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, 2003
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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
incorporation or organization) Identification No.)
47 Main Street, Warwick, New York 10990
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(Address of principal executive offices) (Zip Code)
Registrant's 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 MARKS 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 by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO .
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 5,401,200 Common
Shares, $.01 par value, outstanding at November 13, 2003, adjusted for the
Company's stock split.
INDEX TO FORM 10Q
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and
December 31, 2002 (Unaudited). 3
Consolidated Statements of Income for the Three and Nine Months ended
September 30, 2003 and September 30, 2002 (Unaudited). 4
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2003 and September 30, 2002 (Unaudited). 5
Notes to Consolidated Financial Statements (Unaudited). 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 14
Item 4. Controls and Procedures. 14
PART 2 - OTHER INFORMATION
Item 2. Changes in Securities and Proceeds 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K. 15
Exhibits -
3(i) Restated and amended Certificate of Incorporation
3(ii) By-Laws (Incorporated by reference to Exhibit 3(b) to the Company's
Annual Report on Form 10-K for 2002)
4 New form of certificate representing common shares
31.1 Chief Executive Officer Certification
31.2 Chief Financial Officer Certification
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 signed by M. Lynn
Pike-principal Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 signed by Philip A.
Grybas-principal Financial Officer.
Reports on Form 8-K -
8K filed on August 1, 2003.
8K filed on September 19, 2003.
-2-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands except per share amounts)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
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Current Assets:
Cash $ 4,783 $ 1,641
Accounts receivable - net of reserve for uncollectibles 3,983 3,428
Refundable income taxes 0 313
Materials and supplies 1,537 1,468
Prepaid expenses 930 544
-------- --------
Total Current Assets 11,233 7,394
Unamortized debt issuance expense 119 5
Intangible asset - pension 831 831
Other deferred charges 433 27
Investments 6,298 7,775
Property, Plant and Equipment:
Plant in service 65,910 63,358
Plant under construction 1,328 1,974
67,238 65,332
Less: Accumulated depreciation 27,883 25,827
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Total Property, Plant and Equipment 39,355 39,505
-------- --------
TOTAL ASSETS $ 58,269 $ 55,537
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 0 $ 5,000
Current maturities of long term debt 4,000 4,000
Accounts payable 2,221 2,652
Advance billing and payments 250 230
Customer deposits 126 125
Accrued taxes 338 66
Accrued interest 131 74
Pension and post retirement benefits 155 516
Other accrued expenses 178 537
-------- --------
Total Current Liabilities 7,399 13,200
Long-term Debt 3,149 0
Deferred Credits and Other Long Term Liabilities
Accumulated deferred federal income taxes 4,331 3,978
Unamortized investment tax credits 13 22
Other deferred credits 21 20
Pension and post retirement benefit obligation 4,317 2,812
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Total Deferred Credits and Other Long Term Liabilities 8,682 6,832
Stockholders' Equity
Preferred stock - $100 par value; authorized and issued shares 5,000; 500 500
$0.01 par value authorized and unissued shares 9,995,000;
Common stock - $0.01 par value; authorized shares 10,000,000 60 60
Issued 5,984,427 for 9/30/03 and 5,982,810 for 12/31/02
Additional paid in capital 3,470 3,421
Treasury stock - 583,350 shares for 9/30/03 and 583,683 for 12/31/02 (3,598) (3,598)
Minimum pension liability (269) (269)
Retained earnings 38,876 35,391
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Total Stockholders' Equity 39,039 35,505
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,269 $ 55,537
======== ========
Please see the accompanying notes, which are an integral part of the
consolidated financial statements.
