10-Q 1 l89918ae10-q.txt WARWICK VALLEY TELEPHONE COMPANY 10-Q 1 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 June 30, 2001 ------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES -- EXCHANGE ACT OF 1934 For the transition period from To Commission file number 0-11174 ------- WARWICK VALLEY TELEPHONE COMPANY -------------------------------- (Exact name of registrant as specified in its charter) New York 14-1160510 -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 47 Main Street, Warwick, New York 10990 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrants' telephone number, including area code (845) 986-8080 -------------- Former name, former address and former fiscal year, if changed since last report. INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: 1,803,519 common shares, no par value, outstanding at June 30, 2001. 2 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ (Unaudited) (Audited) CURRENT ASSETS: Cash $ 916,568 $ 738,495 Accounts receivable 4,037,337 4,090,401 Materials and supplies 2,735,350 1,665,679 Prepaid expenses 1,265,353 487,805 ----------- ----------- 8,954,608 6,982,380 ----------- ----------- NONCURRENT ASSETS: Unamortized debt issuance expense 12,988 15,630 Other deferred charges 54,719 93,613 Investments 4,857,837 5,488,603 ----------- ----------- 4,925,544 5,597,846 ----------- ----------- PROPERTY, PLANT & EQUIPMENT: Plant in service 50,269,035 49,338,440 Plant under construction 4,801,154 2,454,882 ----------- ----------- 55,070,189 51,793,322 Less: Accumulated depreciation 24,218,373 22,360,624 ----------- ----------- TOTAL PLANT 30,851,816 29,432,698 ----------- ----------- TOTAL ASSETS $44,731,968 $42,012,924 =========== =========== 3 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ------------ ------------ (Unaudited) (Audited) CURRENT LIABILITIES: Notes payable $ 6,050,000 $ 4,950,000 Accounts payable 2,295,852 2,799,229 Advance billing and payments 77,798 193,862 Customer deposits 132,557 130,990 Accrued taxes 1,091 26,432 Accrued interest 94,107 28,563 Other accrued expenses 207,451 381,023 ----------- ----------- 8,858,856 8,510,099 ----------- ----------- LONG TERM DEBT & DEFERRED CREDITS: Long-term debt 4,000,000 4,000,000 Accumulated deferred federal income taxes 2,285,611 2,207,871 Unamortized investment tax credits 63,047 81,047 Other deferred credits 290,298 47,218 Post retirement benefit obligation 712,899 772,756 ----------- ----------- 7,351,855 7,108,892 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock - 5% cumulative; $100 par value; Authorized 7,500 shares; Issued and outstanding 5,000 shares 500,000 500,000 Common stock - no par value; Authorized shares: 2,160,000 Issued 1,994,016 for 6/30/01 and 1,993,593 for 12/31/00 3,467,749 3,450,465 Retained earnings 27,938,308 25,828,268 ----------- ----------- 31,906,057 29,778,733 Less: Treasury stock at cost, 190,497 shares for 6/30/01 and 12/31/00, respectively 3,384,800 3,384,800 ----------- ----------- 28,521,257 26,393,933 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,731,968 $42,012,924 =========== ===========
Please see the accompanying notes, which are an integral part of these financial statements. 4 ITEM 1. FINANCIAL STATEMENTS WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- OPERATING REVENUES: Local network service $ 1,047,362 $ 1,003,829 $ 2,166,253 $ 2,033,538 Network access and long distance network service 2,303,291 2,254,375 4,836,755 4,654,426 Other services and sales 3,483,882 3,072,225 6,811,220 5,894,832 ------------ ------------ ------------ ------------ 6,834,535 6,330,429 13,814,228 12,582,796 Less: Provision for uncollectibles (19,950) (10,002) (31,200) (20,004) ------------ ------------ ------------ ------------ Total operating revenues 6,814,585 6,320,427 13,783,028 12,562,792 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Plant specific 895,727 818,947 1,822,319 1,517,174 Plant non-specific: Depreciation 956,962 909,837 1,917,946 1,810,053 Other 535,425 365,626 1,033,390 735,921 Customer operations 1,027,839 996,126 2,204,231 2,080,980 Corporate operations 787,237 742,872 1,470,222 1,543,998 Cost of services and sales 555,885 513,958 1,119,128 1,015,065 ------------ ------------ ------------ ------------ Total operating expenses 4,759,075 4,347,366 9,567,236 8,703,191 ------------ ------------ ------------ ------------ OPERATING TAXES: Federal income taxes 971,738 754,235 1,846,538 1,471,700 Property, revenue and payroll 445,078 424,582 866,915 799,865 ------------ ------------ ------------ ------------ Total operating taxes 1,416,816 1,178,817 2,713,453 2,271,565 ------------ ------------ ------------ ------------ Operating income 638,694 794,244 1,502,339 1,588,036 NONOPERATING INCOME (EXPENSES)-NET: 1,466,378 842,544 2,506,234 