10-Q 1 l96673ae10vq.txt WARWICK VALLEY TELEPHONE COMPANY 10-Q/9-30-02 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 September 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 (IRS Employer of incorporation or organization) 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 1,803,662 common shares, no par value, outstanding at September 30, 2002. INDEX TO FORM 10Q PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of 9/30/02 (Unaudited) and 12/31/01. Consolidated Statement of Income for the Three and Nine Months ended 9/30/02 (Unaudited). Consolidated Statement of Cash Flows for the Nine Months ended 9/30/02 (Unaudited) and 09/30/01. Notes to Consolidated Financial Statements (Unaudited). Item 2. Managements' Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk. Item 4. Controls and Procedures. PART 2 - OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults Upon Senior Securities. Item 4. Submission of Matters to Vote of Securities Holders. Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K.
2 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET ($ in thousands)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------- ------- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash $ 887 $ 581 Accounts receivable-net of reserve for uncollectibles 3,680 3,438 Materials and supplies 2,097 2,271 Prepaid expenses 549 545 ------- ------- TOTAL CURRENT ASSETS 7,213 6,835 ------- ------- NONCURRENT ASSETS: Unamortized debt issuance expense 6 10 Other deferred charges 65 197 Partnerships/Telecommunications business investments 7,484 5,398 ------- ------- TOTAL NONCURRENT ASSETS 7,555 5,605 ------- ------- PROPERTY, PLANT & EQUIPMENT: Plant in service 60,464 56,462 Plant under construction 5,371 4,455 ------- ------- 65,835 60,917 Less: Accumulated depreciation 27,947 25,847 ------- ------- TOTAL PROPERTY, PLANT & EQUIPMENT 37,888 35,070 ------- ------- TOTAL ASSETS $52,656 $47,510 ======= =======
3 Item 1. Financial Statements (Continued) WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET ($ in thousands)
SEPTEMBER 30, DECEMBER 31, 2002 2001 -------- -------- (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 6,700 $ 6,250 Accounts payable 855 1,919 Advance billing and payments 509 202 Customer deposits 115 128 Accrued taxes 161 65 Accrued interest 74 30 Other accrued expenses 553 294 -------- -------- TOTAL CURRENT LIABILITIES 8,967 8,888 -------- -------- -------- -------- LONG TERM DEBT 4,000 4,000 -------- -------- DEFERRED CREDITS & OTHER LONG TERM LIABILITIES: Accumulated deferred federal income taxes 3,577 2,348 Unamortized investment tax credits 21 47 Other deferred credits 83 60 Post retirement benefit obligation 1,267 1,271 -------- -------- TOTAL DEFERRED CREDITS & OTHER LONG TERM LIABILITIES 4,948 3,726 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock - 5% cumulative; $100 par value; Authorized 7,500 shares; Issued and outstanding 5,000 shares 500 500 Common stock - no par value; Authorized shares: 2,160,000 Issued 1,994,159 for 9/30/02 and 1,994,080 for 12/31/01 3,476 3,471 Retained earnings 34,150 30,310 Treasury stock at cost, 190,497 shares (3,385) (3,385) -------- -------- TOTAL STOCKHOLDERS' EQUITY 34,741 30,896 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,656 $ 47,510 ======== ========
The accompanying notes 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited) ($ in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- OPERATING REVENUES: Local network service $ 1,187 $ 1,079 $ 3,458 $ 3,245 Network access service 2,187 1,851 5,979 5,592 Long distance network service 513 535 1,514 1,627 Directory advertising 343 308 984 871 Long distance sales 505 531 1,458 1,571 Internet services 1,591 1,584 4,479 4,556 Other services and sales 669 979 2,347 3,215 ----------- ----------- ----------- ----------- Total operating revenues 6,995 6,867 20,219 20,677 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Plant specific 1,087 782 3,144 2,604 Plant non-specific: Depreciation & amortization 996 900 2,934 2,820 Other 483 520 1,640 1,554 Customer operations 969 1,149 3,010 3,315 Corporate operations 842 707 2,592 2,178 Cost of services and sales 657 413 1,667 1,597 Property, revenue and payroll taxes 425 347 1,153 1,213 ----------- ----------- ----------- ----------- Total operating expenses 5,459 4,818 16,140 15,281 ----------- ----------- ----------- ----------- OPERATING INCOME 1,536 2,049 4,079 5,396 OTHER INCOME (EXPENSE) Interest expense (153) (145) (425) (513) Interest income 0 3 4 11 Income from partnerships 2,019 1,171 5,412 3,566 Other income (expense) 2 70 264 173 ----------- ----------- ----------- ----------- Total other income (expense) - net 1,868 1,099 5,255 3,237 INCOME BEFORE TAXES 3,404 3,148 9,334 8,633 FEDERAL INCOME TAXES 1,203 1,061 3,148 2,907 NET INCOME 2,201 2,087 6,186 5,726 PREFERRED DIVIDENDS 6 6 19 19 ----------- ----------- ----------- ----------- INCOME APPLICABLE TO COMMON STOCK $ 2,195 $ 2,081 $ 6,167 $ 5,707 ----------- ----------- ----------- ----------- NET INCOME PER AVERAGE SHARE OF OUTSTANDING COMMON STOCK $ 1.22 $ 1.15 $ 3.42 $ 3.16 =========== =========== =========== =========== CASH DIVIDENDS PAID PER SHARE $ .43 $ .43 $ 1.29 $ 1.27 =========== =========== =========== =========== AVERAGE SHARES OF COMMON STOCK OUTSTANDING 1,803,662 1,804,251 1,803,653 1,804,251 =========== =========== =========== ===========