-3-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ in thousands except share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------- --------- --------- ---------
OPERATING REVENUES:
Local network service $ 1,025 $ 1,097 $ 3,062 $ 3,188
Network access service 2,516 2,280 7,283 6,252
Long distance network service 467 513 1,432 1,514
Directory advertising 351 343 1,061 984
Long distance sales 502 505 1,414 1,458
Internet services 1,689 1,591 4,932 4,478
Other services and sales 870 669 2,572 2,348
--------- --------- --------- ---------
Total operating revenues 7,420 6,998 21,756 20,222
--------- --------- --------- ---------
OPERATING EXPENSES:
Plant specific 1,331 1,087 3,608 3,144
Plant non-specific:
Depreciation & amortization 1,247 996 3,648 2,934
Other 683 483 2,025 1,639
Customer operations 1,086 969 3,206 3,010
Corporate operations 993 842 3,264 2,592
Cost of services and sales 577 660 1,856 1,670
Property, revenue and payroll taxes 352 425 1,067 1,153
--------- --------- --------- ---------
Total operating expenses 6,269 5,462 18,674 16,142
--------- --------- --------- ---------
OPERATING INCOME 1,151 1,536 3,082 4,080
OTHER INCOME (EXPENSES)
Interest expense (103) (153) (329) (425)
Interest income 3 0 3 4
Income from cellular partnership 2,511 2,019 6,771 5,412
Other income (expense) (48) 2 (24) 263
--------- --------- --------- ---------
Total other income (expense) - net 2,363 1,868 6,421 5,254
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 3,514 3,404 9,503 9,334
FEDERAL INCOME TAXES 1,192 1,203 3,223 3,148
--------- --------- --------- ---------
NET INCOME 2,322 2,201 6,280 6,186
PREFERRED DIVIDENDS 6 6 19 19
INCOME APPLICABLE TO COMMON STOCK $ 2,316 $ 2,195 $ 6,261 $ 6,167
--------- --------- --------- ---------
BASIC AND DILUTED EARNINGS PER SHARE $ 0.43 $ 0.41 $ 1.16 $ 1.14
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING 5,401,409 5,411,555 5,400,745 5,411,492
========= ========= ========= =========
Please see the accompanying notes, which are an integral part of the
consolidated financial statements.
-4-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
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FROM OPERATING ACTIVITIES:
Net income $ 6,280 $ 6,186
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,648 2,935
Deferred income tax and investment tax credit 659 1,225
Interest charged to construction (38) (257)
Income from partnership (6,771) (5,412)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (556) (242)
(Increase) Decrease in materials and supplies (69) 175
(Increase) Decrease in prepaid expenses (386) (4)
(Increase) Decrease in deferred charges (406) 132
Increase (Decrease) in accounts payable (429) (1,064)
Increase (Decrease) in customers' deposits 1 (12)
Increase (Decrease) in advance billing and payment 20 307
Increase (Decrease) in accrued expenses 328 140
Increase (Decrease) in pension and post retirement
benefits obligations 1,144 (4)
Increase (Decrease) in other liabilities (358) 258
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Net cash provided by (used in) operating activities 3,067 4,363
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FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,489) (5,748)
Interest charged to construction 38 257
Distributions from partnership 8,250 4,125
Changes in other investments 0 (800)
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Net cash provided by (used in) investing activities 4,799 (2,166)
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FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (5,000) 450
Net proceeds from issuance of long term debt 3,023 --
Dividends(Common & Preferred) (2,795) (2,346)
Sale of common stock 48 5
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Net cash provided by (used in) financing activities (4,724) (1,891)
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Increase (Decrease) in cash and cash equivalents 3,142 306
Cash and cash equivalents at beginning of period 1,641 581
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,783 $ 887
======= =======
Please see the accompanying notes, which are an integral part of the
consolidated financial statements.
-5-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands except per share amounts
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Warwick Valley Telephone Company ("the Company") and its
subsidiaries 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 month periods ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the entire year.
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.
Our investment in the Orange County-Poughkeepsie Limited Partnership
(O-P) is accounted for under the equity method of accounting. Our other
investments, where we do not exercise significant control or receive income
distributions, are accounted for under the cost method of accounting.
