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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from To
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Commission file number 0-11174
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WARWICK VALLEY TELEPHONE COMPANY
--------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1160510 .
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
47 Main Street, Warwick, New York 10990 .
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(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (845) 986-8080
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Former name, former address and former fiscal year, if changed since last
report.
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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Indicate 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)