1,619,644 ------------ ------------ ------------ ------------ Income available for fixed charges 2,105,072 1,636,788 4,008,573 3,207,680 ------------ ------------ ------------ ------------ FIXED CHARGES: Interest on funded debt 70,500 93,125 141,000 231,500 Other interest charges 120,465 49,390 227,533 57,777 Amortization 1,321 1,936 2,642 5,103 ------------ ------------ ------------ ------------ Total fixed charges 192,286 144,451 371,175 294,380 ------------ ------------ ------------ ------------ NET INCOME 1,912,786 1,492,337 3,637,398 2,913,300 PREFERRED DIVIDENDS 6,250 6,250 12,500 12,500 ------------ ------------ ------------ ------------ INCOME APPLICABLE TO COMMON STOCK $ 1,906,536 1,486,087 $ 3,624,898 $ 2,900,800 ------------ ------------ ------------ ------------ NET INCOME PER AVERAGE SHARE OF OUTSTANDING COMMON STOCK $ 1.06 $ 0.83 $ 2.01 $ 1.59 ============ ============ ============ ============ CASH DIVIDENDS PAID PER SHARE $ 0.41 $ 0.37 $ 0.84 $ 0.74 ============ ============ ============ ============ AVERAGE SHARES OF COMMON STOCK OUTSTANDING 1,804,251 1,819,115 1,804,251 1,818,613 ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements. 5 ITEM 1. FINANCIAL STATEMENTS (Continued) WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
2001 2000 ---------------- ---------------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 3,637,398 $ 2,913,300 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,920,588 1,815,156 Deferred income tax and investment tax credit 242,963 81,589 Interest charged to construction (106,013) (39,030) Change in assets and liabilities: (Increase) Decrease in accounts receivable 53,064 (441,134) (Increase) Decrease in materials and supplies (1,069,671) (154,344) (Increase) Decrease in prepaid expenses (777,548) (222,942) (Increase) Decrease in deferred charges 38,894 165,001 Increase (Decrease) in accounts payable (503,377) 234,436 Increase (Decrease) in customers' deposits 1,567 4,310 Increase (Decrease) in advance billing and payment (116,064) 81,678 Increase (Decrease) in accrued expenses 40,203 (11,931) Increase (Decrease) in other liabilities (173,572) (152,994) ----------- ----------- Net cash provided by operating activities 3,188,432 4,273,095 ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (3,337,064) (2,310,423) Interest charged to construction 106,013 39,030 Changes in other investments 630,766 (388,194) ----------- ----------- Net cash used in investing activities (2,600,285) (2,659,587) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Increase (Decrease) in notes payable 1,100,000 2,100,000 Repayment of long term debt 0 (3,000,000) Sale of common stock 17,284 77,835 Dividends (1,527,358) (1,358,645) ----------- ----------- Net cash provided by (used in) financing activities (410,074) (2,180,810) ----------- ----------- Increase (Decrease) in cash and cash equivalents 178,073 (567,302) Cash and cash equivalents at beginning of year 738,495 865,521 ----------- ----------- Cash and cash equivalents at end of year $ 916,568 $ 298,219 =========== ===========
The accompanying notes are an integral part of the financial statements. 6 ITEM 1. FINANCIAL STATEMENTS WARWICK VALLEY TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to From 10-Q and Article 10 of Regulation S-X. 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 of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six-month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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 disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. The balance sheet as of December 31, 2000 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. Non-operating income and expenses for the three and six month periods ended June 30, 2001 and 2000 were as follows:
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------------ ------------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest Income $ 3,994 $ 6,622 $ 7,841 $ 11,805 Interest during construction 81,297 19,170 106,013 39,030 G/L dispositions certain property 5,883 40,553 18,411 74,565 Special charges (12,393) (10,590) (21,350) (18,874) Other non-operating income 1,387,597 786,789 2,395,319 1,513,118 ----------- ----------- ----------- ----------- $ 1,466,378 $ 842,544 $ 2,506,234 $ 1,619,644 =========== =========== =========== ===========