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 the 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, 2002 has been derived from the audited consolidated
financial statements at that date. The interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's latest annual report on Form 10-K.
STOCK SPLIT
On April 25, 2003, the Company announced a three-for-one stock split
of the Company's common stock. Approval for the stock split was received by both
the New York State Public Service Commission and the New Jersey Board of Public
Utilities on October 6, 2003, and the shares were made available on October 13,
2003. Also, par value, equal to one-cent per share, was established for common
stock. As a result, the common stock amounts in Stockholders' Equity for the
periods ended September 30, 2003 and December 31, 2002, have been restated to
reflect the stock split. Also, additional paid-in capital, in the amounts of
$3,469K and $3,421K for the periods ended September 30, 2003 and December 31,
2002, respectively, was recorded as a result of these events. In addition,
earnings per share amounts for the three- and nine-month periods ended September
30, 2003 and 2002, have been restated for the stock split.
NOTE 2: 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.
NOTE 3: EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of actual shares outstanding of 5,400,745 and 5,411,492 for the nine
month periods ended September 30, 2003 and 2002, and 5,401,409 and 5,411,555 for
the three month periods ended September 30, 2003 and 2002. Share amounts have
been restated for the three-for-one stock split (see Note 1).
The Company did not have any common stock equivalents as of September
30, 2003 and 2002.
NOTE 4: COMPREHENSIVE INCOME
Comprehensive income is equivalent to net income for the three and
nine month periods ended September 30, 2003 and 2002, respectively.
-6-
NOTE 5: FINANCIAL ACCOUNTING STATEMENT NO. 143 ADOPTION
The Company adopted SFAS No. 143, Accounting for Asset Retirement
Obligations, effective January 1, 2003. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
or normal use of the assets. SFAS No. 143 requires that a liability for an asset
retirement obligation be recognized when incurred and reasonably estimable,
recorded at fair value, and classified as a liability in the balance sheet. When
the liability is initially recorded, the entity capitalizes the cost and
increases the carrying value of the related long-lived asset. The liability is
then accreted to its present value each period, and the capitalized cost is
depreciated over the estimated useful life of the related asset. At the
settlement date, the entity will settle the obligation for its recorded amount
and recognize a gain or loss upon settlement.
Warwick Valley Telephone Company is a regulated telephone company and
as such follows the provisions of SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation" and therefore conforms to the accounting principles
as prescribed by the respective state public utility commissions and the Federal
Communications Commission ( FCC ), and where applicable, accounting principles
generally accepted in the United States of America. In accordance with federal
and state regulations, depreciation expense for the Company's wireline
telecommunications business has historically included an additional provision
for cost of removal. In December 2002, the Federal Communications Commission (
FCC ) notified wireline carriers that they should not adopt the provisions of
SFAS No. 143 unless specifically required by the FCC in the future. As a result
of the FCC ruling, the Company will continue to record a regulatory liability
for cost of removal for its telecommunications business that follows the
accounting prescribed by SFAS No. 71. The regulatory liability for cost of
removal included in accumulated depreciation amounted to $1,104K and $981K at
September 30, 2003 and 2002, respectively.
For the Company's operations not subject to SFAS No. 71, the Company
has determined that it does not have a material legal obligation to remove
long-lived assets as prescribed by SFAS No. 143. Accordingly, the Company has
not accrued a liability for anticipated removal costs in the past and will
continue to expense the costs of removal as incurred.
NOTE 6: SEGMENTED INFORMATION
Warwick Valley Telephone Company's segments are strategic business
units that offer different products and services and are managed as telephony
and online services. We evaluate performance based upon operating income.
The wireline segment provides landline telecommunications services,
including local, network access, long distance services and messaging, and sells
customer premise equipment, private business exchange equipment and yellow and
white pages advertising and electronic publishing.
The Online segment provides high speed and dial up Internet services,
help desk operations, and video over VDSL.
