10-Q 1 l95320ae10vq.txt WARWICK VALLEY TELEPHONE COMPANY 10-Q 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, 2002 -------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from To ----- Commission file number 0-11174 ------- WARWICK VALLEY TELEPHONE COMPANY -------------------------------- (Exact name of registrant as specified in its charter) New York 14-1160510 . ----------------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 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 1,803,661 common shares, no par value, outstanding at June 30, 2002. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash $ 484,037 $ 580,492 Accounts receivable-net of reserve for uncollectibles 3,136,319 3,438,192 Materials and supplies 2,808,372 2,271,316 Prepaid expenses 702,824 545,069 ----------- ----------- TOTAL CURRENT ASSETS 7,131,552 6.835,069 ----------- ----------- NONCURRENT ASSETS: Unamortized debt issuance expense 7,705 10,347 Other deferred charges 105,936 197,492 Partnerships 6,939,467 5,396,802 ----------- ----------- TOTAL NONCURRENT ASSETS 7,053,108 5,604,641 ----------- ----------- PROPERTY, PLANT & EQUIPMENT: Plant in service 57,362,804 56,461,551 Plant under construction 6,893,672 4,455,113 ----------- ----------- 64,256,476 60,916,664 Less: Accumulated depreciation 26,965,773 25,846,794 ----------- ----------- TOTAL PROPERTY, PLANT & EQUIPMENT 37,290,703 35,069,870 ----------- ----------- TOTAL ASSETS $51,475,363 $47,509,580 =========== ===========
Item 1. Financial Statements (Continued) WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 7,900,000 $ 6,250,000 Accounts payable 1,381,271 1,918,618 Advance billing and payments 445,571 202,162 Customer deposits 112,355 127,665 Accrued taxes 49,671 64,801 Accrued interest 73,654 30,155 Other accrued expenses 358,440 294,362 ------------ ------------ TOTAL CURRENT LIABILITIES 10,320,962 8,887,763 ------------ ------------ ------------ ------------ LONG TERM DEBT 4,000,000 4,000,000 ------------ ------------ DEFERRED CREDITS & OTHER LONG TERM LIABILITIES: Accumulated deferred federal income taxes 2,449,696 2,348,140 Unamortized investment tax credits 29,790 46,590 Other deferred credits 82,837 60,203 Post retirement benefit obligation 1,270,021 1,270,895 ------------ ------------ TOTAL DEFERRED CREDITS & OTHER LONG TERM LIABILITIES 3,832,344 3,725,828 ------------ ------------ 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 1,994,158 for 6/30/02 and 1,994,080 for 12/31/01 3,475,550 3,471,076 Retained earnings 32,731,307 30,309,713 Treasury stock at cost, 190,497 shares (3,384,800) (3,384,800) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 33,322,057 30,895,989 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,475,363 $ 47,509,580 ============ ============
The accompanying notes are an integral part of these financial statements. Item 1. Financial Statements WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 ------------ --------- ------------ --------- OPERATING REVENUES: Local network service $ 1,076,603 1,047,362 $ 2,271,563 2,166,253 Network access service 1,858,146 1,775,004 3,791,665 3,740,439 Long distance network service 501,769 523,640 1,001,011 1,091,669 Directory advertising 316,532 281,988 640,382 562,748 Long distance sales 474,936 512,237 952,718 1,040,433 Internet services 1,588,313 1,623,926 2,887,698 2,971,462 Other services and sales 822,052 1,065,730 1,678,495 2,236,576 --------------------------- ---------------------------- Total operating revenues 6,638,351 6,829,887 13,223,532 13,809,580 --------------------------- ---------------------------- OPERATING EXPENSES: Plant specific 1,068,245 895,726 2,057,322 1,822,318 Plant non-specific: Depreciation & amortization 981,344 958,280 1,937,983 1,920,586 Other 572,318 535,426 1,156,870 1,033,391 Customer operations 934,650 989,926 2,041,348 2,166,318 Corporate operations 820,125 787,237 1,749,662 1,470,222 Cost of services and sales 668,295 609,100 1,009,664 1,183,592 Property, revenue and payroll taxes 381,318 445,078 727,248 866,915 --------------------------- ---------------------------- Total operating expenses 5,426,295 5,220,773 10,680,097 10,463,342 --------------------------- ---------------------------- OPERATING INCOME 1,212,056 1,609,114 2,543,435 3,346,238 OTHER INCOME (EXPENSE) Interest expense (142,701) (190,966) (272,150) (368,534) Interest income 1,265 3,992 3,514 7,839 Income from partnerships 2,009,602 1,387,596 3,392,665 2,395,318 Other income (expense) 160,336 74,789 262,621 103,076 --------------------------- ---------------------------- Total other income (expense) - net 2,028,502 1,275,411 3,386,650 2,137,699 INCOME BEFORE TAXES 3,240,558 2,884,525 5,930,085 5,483,937 FEDERAL INCOME TAXES 1,052,639 971,738 1,944,844 1,846,538 NET INCOME 2,187,919 1,912,787 3,985,241 3,637,399 PREFERRED DIVIDENDS 6,250 6,250 12,500 12,500 --------------------------- ---------------------------- INCOME APPLICABLE TO COMMON STOCK $ 2,181,669 1,906,537 $ 3,972,741 3,624,899 --------------------------- ---------------------------- NET INCOME PER AVERAGE SHARE OF OUTSTANDING COMMON STOCK $ 1.21 1.06 $ 2.20 2.01 =========================== ============================ CASH DIVIDENDS PAID PER SHARE $ 0.43 0.41 $ 0.86 0.84 =========================== ============================ AVERAGE SHARES OF COMMON STOCK OUTSTANDING 1,803,661 1,804,251 1,803,642 1,804,251 =========================== ============================