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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited) ($ in thousands)
2002 2001 ------- ------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 6,186 $ 5,724 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 2,935 2,820 Deferred income tax and investment tax credit 1,225 429 Interest charged to construction (257) (186) Income from partnerships (5,412) (3,566) Change in assets and liabilities: (Increase) Decrease in accounts receivable (242) (1,008) (Increase) Decrease in materials and supplies 175 (1,200) (Increase) Decrease in prepaid expenses (4) (535) (Increase) Decrease in deferred charges 132 80 Increase (Decrease) in accounts payable (1,064) 365 Increase (Decrease) in customers' deposits (12) 0 Increase (Decrease) in advance billing and payment 307 (138) Increase (Decrease) in accrued expenses 140 75 Increase (Decrease) in post retirement benefits obligation (4) (87) Increase (Decrease) in other liabilities 258 45 ------- ------- Net cash provided by operating activities 4,363 2,818 ------- ------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (5,748) (4,682) Interest charged to construction 257 186 Distributions from partnerships 4,125 3,026 Capital contributions to partnerships (800) 0 ------- ------- Net cash used in investing activities (2,166) (1,470) ------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Increase (Decrease) in notes payable 450 450 Sale of common stock 5 17 Dividends (2,346) (2,309) ------- ------- Net cash provided by (used in) financing activities (1,891) (1,842) ------- ------- Increase (Decrease) in cash and cash equivalents 306 (494) Cash and cash equivalents at beginning of period 581 738 ------- ------- Cash and cash equivalents at the end of period $ 887 $ 244 ======= =======
The accompanying notes are an integral part of the financial statements. 6 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 nine months periods ended September 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. In the financial statements, corresponding notes to financial statements, and the management discussion and analysis of financial condition and results of operations the dollar amounts presented are rounded to the nearest thousand. 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 June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from acquisition, construction, development and/or normal use of assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company is currently evaluating the timing of adoption and the effect that implementation of the new standard may have on its results of operations and financial position. 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 has had 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 91% 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 7 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 regulated 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 is lower than the recoverable amount as measured at the higher of net selling price and value in use as prescribed in FASB No. 121. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS 146 to have any impact on its operating results or financial position. 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, video over VDSL 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 actual shares outstanding of 1,803,653 and 1,804,251 for the nine-months ending September 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, and 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 September 30, 2002 and December 31, 2001, the Material and Supplies inventory consisted of the following:
2002 2001 ------ ------ ($ in thousands) Inventory for outside plant $ 364 $ 653 Inventory for inside plant 1,378 1,157 Inventory for online plant 107 205 Inventory of equipment held for sale or lease 189 256 Inventory of video equipment 59 0 ------ ------ $2,097 $2,271 ====== ======