7 WARWICK VALLEY TELEPHONE COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS -SIX MONTHS ENDED JUNE 30, 2001 - The Company's net income from all sources increased $724,098 (or 24.9%) to $3,637,398 for the six-month period ended June 30, 2001, as compared to $2,913,300 for the corresponding period in 2000. Operating revenues increased by $1,220,236 (or 9.7%) after provision for uncollectibles, to $13,783,028 for the six-month period ended June 30, 2001 as compared to $12,562,792 for the corresponding period of 2000. The change in operating revenues was primarily the result of increases in reciprocal compensation of $502,620 (or 150.3%), online services of $345,892 (or 13.2%) and network access service of $357,240 (or 27.3%) during the period as compared to the same six-month period of 2000. Operating expenses increased by $864,045 (or 9.9%) to $9,567,236 for the six-month period ended June 30, 2001 as compared $8,703,191 for the corresponding period in 2000 due primarily to increased trunkline agreements ($440,200), costs of salaries and benefits ($353,500), engineering expense ($151,000). These costs were partially offset by a decrease in costs for non-qualified pension expense ($131,200). Non-operating income and expenses increased by $886,590 (or 54.7%) from $1,619,644 in the six-month period ended June 30, 2000 to $2,506,234 in the corresponding period of 2001 largely as a result of improved earnings in the Company"s cellular partnership, Verizon Wireless. (See Liquidity and Capital Resources). RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 - The Company"s net income from all sources increased $420,449 (or 28.2%) to $1,912,786 for the three-month period ended June 30, 2001, as compared to the $1,492,337 for the corresponding period in 2000. Operating revenues increased by $494,158 (or 7.8%) after provision for uncollectibles, to $6,814,585 for the three-month period ended June 30, 2001 as compared to $6,320,427 for the corresponding period of 2000. The change in operating revenues was largely due to the increase in the amount of $407,716 (or 121.9%) for the Company's CLEC operations during the period as compared to the corresponding period of 2000. Operating expenses increased by $411,709 (or 9.5%) to $4,759,075 for the three-month period ended June 30, 2001 as compared to the $4,347,366 for the corresponding period in 2000, primarily due to increased costs of trunkline agreements ($181,600), legal fees ($79,500), salaries and benefits ($77,600), and engineering expenses ($70,600). Non-operating income and expenses increased by $623,834 (or 74.0%) from $842,544 in the three-month period ended June 30, 2000 to $1,466,378 for the corresponding period of 2001 largely as a result of improved earnings in the Company"s cellular partnership, Verizon Wireless. (See Liquidity and Capital Resources). LIQUIDITY AND CAPITAL RESOURCES - The Company holds a 7.5% limited partnership interest in the cellular mobile telephone partnership, Verizon Wireless, which is licensed to operate as the wire-line licensee in both Orange and Dutchess Counties, New York. Since the inception of this partnership, the Company has made capital contributions aggregating $249,750. No further capital contributions are currently scheduled. The Company"s share in the partnership"s earnings increased by $882,300 (or 58.3%) to $2,395,300 during the first six months of 2001, compared to $1,513,000 for the corresponding 2000 period. The Company has two wholly owned subsidiaries which belong to the telephone segment of its operations. Warwick Valley Mobile Telephone Company ("WVMT") resells cellular telephone service to the Company's subscribers as well as to non-subscribers. WVMT also sells and installs cellular telephone sets. The Company has invested approximately $97,000 in WVMT since its operations began on April 1, 1989. WVMT's earnings decreased by $21,000 (or 67.7%) to approximately $10,000 during the first six months of 2001, compared to $31,000 for the corresponding 2000 period. Warwick Valley Long Distance Company, Inc. ("WVLD"), began business in December 1993 in New Jersey and in May 1994 in New York. WVLD resells toll service to customers of Warwick Valley Telephone. WVLD achieved positive retained earnings prior to the end of 1994 and has been profitable since then, earning approximately $218,900 during the first six months of 2001, compared to $166,000 for the corresponding 2000 period. 8 Hometown Online, Inc. ("ONLINE"), another wholly-owned subsidiary, was established to provide connectivity to the Internet as well as local and regional information services to personal computer users. Service is offered within WVTC"s service area as well as in nearby areas of New York, New Jersey and Pennsylvania. ONLINE began service in July 1995. WVTC has invested approximately $660,000 in ONLINE since its inception. ONLINE earned approximately $227,000 (a decrease of $213,000 or 48.4%) during the first six months of 2001, compared to $440,000 for the corresponding 2000 period. This decrease was largely due to an influx of more competition. The Company has an 8.9% ownership interest in Hudson Valley DataNet ("HVDN"), L.L.C., a competitive telecommunications company that plans