The accompanying notes are an integral part of the financial statements. Item 1. Financial Statements (Continued) WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited)
2002 2001 ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 3,985,241 3,637,399 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,937,983 1,920,586 Deferred income tax and investment tax credit 107,390 242,963 Interest charged to construction (198,658) (106,013) Income from partnerships (3,392,665) (2,369,234) Change in assets and liabilities: (Increase) Decrease in accounts receivable 301,873 53,064 (Increase) Decrease in materials and supplies (537,056) (1,069,671) (Increase) Decrease in prepaid expenses (157,755) (777,548) (Increase) Decrease in deferred charges 91,556 38,894 Increase (Decrease) in accounts payable (537,347) (503,377) Increase (Decrease) in customers' deposits (15,310) 1,567 Increase (Decrease) in advance billing and payment 243,409 (116,064) Increase (Decrease) in accrued expenses 28,369 40,203 Increase (Decrease) in post retirement benefits obligation (874) 0 Increase (Decrease) in other liabilities 64,079 (173,573) ----------- ----------- Net cash provided by operating activities 1,920,235 819,196 ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (4,156,173) (3,337,064) Interest charged to construction 198,658 106,013 Distributions from partnerships 2,250,000 3,000,000 Capital contributions to partnerships (400,000) 0 ----------- ----------- Net cash used in investing activities (2,107,515) (231,051) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Increase (Decrease) in notes payable 1,650,000 1,100,000 Sale of common stock 4,473 17,284 Dividends (1,563,648) (1,527,358) ----------- ----------- Net cash provided by (used in) financing activities 90,825 (410,074) ----------- ----------- Increase (Decrease) in cash and cash equivalents (96,455) 178,071 Cash and cash equivalents at beginning of period 580,492 738,495 ----------- ----------- Cash and cash equivalents at the end of period $ 484,037 916,566 =========== ===========
The accompanying notes are an integral part of the financial statements. Item 1. Financial Statements WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION 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 Form 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 three and six months periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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, 2001 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. 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, 2001. NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 will have no impact on our results of operation or our financial position. Warwick Valley Telephone Company's review of asset impairment under FASB No. 121 for year end December 31, 2001 focused upon the carrying value of Property, Plant and Equipment. Since approximately 89% of the Company's fixed assets are used for its regulated operations as a telecommunications service provider and fall under the requirements of FASB No. 71, the impairment tests of FASB No. 121 do not apply to these assets. Warwick Valley Telephone Company is a regulated telephone company. As noted in FASB 71 Section 5 paragraphs a-c, Warwick Valley Telephone Company's rates for regulated services/products are subject to approval by an independent third party regulator, such rates are designed to recover the costs of providing the regulated service and it is reasonable to assume that the rates are set at levels that will recover Warwick Valley Telephone Company's costs. As a rate regulated enterprise, the Company's plant used in regulated operations is used as a basis in setting rates. The carrying value of these fixed assets will be recovered in the rates charged to customers in the long run. The deregulated plant and equipment of the Company is depreciated over a short life cycle. Our examination of the carrying value of these assets has determined that the value on our books is well less than the future expected cash flow from them. The Company believes that the carrying value of all other long lived assets are lower than the recoverable amount as measured at the higher of net selling price and value in use as prescribed in FASB No. 121. NOTE 3: REVENUE RECOGNITION The Company earns revenue principally by providing communication related services to its customers, which include end users who purchase local service, toll service, internet access and interexchange carriers who resell network access services. These revenues are recognized when the services are provided. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. We were required to adopt the provisions of SAB No. 101 in the fourth quarter of 2000, retroactive to January 1, 2000. Based upon a review of our revenue recognition policies, we concluded that the adoption of SAB No. 101 did not require a change in those policies nor did it materially affect the timing or amount of revenue recognition. NOTE 4: COMPREHENSIVE INCOME The Company does not have any components of comprehensive income as stated in SFAS No. 130 and consequently net income is comprehensive income. NOTE 5: EARNINGS PER SHARE Earnings per share are based on the average number of shares outstanding of 1,803,642 and 1,804,251 for the six-months ending June 30, 2002 and 2001, respectively. NOTE 6: SEGMENTED INFORMATION Warwick Valley Telephone Company's segments are strategic business units that offer different products and services and are managed accordingly. We evaluate performance based upon income before taxes adjusting for normalizing one time items, if any. Currently, we have two reportable segments that reflect our business: 1. Telephone (wireline) and 2. Internet. The wireline segment provides landline telecommunications services, including local, network access and long distance services, messaging, and sells customer premise, private business exchange equipment and yellow and white pages advertising and electronic publishing. The Internet segment provides high speed and dial up internet services, help desk operations, and video over VDSL. NOTE 7: INVENTORY Inventories are carried at average original cost except that specific costs are used in the case of large individual items. As of June 30, 2002 and December 31, 2001, the Material and Supplies inventory consisted of the following:
2002 2001 -------------- ------------- Inventory for outside plant 594,244 653,245 Inventory for inside plant 1,790,642 1,157,445 Inventory for online plant 114,866 204,565 Inventory of equipment held for sale or lease 252,410 256,061 Inventory of Video equipment 56,210 0 -------------- ------------- 2,808,372 2,271,316 ============== =============
NOTE 8: INVESTMENTS The "Company" has a 7.5% investment interest in the Bell Atlantic Orange County/Poughkeepsie Limited Partnership (O/P) which is accounted for under the equity method. The majority owner in the partnership has informed the Company that its interest will be transferred to Verizon Wireless of the East L.P. The transaction is expected to close on August 15, 2002 subject to shareholder approval and other customary conditions. It is not anticipated that the transfer will have any significant impact on O/P's financial condition, operations or structure as it relates to its partners. After the closing of the transaction, Verizon Wireless of the East L.P. will become the general partner of O/P. The partnership is individually significant as defined by applicable SEC regulations. The following summarizes the income statement (unaudited) of the investee:
Six months ended June 30, (000's) 2002 2001 ------------ -------------- Net sales 51,007 36,615 Costs & expenses Cellular service cost 6,574 5,794 Operating expenses 3,063 2,887 ------------ -------------- 9,637 8,681 Net operating income 41,370 27,934 Other income 719 794 ------------ -------------- Net income 42,089 28,728 ============ ============== WVT income share 3,157 2,155 ============ ==============
Partnership financial statements are typically received well after the Company's books are closed. Consequently, the Company relies upon Partnership income estimates (as well as its own estimates) in order to close the Company's books on a timely basis. Historically, differences between conservatively booked revenue and subsequent Partnership reported income have been minor. The Company typically treats such differences as a timing difference with adjustments taking place immediately in the next financial period. In late July, the Company received information that the partnership results for the second quarter were better than expected. As a result, $356,000 in additional income has been booked and is reflected in June results. Additionally Partnership year to date income also includes a true-up of 2001 income based upon O/P's final audited results. NOTE 9: POOLING Each year the Company receives a true-up payment from the National Exchange Carrier Association ("NECA") for Local Switching Support associated with Universal Service Administrative Co-op. This year the Company received an amount which was considered excessive as compared to previous true-ups. The Company is currently in the process of reviewing the NECA calculations. As a result the Company has not recognized $452,671 as revenue and has booked this amount as a liability in Advanced Billing and Payment until the review has been completed. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEWS: RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2002 - NET INCOME The Company's net income from all sources increased $347,842 (or 9.6%) to $3,985,241 for the six-month period ended June 30, 2002, as compared to an increase of $724,098 to $3,637,399 for the corresponding period in 2001. Net income for the six month period ending June 30, 2002:
Intercompany Consolidated Telephone Internet Elimination Total --------------- ------------- ----------------- ----------------- Operating revenues 11,465,222 2,887,698 (1,129,388) 13,223,532 Operating expenses 9,234,661 2,574,824 (1,129,388) 10,680,097 Other income (expenses) 3,384,919 1,731 3,386,650 Federal income taxes 1,860,188 84,656 1,944,844 --------------- ------------- ----------------- ----------------- Net income 3,755,292 229,949 3,985,241 =============== ============= ================= =================
Net income for the six month period ending June 30, 2001:
Intercompany Consolidated Telephone Internet Elimination Total -------------- -------------- ------------------ ----------------- Operating revenues 11,752,958 2,971,462 (914,840) 13,809,580 Operating expenses 8,747,149 2,631,033 (914,840) 10,463,342 Other income (expenses) 2,134,119 3,580 2,137,699 Federal income taxes 1,729,575 116,963 1,846,538 -------------- -------------- ------------------ ----------------- Net income 3,410,353 227,046 3,637,399 ============== ============== ================== =================
The Company's 2002 net income results were affected by a decrease in revenue from two sources, Reciprocal Compensation ("RC") and Internet Services, by a substantial increase in Orange/Poughkeepsie (O/P) Partnership income and by the events of the WorldCom bankruptcy. The Company at the end of the second quarter was owed $244,888 by WorldCom/MCI for connecting MCI customers with MCI. This entire amount has been booked to the Reserve for Bad Debt and is reflected in the quarter's results under Other Services and Sales. The Company will reserve WorldCom revenue until the court clarifies the Company's standing as a creditor. RC revenue decreased by 68% over the prior year due primarily to an FCC order (FCC 01-131) reaffirming that dial-up Internet Service Provider ("ISP) traffic is interstate and thus not subject to RC. In the order, the FCC established a phase-down approach over several years. This phase down solution allows for compensation for "ISP"-bound traffic to gradually decline. The impact of the downward trend is now being felt. It is expected that RC revenue will continue its downward trend until the phase out is complete in 2003. Internet service has decreased primarily due to dial-up customer migration to competitors who are able to provide DSL services in areas where WVTC cannot. Where WVTC is the franchised local telephone carrier and able to provide fast Internet, our DSL penetration continues to grow and customer retention remains strong. REVENUE Operating revenues decreased by $586,048 (or 4.2%) to $13,223,532 for the six-month period ended June 30, 2002 as compared to $13,809,580 for the corresponding period of 2001. The change in operating revenues was primarily the result of decreases of $571,988 (or 68.0%) in Reciprocal Compensation, and $87,715 (0r 8.4%) in long distance sales during the period as compared to the same six-month period of 2001. Also contributing to the decrease is flat access line growth which is due in part to the loss of second lines when dial-up Internet customers switch to DSL. For the six month period ending June 30, 2002:
Intercompany Consolidated Telephone Internet Elimination Total --------------- ------------- ----------------- ----------------- Revenues From: Local network services 2,271,563 2,271,563 Network access revenues 4,921,053 (1,129,388) 3,791,665 Long distance network service 1,001,011 1,001,011 Directory advertising 640,382 640,382 Long distance sales 952,718 952,718 Internet services 2,887,698 2,887,698 Other services and sales 1,678,495 1,678,495 --------------- ------------- ----------------- ----------------- Total operating revenues 11,465,222 2,887,698 (1,129,388) 13,223,532 =============== ============= ================= =================
For the six month period ending June 30, 2001:
Intercompany Consolidated Telephone Internet Elimination Total -------------- -------------- ----------------- ---------------- Revenues From: Local network services 2,166,252 2,166,252 Network access revenues 4,655,279 (914,840) 3,740,439 Long distance network service 1,091,669 1,091,669 Directory advertising 562,748 562,748 Long distance sales 1,040,433 1,040,433 Internet services 2,971,462 2,971,462 Other services and sales 2,236,577 2,236,577 -------------- -------------- ----------------- ---------------- Total operating revenues 11,752,958 2,971,462 (914,840) 13,809,580 ============== ============== ================= ================