8 NOTE 8: INVESTMENTS The Company has a 7.5% investment interest in the Orange-Poughkeepsie Limited Partnership ("O-P") which is accounted for under the equity method. The majority owner and general partner is Verizon Wireless of the East L.P. The partnership is individually significant as defined by applicable SEC regulations. The following summarizes the income statement (unaudited) of the investee:
Nine months ended September 30, ($ in thousands) ------------------------ 2002 2001 ------- ------- Net sales $82,110 $58,649 Costs & expenses Cellular service cost 10,044 8,910 Operating expenses 4,170 4,993 ------- ------- 14,214 13,903 Net operating income 67,896 44,746 Other income 1,113 984 ------- ------- Net income 69,009 45,730 ======= ======= WVT income share $ 5,176 $ 3,430 ======= =======
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 income 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. Additionally, Partnership year to date income on the consolidated statement of 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 $453K as revenue and has booked this amount as a liability in Advanced Billing and Payment until the review has been completed. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEWS: RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 - NET INCOME The Company's net income from all sources increased $461K (or 8.1%) to $6,186K for the nine-month period ended September 30, 2002, as compared to an increase of $468K (or 8.9%) to $5,726K for the corresponding period in 2001. Net income was affected by the inclusion of a fifth payroll period in September. Without the fifth payroll, normalized net income growth is 9.7%. 9 Net income for the nine month period ending September 30, 2002 ($ in thousands):
Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Operating revenues 17,396 4,478 (1,655) 20,219 Operating expenses 13,521 4,274 (1,655) 16,140 Other income (expenses) 5,252 3 5,255 Federal income taxes 3,078 70 3,148 ------ ----- ------ ------ Net income 6,049 137 6,186 ====== ===== ====== ======
Net income for the nine month period ending September 30, 2001 ($ in thousands):
Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Operating revenues 17,513 4,555 (1,391) 20,677 Operating expenses 12,858 3,814 (1,391) 15,281 Other income (expenses) 3,231 6 3,237 Federal income taxes 2,652 255 2,907 ------ ----- ------ ------ Net income 5,234 492 5,726 ====== ===== ====== ======
The Company's 2002 net income for the nine month period ending September 30, 2002 was affected by a decrease in revenue from two sources, Reciprocal Compensation ("RC") and Internet Services, by a substantial increase in O-P income and by the events of the WorldCom bankruptcy. The Company at the end of the second quarter was owed $245K by WorldCom/MCI for connecting MCI customers with MCI. This entire amount was booked to the Reserve for Bad Debt. In July the Company accrued an additional amount of $186K which was also booked to the Reserve for Bad Debt. The sum of these amounts are reflected in the quarter's results under Other Services and Sales. The Company will reserve pre-bankruptcy filing WorldCom revenue until the court clarifies the Company's standing as a creditor. WorldCom/MCI is currently reimbursing the Company for post-bankruptcy services; therefore no additional Bad Debt was reserved during the quarter. RC revenue decreased by 66% 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 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 $458K (or 2.2%) to $20,219K for the nine-month period ended September 30, 2002 as compared to $20,677K for the corresponding period of 2001. The change in operating revenues was primarily the result of decreases of $707K (or 65.8%) in Reciprocal Compensation, and $226K (or 7.21%) in long distance sales and long distance network service combined during the period as compared to the same nine-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. It is expected that access line growth is likely to remain flat due to the success of DSL. The launch of our Video product in April 2002 has contributed $38K in revenue as of September 30, 2002 and is proceeding according to plan. 10 For the nine month period ending September 30, 2002 ($ in thousands):
Revenues From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Local network services 3,458 3,458 Network access revenues 7,634 (1,655) 5,979 Long distance network service 1,514 1,514 Directory advertising 984 984 Long distance sales 1,458 1,458 Internet services 4,479 4,479 Other services and sales 2,347 2,347 ------ ----- ------ ------ Total operating revenues 17,395 4,479 (1,655) 20,219 ====== ===== ====== ======
For the nine month period ending September 30, 2001 ($ in thousands):
