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 March 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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
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(Exact name of registrant as specified in its charter)
New York 14-1160510
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
47 Main Street, Warwick, New York 10900
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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
--- ---
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 March 31, 2002.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
2002 2001
------------------- -------------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 643,709 $ 580,492
Accounts receivable-net of reserve for uncollectibles 3,578,817 3,438,192
Materials and supplies 2,122,958 2,271,316
Prepaid expenses 677,805 545,069
------------------- -------------------
TOTAL CURRENT ASSETS 7,023,289 6,835,069
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NONCURRENT ASSETS:
Unamortized debt issuance expense 9,026 10,347
Other deferred charges 137,200 197,492
Investments 6,778,575 5,396,802
------------------- -------------------
TOTAL NONCURRENT ASSETS 6,924,801 5,604,641
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PROPERTY, PLANT & EQUIPMENT:
Plant in service 57,229,103 56,461,551
Plant under construction 6,627,995 4,455,113
------------------- -------------------
63,857,098 60,916,664
Less: Accumulated depreciation 26,753,446 25,846,794
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TOTAL PROPERTY, PLANT & EQUIPMENT 37,103,652 35,069,870
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TOTAL ASSETS $ 51,051,742 $ 47,509,580
=================== ===================
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
----------------- ---------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Notes payable $ 7,750,000 $ 6,250,000
Accounts payable 2,289,299 1,918,618
Advance billing and payments 14,136 202,162
Customer deposits 116,690 127,665
Accrued taxes 753,018 64,801
Accrued interest 73,654 30,155
Other accrued expenses 340,275 294,362
----------------- ---------------
TOTAL CURRENT LIABILITIES 11,337,072 8,887,763
----------------- ---------------
----------------- ---------------
LONG TERM DEBT 4,000,000 4,000,000
----------------- ---------------
DEFERRED CREDITS & OTHER LONG TERM LIABILITIES:
Accumulated deferred federal income taxes 2,398,966 2,348,140
Unamortized investment tax credits 38,190 46,590
Other deferred credits 82,448 60,203
Post retirement benefit obligation 1,280,392 1,270,895
----------------- ---------------
TOTAL DEFERRED CREDITS & OTHER LONG TERM LIABILITIES 3,799,996 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 3/31/02 and 1,994,080 for 12/31/01 3,475,553 3,471,076
Retained earnings 31,323,921 30,309,713
Treasury stock at cost, 190,497 shares (3,384,800) (3,384,800)
----------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 31,914,674 30,895,989
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,051,742 $ 47,509,580
================= ===============
The accompanying notes are an integral part of these financial statements.
ITEM 1. FINANCIAL STATEMENTS
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WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2002 2001
------------------------------------
OPERATING REVENUES:
Local network service $ 1,194,961 1,118,891
Network access service 1,933,519 1,965,435
Long distance network service 499,242 568,029
Directory advertising 323,849 280,760
Long distance sales 477,782 528,196
Internet services 1,299,385 1,347,536
Other services and sales 856,443 1,170,846
------------------------------------
Total operating revenues 6,585,181 6,979,693
------------------------------------
OPERATING EXPENSES:
Plant specific 989,076 926,592
Plant non-specific:
Depreciation & amortization 956,639 962,306
Other 584,552 497,965
Customer operations 1,106,698 1,176,392
Corporate operations 929,537 682,985
Cost of services and sales 341,369 574,492
Property, revenue and payroll taxes 345,931 421,837
------------------------------------
Total operating expenses 5,253,802 5,242,569
------------------------------------
OPERATING INCOME 1,331,379 1,737,124
OTHER INCOME (EXPENSE)
Interest expense (129,449) (177,568)
Interest income 2,249 3,847
Other investments 1,383,063 1,007,722
Other income (expense) 102,285 28,287
------------------------------------
Total other income (expense) - net 1,358,148 862,288
INCOME BEFORE TAXES 2,689,527 2,599,412
FEDERAL INCOME TAXES 892,205 874,800
NET INCOME 1,797,322 1,724,612
PREFERRED DIVIDENDS 6,250 6,250
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INCOME APPLICABLE TO COMMON STOCK $ 1,791,072 1,718,362
------------------------------------
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK $ 0.99 0.96
====================================
CASH DIVIDENDS PAID PER SHARE $ 0.43 0.41
====================================
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING 1,803,622 1,804,251
====================================
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 and 2001
(Unaudited)
2002 2001
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 1,797,322 1,724,612