Long Distance revenues continue to show decreases due primarily to intense competition from other long distance carriers as well as wireless providers. Directory advertising has increased 13.8% over the prior period primarily due to efficiencies gained by full incorporation of the majority of the directory production process in house thereby resulting in successful solicitation/retention of customers. Competitive local exchange (CLEC) services and full inter-exchange Long Distance service are provided by WVTC in selected areas outside of its own servicing territory. CLEC revenues are generated by providing local service to customers located in certain Frontier - a Citizens Communications Company - and Sprint areas giving the customer a choice of service providers. CLEC revenue during the quarter increased 48% (excluding reciprocal compensation) over the same period last year. EXPENSE Operating expenses are 2% over 2001 due in large part to the impact of the WorldCom bankruptcy. The elimination of Operator Services, lower trunkline costs and access charges have reduced costs somewhat, but these decreases were slightly offset by increases in Plant and Corporate Operations due to the rollout of our Video product. For the six month period ending June 30, 2002:
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total --------------- --------------- ----------------- ------------------- Plant specific 2,045,161 12,161 2,057,322 Plant non-specific: Depreciation 1,530,805 407,178 1,937,983 Other 530,069 626,801 1,156,870 Customer operations 1,963,481 77,867 2,041,348 Corporate operations 1,740,483 9,179 1,749,662 Cost of services and sales 773,405 1,365,647 (1,129,388) 1,009,664 Property, revenue and payroll tax 651,257 75,991 727,248 --------------- --------------- ----------------- ------------------- Total operating expenses 9,234,661 2,574,824 (1,129,388) 10,680,097 =============== =============== ================= ===================
For the six month period ending June 30, 2001:
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total ---------------- --------------- ----------------- ------------------ Plant specific 1,819,990 2,328 1,822,318 Plant non-specific: Depreciation 1,532,197 388,389 1,920,586 Other 478,699 554,692 1,033,391 Customer operations 2,034,433 131,885 2,166,318 Corporate operations 1,463,488 6,734 1,470,222 Cost of services and sales 687,464 1,410,968 (914,840) 1,183,592 Property, revenue and payroll tax 730,878 136,037 866,915 ---------------- --------------- ----------------- ------------------ Total operating expenses 8,747,149 2,631,033 (914,840) 10,463,342 ================ =============== ================= ==================
OTHER INCOME AND EXPENSE Other income and expenses increased by $1,248,951 (or 58.4%) from $2,137,699 in the six-month period ended June 30, 2001 to $3,386,650 in the corresponding period of 2002 primarily due to the increase in income from the Orange/Poughkeepsie partnership. During the second quarter, the partnership earnings increased 46.5% over the same period last year. O/P call volume was the primary factor for the year over year increase but it should be noted that there is no guarantee of increased call volume for the rest of the year. LIQUIDITY AND CAPITAL RESOURCES The Company had $484,036 of cash and cash equivalents available at June 30, 2002. The Company has lines of credit with two banks totaling $10,000,000 of which $2,100,000 remained unused at June 30, 2002. $2,500,000 of the total line of credit is at a variable lending rate and borrowings are on a demand basis without restrictions. CASH FROM OPERATING ACTIVITIES During 2002 the Company's primary source of funds continues to be cash generated from operations, as shown in the consolidated statements of cash flows. For the period ending June 30, 2002 net cash from operating activities was less than our capital expenditures due to the Company's entrance into the video business. CASH FROM INVESTING ACTIVITIES Capital expenditures totaled $4,156,174 during the six-month period ending June 30, 2002 as compared to $3,337,064 for the corresponding period of 2001. The majority of these expenditures primarily can be attributed to the Company's expansion into the Video business and network upgrades. In order to provide the high-quality communications services expected from our customers, the Company continued to aggressively invest in and upgrade its property, plant and equipment. The amount of investment is influenced by demand for services and products, ongoing growth, regulatory commitments and plant refurbishment. A significant amount of the Company's capital expenditures during the quarter was due to the result of our expansion into digital video services. The Company has been approved to provide Video service in New Jersey and just recently in New York. Overall, the company has budgeted over $10 million to be spent on