Revenues From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Local network services 3,245 3,245 Network access revenues 6,983 (1,391) 5,592 Long distance network service 1,627 1,627 Directory advertising 871 871 Long distance sales 1,571 1,571 Internet services 4,556 4,556 Other services and sales 3,215 3,215 ------ ----- ------ ------ Total operating revenues 17,512 4,556 (1,391) 20,677 ====== ===== ====== ======
Long Distance revenues continue to show decreases due primarily to intense competition from other long distance carriers as well as wireless providers. Directory revenues have increased 13.0% 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 increased 48% (excluding reciprocal compensation) over the same period last year. EXPENSE Operating expenses are 5.6% over 2001 due in large part to the impact of the WorldCom bankruptcy. The elimination of Operator Services 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 nine month period ending September 30, 2002 ($ in thousands):
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Plant specific 2,859 285 3,144 Plant non-specific: Depreciation 2,332 602 2,934 Other 705 935 1,640 Customer operations 2,861 149 3,010 Corporate operations 2,508 84 2,592 Cost of services and sales 1,220 2,102 (1,655) 1,667 Property, revenue and payroll tax 1,036 117 1,153 ------ ----- ------ ------ Total operating expenses 13,521 4,274 (1,655) 16,140 ====== ===== ====== ======
11 For the nine month period ending September 30, 2001 ($ in thousands):
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Plant specific 2,600 4 2,604 Plant non-specific: Depreciation 2,245 575 2,820 Other 727 827 1,554 Customer operations 3,064 251 3,315 Corporate operations 2,168 10 2,178 Cost of services and sales 988 2,000 (1,391) 1,597 Property, revenue and payroll tax 1,066 147 1,213 ------ ----- ------ ------ Total operating expenses 12,858 3,814 (1,391) 15,281 ====== ===== ====== ======
OTHER INCOME AND EXPENSE Other income and expenses increased by $2,018K (or 62.3%) from $3,237K in the nine-month period ended September 30, 2001 to $5,255K in the corresponding period of 2002 primarily due to the increase in income from O-P. Year to date, the partnership earnings increased 50.9% over the same comparable 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 that call volume will remain strong, that expense allocations from the general partner will remain the same, and that significant year over year increases will continue. LIQUIDITY AND CAPITAL RESOURCES The Company had $887K cash and cash equivalents available at September 30, 2002. The Company has lines of credit with two banks totaling $10 million which $3,300K remained unused at September 30, 2002. $2,500K 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 September 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 $5,748K during the nine-month period ending September 30, 2002 as compared to $4,682K 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 by our customers, the Company continued to 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 percentage 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 management projects approximately 28% of our Interexchange Local Exchange Carrier "ILEC" and CLEC customers will be subscribing to our voice, video and data services. O-P 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 $1,746K (or 50.9%) to $5,176K during the first nine months of 2002, compared to $3,430K for the corresponding 2001 period. Partnership earnings are distributed to the Company on a quarterly basis. 12 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 million. HVDN is a competitive telecommunications company that offers high-speed bandwidth throughout the region of Orange, Dutchess and Ulster counties. HVDN has achieved cash flow positive results each month since June 2002. The Company owns a 17.0% interest in Zefcom, ("Zefcom"), L.L.C., a licensed reseller of wireless services. As of September 30, 2002 the Company had made capital contributions of $2 million. Year to date, the Company has invested $800K according to the terms of its investment agreement with Zefcom. 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 September 30, 2002, compared to $0.43 for the corresponding period in 2001. The total dividends paid through the third quarter of 2002 for common stock by Warwick Valley Telephone Company were $1,846K, compared to $1,809K 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 SEPTEMBER 30, 2002 - NET INCOME The Company's net income from all sources increased by $114K (or 5.5%) to $2,201K for the three-month period ended September 30, 2002, as compared to a decrease of $256K (or 10.9%)to $2,087K for the corresponding period in 2001. Net income for the three month period ending September 30, 2002 ($ in thousands):
Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Operating revenues 5,930 1,591 (526) 6,995 Operating expenses 4,286 1,699 (526) 5,459 Other income (expenses) 1,868 0 1,868 Federal income taxes 1,217 (14) 1,203 ----- ----- ---- ----- Net income 2,295 (94) 2,201 ===== ===== ==== =====
Net income for the three month period ending September 30, 2001 ($ in thousands):
Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Operating revenues 5,759 1,584 (476) 6,867 Operating expenses 4,111 1,183 (476) 4,818 Other income (expenses) 1,097 2 1,099 Federal income taxes 924 137 1,061 ----- ----- ---- ----- Net income 1,821 266 2,087 ===== ===== ==== =====
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 O-P income. RC revenue decreased by 65.8% 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 compensation for "ISP"-bound traffic to gradually decline. The impact of the downward trend is now being felt. When comparing third Quarter 2002 to the third Quarter 2001, there has been a 57.0% 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. 13 REVENUE Operating revenues increased by $128K (or 1.9%) to $6,995K for the three-month period ended September 30, 2002 as compared to $6,867K for the corresponding period of 2001. The change in operating revenues was primarily the result of an increase of $334K (or 18.1%) in network access service rates. This increase was offset by decreases of $135K (or 57.0%) in reciprocal compensation and $48K (or 4.5%) in long distance sales and long distance network service combined during the period as compared to the same three-month period of 2001. For the three month period ending September 30, 2002 ($ in thousands):
Revenues From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Local network services 1,187 1,187 Network access revenues 2,713 (526) 2,187 Long distance network service 513 513 Directory advertising 343 343 Long distance sales 505 505 Internet services 1,591 1,591 Other services and sales 669 669 ----- ----- ---- ----- Total operating revenues 5,930 1,591 (526) 6,995 ===== ===== ==== =====
For the three month period ending September 30, 2001 ($ in thousands):
Revenues From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Local network services 1,079 1,079 Network access revenues 2,327 (476) 1,851 Long distance network service 535 535 Directory advertising 308 308 Long distance sales 531 531 Internet services 1,584 1,584 Other services and sales 979 979 ----- ----- ---- ----- Total operating revenues 5,759 1,584 (476) 6,867 ===== ===== ==== =====
Operating revenues increased slightly for the three months ending September 30, 2002 due to additional CLEC access line growth, network access revenue rate increases and additional DSL. 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 revenues have increased 11.5% 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 13.3% over 2001 due in large part to the impact of the WorldCom bankruptcy. The elimination of Operator Services, and lower 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. 14 For the three month period ending September 30, 2002 ($ in thousands):
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Plant specific 814 273 1,087 Plant non-specific: Depreciation 801 195 996 Other 175 308 483 Customer operations 898 71 969 Corporate operations 767 75 842 Cost of services and sales 447 736 (526) 657 Property, revenue and payroll tax 384 41 425 ----- ----- ---- ----- Total operating expenses 4,286 1,699 (526) 5,459 ===== ===== ==== =====
For the three month period ending September 30, 2001 ($ in thousands):
Expenses From: Intercompany Consolidated Telephone Internet Elimination Total --------- -------- ----------- ----- Plant specific 781 1 782 Plant non-specific: Depreciation 713 187 900 Other 248 272 520 Customer operations 1,029 120 1,149 Corporate operations 704 3 707 Cost of services and sales 300 589 (476) 413 Property, revenue and payroll tax 336 11 347 ----- ----- ---- ----- Total operating expenses 4,111 1,183 (476) 4,818 ===== ===== ==== =====