to offer high-speed bandwidth throughout the region in which the Company competes. During the year ended December 31, 2000, the Company made a capital contribution to HVDN of $1,000,000. No further capital contributions are currently scheduled, although the Company may voluntarily increase or be asked to increase its investment from time to time. The Company has a 19.5% interest in Zefcom, L.L.C., a licensed reseller of wireless services. In addition to an initial capital contribution of $1,000,000, made in October 2000, the Company has a commitment to contribute another $500,000 to Zefcom, L.L.C. in the form of a promissory note payable on demand. The Company has a line of credit which accrues interest at 0.75% below prime rate. On May 1, 2000 the Company repaid its $3,000,000 Series I bond with short-term borrowing. The Company has the option of renewing such short-term borrowing every thirty, sixty or ninety days at prime rate or LIBOR rate plus 1.75%. The Telecommunications Act of 1996 (the "Act") creates 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 markets affected first have been the regional toll areas in New York and New Jersey. Regional toll competition was implemented in New York on January 1, 1997 and in New Jersey in May 1997. The competition in these regional toll areas has had the effect of reducing Warwick"s revenues. The reduction in regional toll revenues for the first six months of 2001 was $53,284 (or 10.4%) from $510,258 to $456,974 in New York and $69,507 (or 9.4%) from $740,148 to $670,641 in New Jersey as compared to the same period in 2000. Under the Act the Company itself can provide competitive local exchange telephone service outside its franchised territory. The Company is currently competing with Citizen's Telecommunications of New York in the Middletown, New York area for local service through access lines. The Company is also reviewing plans to provide limited service in other surrounding areas in both New York and New Jersey. However, there can be no assurances that the Company will implement any such additional plans, or that other companies will not begin providing competitive local exchange telephone service in the Company's franchise territory. On February 9, 2001 the Company filed a petition with the New York State Public Service Commission ("NYSPSC") seeking authority to issue unsecured promissory notes (the "Notes") in the aggregate amount of $21,238,971. The Company intends to use the proceeds of the Notes to replace existing equipment, to refinance existing indebtedness and to purchase equipment to be used in connection with the Company's new video business. The Petition is currently pending and NYSPSC action, as well as action by any other relevant public utility commission, is expected, but not assured, during the third quarter of 2001. 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 subsidiaries. Before the Company may complete this proposed reorganization plan, it must first obtain the approval of both the NYSPSC and its shareholders. Assuming all approvals are obtained, the Company expects to complete this reorganization by the end of 2001. 9 CONSOLIDATION - 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. Certain prior year amounts have been reclassified to conform with the financial statements in the Company"s Annual Report on Form 10-K for the year ended December 31, 2000. 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; or 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 derivatives 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"s mortgage liabilities currently bear interest at fixed rates. If the Company refinances its liabilities when they mature the nature and amount of the applicable interest rate or rates will be determined at that time. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - Not Applicable ITEM 2. CHANGES IN SECURITIES - Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - Not Applicable ITEM 5. OTHER INFORMATION - On August 6, 2001 the Company's Board of Directors elected Mr. Philip A. Grybas to serve as its Vice President and Chief Financial Officer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits - Not applicable b) Reports on Form 8-K - Form 8-K reporting date: May 11, 2001. Item Reported - Item 5. Other Events and Regulation FD. Disclosure: The Company filed a petition with the New York Public Service Commission 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. 10 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 8/14/01 /S/ Herbert Gareiss, Jr. ------- ------------------------ Herbert Gareiss, Jr., Vice President (Duly Authorized Officer) Date 8/14/01 /S/ Philip A. Grybas ------ -------------------- Philip A. Grybas, Vice President (Principal Financial and Chief Accounting Officer)