Capital projects in 2002 with approximately 35% of this amount slated for video services. Upon completion of the 2002 Capital program, WVTC will be able to offer competitive Voice, Video and Data services to approximately 28% of our ILEC and CLEC customers. Bell Atlantic Orange County/Poughkeepsie Limited Partnership is licensed to operate as the wire line licensee in both Orange and Dutchess Counties, New York. The Company's share in the partnership's earnings increased by approximately $1,002,000 (or 46.5%) to $3,157,000 during the first six months of 2002, compared to $2,155,000 for the corresponding 2001 period. The Company has a 8.9% ownership interest in Hudson Valley DataNet ("HVDN"), L.L.C., in return for its initial capital contribution of $1,000,000. HVDN is a competitive telecommunications company that offers high-speed bandwidth throughout the region of Orange, Dutchess and Ulster counties. HVDN management reported in June the achievement of positive cash flow. The Company owns a 17.0% interest in Zefcom,("Zefcom"), L.L.C., a licensed reseller of wireless services. As of June 30, 2002 the Company had made capital contributions of $1,600,000 to Zefcom. The Company had a commitment to contribute another $400,000 to Zefcom in the form of a promissory note payable on demand. This commitment was fulfilled in August 2002 making the Company's total capital contribution to Zefcom $2,000,000. CASH FROM FINANCING ACTIVITIES Dividends declared by the Board of Directors of Warwick Valley Telephone Company were $0.43 per share for the three-month period ending June 30, 2002, compared to $0.41 for the corresponding period in 2001. The total dividends paid through the second quarter of 2002 for common stock by Warwick Valley Telephone Company were $1,551,148, compared to $1,514,858 for the same period in 2001. Warwick Valley Telephone Company's dividend policy considers both the expectations and requirements of shareowners and the internal requirements of the company. OVERVIEWS: RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 - NET INCOME The Company's net income from all sources increased $275,132 (or 14.4%) to $2,187,919 for the three-month period ended June 30, 2002, as compared to an increase of $420,450 to $1,912,787 for the corresponding period in 2001. Net income for the three month period ending June 30, 2002:
Intercompany Consolidated Telephone Internet Elimination Total -------------- ------------- ----------------- ---------------- Operating revenues 5,557,566 1,588,313 (507,528) 6,638,351 Operating expenses 4,656,230 1,277,593 (507,528) 5,426,295 Other income (expenses) 2,027,634 868 2,028,502 Federal income taxes 950,980 101,659 1,052,639 -------------- ------------- ----------------- ---------------- Net income 1,977,990 209,929 2,187,919 ============== ============= ================= ================
Net income for the three month period ending June 30, 2001: Intercompany Consolidated Telephone Internet Elimination Total ------------- ------------- ------------------- ---------------- Operating revenues 5,663,668 1,623,926 (457,707) 6,829,887 Operating expenses 4,359,745 1,318,735 (457,707) 5,220,773 Other income (expenses) 1,273,334 2,077 1,275,411 Federal income taxes 867,267 104,471 971,738 ------------- ------------- ------------------- ---------------- Net income 1,709,990 202,797 1,912,787 ============= ============= =================== ================
The Company's net income growth was affected by a decrease in revenue from two sources, Reciprocal Compensation ("RC") and Internet Service revenue and by an increase in Orange/Poughkeepsie (O/P) Partnership income. RC revenue decreased by 68% over the prior year due primarily to an FCC order (FCC 01-131) reaffirming that dial-up Internet Service Provider ("ISP") traffic is interstate and thus not subject to RC. In the order, the FCC established a phase-down approach over several years. This phase down solution allows for compensation for "ISP"-bound traffic to gradually decline. The impact of the downward trend is now being felt. When comparing second Quarter 2002 over second Quarter 2001, there has been a 86.8% decline in RC revenue. It is expected that RC revenue will continue its downward trend until the phase out is complete in 2003. Internet service has decreased primarily due to dial up customer migration to competitors who are able to provide DSL services in areas where Warwick cannot. Where WVTC is the franchised local telephone carrier and able to provide fast Internet, our DSL penetration continues to grow and customer retention remains strong. REVENUE Operating revenues decreased by $191,536 (or 2.8%) to $6,638,351 for the three-month period ended June 30, 2002 as compared to $6,829,887 for the corresponding period of 2001. The change in operating revenues was primarily the result of decreases of $123,208 (or 30.2%) in reciprocal compensation and $37,301 (0r 7.3%) in long distance sales during the period as compared to the same three-month period of 2001. For the three month period ending June 30, 2002:
Revenues From: Intercompany Consolidated Telephone Internet Elimination Total ------------- --------------- ----------------- ---------------- Local network services 1,076,602 1,076,602 Network access revenues 2.365,674 (507,528) 1,858,146 Long distance network service 501,769 501,769 Directory advertising 316,533 316,533 Long distance sales 474,936 474,936 Internet services 1,588,313 1,588,313 Other services and sales 822,052 822,052 ------------- --------------- ----------------- ---------------- Total operating revenues 5,557,566 1,588,313 (507,528) 6,638,351 ============= =============== ================= ================
For the three month period ending June 30, 2001:
Revenues From: Intercompany Consolidated Telephone Internet Elimination Total ------------- --------------- ----------------- ---------------- Local network services 1,047,361 1,047,361 Network access revenues 2,232,711 (457,707) 1,775,004 Long distance network service 523,640 523,640 Directory advertising 281,988 281,988 Long distance sales 512,237 512,237 Internet services 1,623,926 1,623,926 Other services and sales 1,065,731 1,065,731 ------------- --------------- ----------------- ---------------- Total operating revenues 5,663,668 1,623,916 (457,707) 6,829,887 ============= =============== ================= ================
Operating revenues decreased over the prior year due to flat access line growth. Overall, Long Distance revenues continue to show decreases due primarily to intense competition as well as customers' use of cell phones as a substitute for wireline long distance service. Directory production process has increased 12.3% over the prior period primarily due to efficiencies gained by full incorporation of our sales force in house and successful solicitation/retention of customers. Competitive local exchange (CLEC) services and full inter-exchange Long Distance service are provided by WVTC in selected areas outside of its own servicing territory. CLEC revenues are generated by providing local service to customers located in certain Frontier - a Citizens Communications Company - and Sprint areas giving the customer a choice of service providers. CLEC revenue during the quarter increased 43.2% (excluding reciprocal compensation) over the same period last year. EXPENSE Operating expenses grew 2% over 2001 due in large part to the impact of the WorldCom bankruptcy. The elimination of Operator Services, lower trunkline costs and access charges have reduced costs somewhat, but these decreases were slightly offset by increases in Plant and Corporate Operations due to the rollout of our Video product. For the three month period ending June 30, 2002:
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total --------------- --------------- ----------------- ----------------- Plant specific 1,064,839 3,406 1,068,245 Plant non-specific: Depreciation 770,253 211,091 981,344 Other 257,235 315,083 572,318 Customer operations 917,728 16,922 934,650 Corporate operations 815,123 5,002 820,125 Cost of services and sales 513,219 662,604 (507,528) 668,295 Property, revenue and payroll tax 317,834 63,484 381,318 --------------- --------------- ----------------- ----------------- Total operating expenses 4,656,231 1,277,592 (507,528) 5,426,295 =============== =============== ================= =================
For the three month period ending June 30, 2001:
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total ---------------- --------------- ----------------- ----------------- Plant specific 894,284 1,442 895,726 Plant non-specific: Depreciation 771,856 186,424 958,280 Other 257,965 277,461 535,426 Customer operations 941,822 48,104 989,926 Corporate operations 783,645 3,592 787,237 Cost of services and sales 345,498 721,309 (457,707) 609,100 Property, revenue and payroll tax 364,946 80,132 445,078 ---------------- --------------- ----------------- ----------------- Total operating expenses 4,360,016 1,318,464 (457,707) 5,220,773 ================ =============== ================= =================
OTHER INCOME AND EXPENSE Other income and expenses increased by $753,091 (or 59.1%) to $2,028,502 in the three-month period ended June 30, 2002 from $1,275,411 in the corresponding period of 2001 primarily due to the increase in income from the Orange/Poughkeepsie partnership, which grew by approximately $1,717,000 to $3,157,000. During the second quarter, the partnership earnings increased 49.2% over the same period last year. The earnings increase is due primarily to stronger than expected call volume. There is no guarantee that call volume will remain strong and that significant year over year increases will continue. OTHER FACTORS: COMPETITION 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 2002 was $59,840 (or 13.1%) from $456,975 to $397,135 in New York and $73,182 (or 10.9%) from $670,641 to $597,459 in New Jersey as compared to the same period in 2001. 