OTHER INCOME AND EXPENSE Other income and expense increased by $769K (or 69.9%) to $1,868K in the three-month period ended September 30, 2002 from $1,099K in the corresponding period of 2001 primarily due to the increase in income from the O-P. Taken by itself, the partnership earnings increased 58.4% 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, that expense allocations from the General Partner will remain the same, 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 were 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 nine months of 2002 was $75K (or 11.1%) from $679K to $604K in New York and $100K (or 10.0%) from $998K to $898K 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 as well as with Sprint in the Vernon, New Jersey areas for local service through access lines. 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. 15 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 two state commissions have authorized the Company to issue $18,475K 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 is reviewing the loan documents with commission staff. 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. Under the Investment Company Act of 1940 as amended, a company can be an "investment company" if more than 40% of its assets consists 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 and the other similar interests as of September 30, 2002 totals only $3,250K, which is clearly less than 40% of WVTC's assets. However, because the income received by WVTC from the O-P 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. The Company has formally applied 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. 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's mortgage liabilities currently bear interest at a fixed rate. If the Company refinances its liabilities when they mature the nature and amount of the 16 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 million 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. ITEM 4. CONTROLS AND PROCEDURES - (a) Evaluation of disclosure controls and procedures The term "disclosure controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of 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 a date within 90 days before the filing of this quarterly report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act. (b) Changes in internal controls We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. For the quarter ended September 30, 2002, there were no significant changes to our internal controls or in other factors that could significantly affect our internal controls. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - Shortly before our Investment Company Act application was filed with the SEC, the Company was served with a complaint filed by a shareholder with the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the Company is required to either register as an investment company or divest the O-P interest. The management of the Company believes that the complaint is without merit. Proceedings have been voluntarily stayed pending the final outcome of the Company's SEC application. 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 October 1, 2002, Warwick Valley Telephone Company (traded on NASDAQ with the symbol WWVY) filed an application with the Securities and Exchange Commission under Section 3(b)(2) of the Investment Company Act of 1940 for an order of exemption from the provisions of that act. The Company had previously reported its intention to file such an application in its Quarterly Report on Form 10-Q for the period ended June 30, 2002. The Company does not believe it is an investment company within the meaning of the Investment Company Act but concluded that it was prudent to request an order of exemption because of the current profitability of its long-standing 7.5% limited partnership interest in O-P. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits - 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by M. Lynn Pike-principle Executive Officer. 99.2 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-principle Financial Officer. b) Reports on Form 8-K - Form 8-K reporting date: October 1, 2002 Item Reported - Item 9. Regulation FD Disclosure: The Company filed an application with the Securities Exchange Commission under Section 3(b) (2) of the Investment Company Act of 1940 for an order of exemption from the provisions of that act. 18 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 11/14/02 /s/ M. Lynn Pike ------------------------------------------ M. Lynn Pike, President (Chief Executive Officer) Date 11/14/02 /s/ Philip A. Grybas ------------------------------------------- Philip A. Grybas, Vice President, Treasurer (Principal Financial and Chief Accounting Officer) 19 CERTIFICATIONS I, M. Lynn Pike, Chief Executive Officer of Warwick Valley Telephone Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Warwick Valley Telephone Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ M. Lynn Pike ----------------- ---------------- Name: M. Lynn Pike Title: President, Chief Executive Officer I, Philip A. Grybas, Chief Financial Officer of Warwick Valley Telephone Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Warwick Valley Telephone Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Philip A. Grybas ----------------- -------------------- Name: Philip A. Grybas Title: Vice President, Chief Financial Officer