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 956,639 962,306
Deferred income tax and investment tax credit 64,671 29,871
Interest charged to construction (104,212) (24,716)
Income from investments (1,383,063) (1,007,798)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (140,625) (380,168)
(Increase) Decrease in materials and supplies 148,358 (1,043,259)
(Increase) Decrease in prepaid expenses (132,736) (174,764)
(Increase) Decrease in deferred charges 60,292 207,005
Increase (Decrease) in accounts payable 370,681 532,513
Increase (Decrease) in customers' deposits (10,975) 2,960
Increase (Decrease) in advance billing and payment (188,026) (179,012)
Increase (Decrease) in accrued expenses 731,716 686,444
Increase (Decrease) in post retirement benefits obligation 9,497 (32,483)
Increase (Decrease) in other liabilities 45,913 (61,684)
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Net cash provided by operating activities 2,225,452 1,241,827
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,989,100) (1,936,690)
Interest charged to construction 104,212 24,716
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Net cash used in investing activities (2,884,888) (1,911,974)
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CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable 1,500,000 1,550,000
Sale of common stock 4,477 7,626
Dividends (781,824) (745,596)
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Net cash provided by (used in) financing activities 722,653 812,030
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Increase (Decrease) in cash and cash equivalents 63,217 141,883
Cash and cash equivalents at beginning of period 580,492 738,495
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Cash and cash equivalents at the end of period $ 643,709 880,378
================== ================
The accompanying notes are an integral part of the financial statements.
ITEM 1. FINANCIAL STATEMENTS
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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-month
period ended March 31, 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 June 2001, the FASB issued SFAS No. 141, "Business Combinations."
This pronouncement eliminated the use of the "pooling of interests" method of
accounting for all mergers and acquisitions. As a result, all mergers and
acquisitions will be accounted for using the "purchase" method of accounting.
SFAS No. 141 is effective for all mergers and acquisitions initiated after June
30, 2001. Adoption of this pronouncement has no impact on our results from
operations or our financial position.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and reporting
for intangible assets (excluding goodwill) acquired individually or with a group
of other assets at the time of their acquisition. It also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. We currently estimate the adoption of SFAS No. 142 will have
no impact on our results from operations or our 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 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 1,803,622 and 1,804,251 for the quarters ending March 31, 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 directory operations -
including yellow and white pages advertising and electronic publishing.
The Internet segment provides high speed, dial up internet services,
help desk operations, and has recently launched its new Video product.
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 March 31, 2002 and
December 31, 2001, the Material and Supplies inventory consisted of the
following:
2002 2001
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Inventory for outside plant 587,590 653,245
Inventory for inside plant 1,014,830 1,157,445
Inventory for online plant 237,287 204,565
Inventory of equipment held for sale or lease 234,759 256,061
Inventory of Video equipment 48,492 0
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2,122,958 2,271,316
============= ===========
NOTE 8: INVESTMENTS
The "Company" also 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 partnership is individually significant as defined
by applicable SEC regulations. The following summarizes the income statement
(unaudited) of the investee:
Three months ended March 31,
(000's)
2002 2001
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Net sales $23,722 $16,731
Costs & expenses
Cellular service cost 3,423 2.673
Operating expenses 1,400 1,380
----------- ----------
4,823 4,053
Net operating income 18,899 12,678
Other income 313 703
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Net income 19,212 13,381
=========== ==========
WVT income share $ 1,441 $ 1,004
=========== ==========
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
treats such differences as a timing difference with adjustments taking place
immediately in the next financial period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEWS: RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 -
-------------------------------------------------------
NET INCOME
- ----------
The Company's net income from all sources increased $72,710 (or 4.2%)
to $1,797,332 for the three-month period ended March 31, 2002, as compared to an
increase of $303,650 to $1,724,612 for the corresponding period in 2001.
