analyzed and that the Company is in full compliance with
all regulatory requirements.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDERS IN 401(K) PLAN
As of June 30, 2004 3.1% 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
Herbert Gareiss, Jr.-principal Executive Officer.
-19-
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
participating with a team of 13 telecommunications firms to organize
the Empire State Independent Fiber Network LLC.
On April 30, 2004 Lynn Pike, then the President of Warwick Valley
Telephone Company ("the Company"), discussed certain aspects of the
Company's business at its Annual Shareholders Meeting.
On June 25, 2004, the Board of Directors accepted the resignation of
Mr. M. Lynn Pike as President, CEO, and Director of Warwick Valley
Telephone Company and designated Mr. Herbert Gareiss, Jr. a Director
and Vice President, as acting President, also effective June 25,
2004, while it conducted a search for Mr. Pike's successor.
On July 21, 2004, the Board of Directors appointed Mr. Herbert
Gareiss, Jr. the Company's President and CEO. Mr. Gareiss, who
joined the Company in 1980, had previously been designated acting
President on June 25, 2004. Mr. Gareiss has been a Director of the
Company since 1998 and will retain his Board membership. The Board
of Directors also named Zigmund C. Nowicki Jr., Director of
Information Technology and Human Resources, as Corporate Secretary
to replace Mr. Gareiss in that position.
On August 16, 2004, Warwick Valley Telephone Company (the "Company")
gave notice that form 12b-25 was filed on August 10, 2004 with the
Securities and Exchange Commission ("SEC"), informing the SEC of the
late filing of its Quarterly Report on Form 10-Q for the period
ended June 30, 2004.
On August 18, 2004, the Company issued a statement that as
previously reported on Form 8-K filed August 16, 2004, Warwick
Valley Telephone Company, National Association of Securities Dealers
Automated Quotation (Nasdaq) Symbol WWVY (the "Company"), had been
delayed in filing its Quarterly Report on Form 10-Q for the period
ended June 30, 2004. The Company stated that it expected to file its
Quarterly Report no later than August 25,2004. From the opening of
business on August 19, 2004 until such time as the Company files its
Quarterly Report or this matter is otherwise resolved, the Company's
Common Shares will trade under the symbol WWVYE.
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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 8/24/04 /s/Herbert Gareiss, Jr.
Herbert Gareiss, Jr., President
(Chief Executive Officer)
Date 8/24/04 /s/Philip A. Grybas
Philip A. Grybas, Vice President, Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
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