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 areas of 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. How and whether the WorldCom bankruptcy will affect competition and the competition policies of the federal and state governments is unclear at this time. REGULATION On January 10, 2002, the Company's Petition with the New York State Public Service Commission ("NYSPSC") seeking authority to issue unsecured promissory notes (the "Notes") was approved. Similar approval was received from the state of New Jersey Board of Public Utilities ("NJBPUC") on August 8, 2001. The NYSPCS has authorized the Company to issue $18,475,000 of unsecured promissory notes. The proceeds of the Notes will be used to replace existing plant, to refinance existing indebtedness and to purchase equipment used in connection with the Company's new video business. The Company has launched its Video business in New Jersey and is preparing for an August launch in New York. The issuance of the unsecured notes is anticipated to take place in the third quarter of 2002. 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. The New York Public Service Commission approved the Hometown Online Certificate of Approval (franchise) to operate in the Village of Warwick, New York. The approval by the NYSPSC now enables the Company to operate as a video provider using a Very high bit Digital Subscriber Line ("VDSL") platform in New York. Under the Investment Company Act a company can be an "investment company" if more than 40% of its assets consist of "investment securities." Included in the definition of investment securities are the securities of issuers in which the company owns an interest of less than 50%. Although WVTC is the sole owner of several companies, it owns less than a majority interest in Hudson Valley DataNet, L.L.C., Zefcom, L.L.C. and the Orange County-Poughkeepsie Partnership. Determining whether more than 40% of WVTC's assets consist of its interests in these less-than-majority-owned companies is difficult, because the Investment Company Act does not fix a clear procedure for calculating their value. The amount which WVTC has paid for its interest in the O/P Partnership and the other similar interests as of June 30, 2002 totals only $2,850,000, which is clearly less than 40% of WVTC's assets. However, because the income received by WVTC from the O/P Partnership is substantial, the value of WVTC's interest could be significantly greater than the amount WVTC paid for it. As a result, the value of WVTC's interest in the Partnership and the other similar interests could, by some methods of valuation, exceed 40% of WVTC's assets. Registering as an investment company would impose many duties on WVTC that could not practically be combined with its activities as a telecommunications company, and restructuring its holdings to avoid the 40% limit would also be impractical for WVTC and, in the view of management, unnecessary to fulfill the purposes of the Investment Company Act. WVTC considers itself to be a telecommunications company and not an investment company and does not hold itself out as an investment company. It will, therefore, apply to the Securities and Exchange Commission (the "SEC") for a determination, under Section 3(b)(2) of the Investment Company Act, that it is not an investment company because it is primarily engaged in the telecommunications business. The SEC is not required to grant this relief. WVTC has not determined how it would restructure its holdings of non-majority interests in companies if relief were not granted. 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 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's mortgage liabilities currently bear interest at a 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. The Company also has a line of credit which accrues interest at 0.75% below the 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%. While the LIBOR rate has been very favorable of late, there is no guarantee that such rates will continue. The interest rates on the Company's $18.475 million term loan will vary based upon the Company's total leverage ratio and several interest rate options, such as LIBOR or a long term fixed rate, among others. 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 -- ITEM 5. OTHER INFORMATION - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 99.1 Certification pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by M. Lynn Pike. 99.2 Certification pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Philip A. Grybas. 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. 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 08/15/02 /S/ M. Lynn Pike M. Lynn Pike, President (Chief Executive Officer) Date 08/15/02 /S/Philip A. Grybas Philip A. Grybas, Vice President, Treasurer (Principal Financial and Chief Accounting Officer)