Net income for the three month period ending March 31, 2002:
Intercompany Consolidated
Telephone Internet Elimination Total
------------- ------------- ----------------- ----------------
Operating revenues 5,907,656 1,299,385 (621,860) 6,585,181
Operating expenses 4,578,431 1,297,230 (621,860) 5,253,801
Other income (expenses) 1,357,285 862 1,358,147
Federal income taxes 909,208 (17,003) 892,205
------------- ------------- ----------------- ----------------
Net income 1,777,302 20,020 1,797,322
============= ============= ================= ================
Net income for the three month period ending March 31, 2001:
Intercompany Consolidated
Telephone Internet Elimination Total
------------- ------------- ------------------- ---------------
Operating revenues 6,089,290 1,347,536 (457,133) 6,979,693
Operating expenses 4,387,404 1,312,298 (457,133) 5,242,569
Other income (expenses) 860,785 1,503 862,288
Federal income taxes 862,308 12,492 874,800
------------- ------------- ------------------- ---------------
Net income 1,700,363 24,249 1,724,612
============= ============= =================== ===============
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 67% over the prior year due primarily to an FCC order (FCC 01-131)
reaffirming that dial-up 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 1st
Quarter 2002 over 1st Quarter 2001, there has been a 67% 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 our out
of territory dial up customer's desire for fast Internet. Where WVTC is the
dominant 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 $394,512 (or 5.7%) to $6,585,181 for
the three-month period ended March 31, 2002 as compared to $6,979,693 for the
corresponding period of 2001. The change in operating revenues was primarily the
result of decreases of $287,480 (or 67.0%) in reciprocal compensation and
$50,414 (0r 9.5%) in long distance sales during the period as compared to the
same three-month period of 2001.
For the three month period ending March 31, 2002
Revenues From: Intercompany Consolidated
Telephone Internet Elimination Total
------------- --------------- ----------------- ----------------
Local network services 1,194,961 - 1,194,961
Network access revenues 2,555,379 (621,860) 1,933,519
Long distance network service 499,242 499,242
Directory advertising 323,849 323,849
Long distance sales 477,782 477,782
Internet services 1,299,385 1,299,385
Other services and sales 856,443 856,443
------------- --------------- ----------------- ----------------
Total operating revenues 5,907,656 1,299,385 (621,860) 6,585,181
============= =============== ================= ================
For the three month period ending March 31, 2001
Revenues From: Intercompany Consolidated
Telephone Internet Elimination Total
------------- --------------- ----------------- ----------------
Local network services 1,118,891 1,118,891
Network access revenues 2,422,568 (457,133) 1,965,435
Long distance network service 568,029 568,029
Directory advertising 280,760 280,760
Long distance sales 528,196 528,196
Internet services 1,347,536 1,347,536
Other services and sales 1,170,846 1,170,846
------------- --------------- ----------------- ----------------
Total operating revenues 6,089,290 1,347,536 (457,133) 6,979,693
============= =============== ================= ================
Operating revenues decreased over the prior year due to flat access
line growth and the implementation of the FCC's order reforming access charge
rates for rate-of-return carriers (commonly referred to as the MAG order). While
the intention of the FCC's MAG order was to approach revenue, neutrality while
changing certain aspects of rate structure, WVTC has not experienced a
corresponding offset from higher Subscriber Line Charges in Local Network
Service that were supposed to compensate for lower Long Distance rates. Overall,
Long Distance revenues continue to show decreases due primarily to intense
competition as well as wireless impacts. Directory advertising has increased 15%
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) revenues and full inter-exchange Long
Distance service is provided by WVTC. CLEC revenues are generated by providing
local service to customers located in certain Frontier - a Citizens
Communications Company - areas giving the customer a choice of service
providers. CLEC revenue during the quarter increased 52% (excluding reciprocal
compensation) over the same period last year.
EXPENSE
- -------
Operating expense growth was flat due in large part to the phase out of
Operator Services in January. Also, lower trunkline costs and access charges
have contributed to the company's ongoing cost containment efforts. Slightly
offsetting these decreases were increases in Plant and Corporate Operations due
to the rollout of our Video product. The increase in Corporate Operations was
primarily due to professional and consulting fees associated with the
introduction of the Video product and the planned corporate re-organization. It
is anticipated that Operator Services savings will be offset by initial expenses
incurred by the aggressive rollout of Video in New Jersey and subsequently in
New York (pending conclusion of the New York regulatory approval process).
For the three month period ending March 31, 2002
Expenses From: Intercompany Consolidated
Telephone Internet Elimination Total
--------------- --------------- ----------------- ----------------
Plant specific 980,322 8,754 989,076
Plant non-specific:
Depreciation 760,552 196,087 956,639
Other 272,834 311,718 584,552
Customer operations 1,045,753 60,945 1,106,698
Corporate operations 925,360 4,177 929,537
Cost of services and sales 260,186 703,043 (621,860) 341,369
Property, revenue and payroll tax 333,423 12,508 345,931
--------------- --------------- ----------------- ----------------
Total operating expenses 4,578,430 1,297,232 (621,860) 5,253,802
=============== =============== ================= ================
For the three month period ending March 31, 2001
Expenses From: Intercompany Consolidated
Telephone Internet Elimination Total
---------------- --------------- ----------------- ------------------
Plant specific 925,706 886 926,592
Plant non-specific:
Depreciation 760,341 201,965 962,306
Other 220,734 277,231 497,965
Customer operations 1,092,611 83,781 1,176,392
Corporate operations 679,843 3,142 682,985
Cost of services and sales 341,966 689,659 (457,133) 574,492
Property, revenue and payroll tax 365,932 55,905 421,837
---------------- --------------- ----------------- ------------------
Total operating expenses 4,387,133 1,312,569 (457,133) 5,242,569
================ =============== ================= ==================
OTHER INCOME AND EXPENSE
- ------------------------
Other income and expenses increased by $495,860 (or 57.5%) from
$862,288 in the three-month period ended March 31, 2001 to $1,358,148 in the
corresponding period of 2002 primarily due to the performance of the
Orange/Poughkeepsie partnership. which grew by approximately $437,000 to
$1,441,000. During the first quarter, the partnership earnings increased 43%
over the same period last year. However, it should be noted that in comparing
the 4th. Quarter 2001 results to the 1st Quarter of 2002. O/P Net income
decreased 2% during this timeframe. Should this trend continue, the partnership
will experience a leveling off from the significant Net Income increases of
prior periods. (See also Footnote #8) (See Liquidity and Capital Resources).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We had $643,709 of cash and cash equivalents available at March 31,
2002. The company has lines of credit with two banks totaling $10,000,000 of
which $2,250,000 remained unused at March 31, 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 March 31, 2002 net cash from operating activities
was less than our capital expenditures due to the Company's entrance into the
video business.
During the fourth quarter of 2001, the Company offered an early
retirement package to certain eligible employees. Special termination benefits
of $320,873 were paid during the first quarter of 2002.
CASH FROM INVESTING ACTIVITIES
- ------------------------------
Our capital expenditures totaled $2,989,100 during the three-month
period ending March 31, 2002 as compared to $1,936,690 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.
The majority of the Company's capital expenditures during the quarter
were made due to our expansion into digital video services. The Company has been
approved to provide Video service in New Jersey and is awaiting approval in New
York. Overall, the Company has budgeted over $10 million to be spent on Capital
projects in 2002 with approximately 35% slated of this amount for video
services. Upon completion of the 2002 Capital program, WVTC will be able to
offer competitive Voice, Video and Data services to 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 $437,000 (or 43.0%) to $1,441,000 during the first three months
of 2002, compared to $1,004,000 for the corresponding 2001 period
The Company has a 8.9% ownership interest in Hudson Valley DataNet
("HVDN"), L.L.C.,in return for our 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.
The Company owns a 17.0% interest in Zefcom, L.L.C., a licensed
reseller of wireless services. In addition to the initial capital contribution
of $1,200,000, the Company has a commitment to contribute another $800,000 to
Zefcom, L.L.C. in the form of a promissory note payable on demand.
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 March
31, 2002, compared to $0.41 for the corresponding period in 2001. The total
dividends paid through the first quarter of 2002 for common stock by Warwick
Valley Telephone Company was $781,824, compared to $745,596 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.
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 three months of 2002 was
$38,014 (or 16.0%) from $237,344 to $199,330 in New York and $49,577 (or 14.3%)
from $347,529 to $297,952 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.
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's Video business
launch and the issuance of the unsecured notes are anticipated to take place in
the 2nd. 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.
Assuming all approvals are obtained, the Company expects to complete this
reorganization by the end of 2002.
On March 6, 2002 The New Jersey Board of Public Utilities Commission
approved the Hometown Online Certificate of Approval (franchise) to operate in
Vernon Township. The approval by the NJBPUC now enables the Company to operate
as a video provider using a Very high bit Digital Subscriber Line ("VDSL")
platform in New Jersey. Hometown Online is currently seeking similar approval in
West Milford and Hardyston, New Jersey as well as several municipalities in the
state of New York.
FORWARD LOOKING STATEMENTS
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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%.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not Applicable
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ITEM 2. CHANGES IN SECURITIES - Not Applicable
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
- ---------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS -
- --------------------------------------------------------------
At the Company's 2002 Annual Meeting of Common Shareholders held on
April 26, 2002, Philip S. Demarest, Herbert Gareiss, Jr. and Corinna S. Lewis
were elected as directors for three-year terms. The terms of Fred M. Knipp,
Howard Conklin, Jr., Robert J. DeValentino, Henry L. Nielsen, Jr., M. Lynn
Pike, Wisner H. Buckbee and Joseph E. DeLuca continued after the meeting.
Matters voted on at the meeting and the results of each vote are as
follows:
For Against Withholding Authority
1. Set the number of directors at ten 1,262,568 5,333 3,315
until the next annual meeting.
For Against Withholding Authority
2. Election of directors - 1,262,568 5,333 3,315
Philip S. Demarest 1,260,320 10,890
Herbert Gareiss, Jr. 1,255,131 10,905
Corinna S. Lewis 1,269,916 10,890
For Against Withholding Authority
3. Ratify the appointment of Bush 1,254,704 954 15,558
and Germain as the independent
public accountants of the Company
ITEM 5. OTHER INFORMATION -
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a) Election of Officers
At its reorganizational meeting on April 26, 2002 , the Board of
Directors eleced the following persons to the positions set forth
opposite their names:
Wisner H. Buckbee Chairman of the Board
Henry L. Nielsen, Jr. Vice Chairman of the Board
M. Lynn Pike President, Chief Executive Officer
Philip A. Grybas Vice President, Chief Financial Officer, Treasurer
Herbert Gareiss, Jr. Vice President, Secretary
Larry Drake Vice President
Brenda A. Schadt Vice President
Colleen M. Shannon Assistant Secretary
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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a) Exhibits - Not applicable
b) Reports on Form 8-K - Form 8-K reporting date: May 11, 2001.
Item Reported - Item 5. Other Events and Regulation FD. Disclosure:
The Company filed a petition with the New York Public Service
Commission seeking approval to reorganize its corporate structure in
order to create a holding company that would separate its regulated
local exchange operations from its deregulated operations.
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 05/15/02 /s/ Herbert Gareiss, Jr.
Herbert Gareiss, Jr., Vice President, Secretary
(Duly Authorized Officer)
Date 05/15/02 /s/Philip A. Grybas
Philip A. Grybas, Vice President, Treasurer
(Principal Financial and Chief
Accounting Officer)