Segmented information for the nine months ended September 30, 2003 and
2002 ($ in thousands):
2003 2002
-------- --------
Revenues
Telephone $ 18,262 $ 17,399
Online 4,932 4,478
Eliminations (1,438) (1,655)
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Total revenues $ 21,756 $ 20,222
Operating income
Telephone 3,241 3,875
Online (159) 205
-------- --------
Total operating income $ 3,082 $ 4,080
Interest expense and income (326) (421)
Partnership income 6,771 5,412
Other income (expense) (24) 263
-------- --------
Income before taxes $ 9,503 $ 9,334
-7-
Segmented balance sheet information as of September 30, 2003 and December 31,
2002 ($ in thousands):
September 30, December 31,
2003 2002
------------- ------------
Assets
Telephone $ 61,602 $ 57,895
Online 9,031 7,914
Elimination (12,364) (10,272)
-------- --------
Total assets $ 58,269 $ 55,537
======== ========
Segmented information for the three months ended September 30, 2003 and 2002 ($
in thousands):
2003 2002
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Revenues
Telephone $ 6,202 $ 5,934
Online 1,689 1,591
Eliminations (471) (527)
------- -------
Total revenues $ 7,420 $ 6,998
Operating income
Telephone 1,077 1,645
Online 74 (109)
------- -------
Total operating income $ 1,151 $ 1,536
Interest expense and income (100) (153)
Partnership income 2,511 2,019
Other income (expense) (48) 2
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Income before taxes $ 3,514 $ 3,404
NOTE 7: INVENTORY
Inventories are carried at average cost except that specific costs are
used in the case of large individual items. As of September 30, 2003 and
December 31, 2002, the Material and Supplies inventory consisted of the
following:
($ in thousands)
2003 2002
------ ------
Inventory for outside plant $ 290 $ 330
Inventory for inside plant 802 650
Inventory for online plant 99 257
Inventory of video equipment 201 56
Inventory of equipment held for sale or lease 145 175
------ ------
$1,537 $1,468
====== ======
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Plant in service, at cost, consisted of the following as of September
30, 2003 and December 31, 2002:
($ in thousands)
2003 2002
------- -------
Land, buildings, furniture and office equipment $ 5,553 5,666
Vehicles and work equipment 1,869 2,048
Central office equipment 23,995 24,384
Customer premise equipment 1,726 1,731
Outside plant equipment 23,376 21,671
Video equipment 4,189 3,109
Internet equipment 5,202 4,749
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$65,910 $63,358
======= =======
-8-
It is our policy to capitalize certain costs incurred in connection
with developing or obtaining internal software. Capitalized software costs are
included in Property, Plant and Equipment and are amortized using estimated
service lives of the various classes of telephone plant.
NOTE 9: INVESTMENTS
The Company is a limited partner in O-P and has a 7.5% investment
interest which is accounted for under the equity method of accounting. The
majority owner and general partner is Verizon Wireless of the East L.P.
The following summarizes O-P's income statement:
(Unaudited)
Nine months ended September 30,
($ in thousands)
2003 2002
------------- --------------
Net sales $107,617 $ 82,110
Cellular service cost 13,288 10,044
Operating expenses 4,647 4,170
------------ -------------
17,935 14,214
Net operating income 89,682 67,896
Other income 1,145 1,113
------------ -------------
Net income $ 90,827 $ 69,009
============= ==============
NOTE 10: NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities--an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN
46 requires the primary beneficiary to consolidate a variable interest entity
("VIE") if it has a variable interest that will absorb a majority of the
entity's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. FIN 46 was initially effective
July 1, 2003 for VIEs created after January 31, 2003, and to VIEs in which the
entity obtained an interest after that date. However on October 8, 2003, the
FASB deferred the latest date by which all public entities must apply FIN 46, to
the first reporting period ending after December 15, 2003. The adoption of FIN
46 is not expected to have a significant impact on the Company's results of
operations, financial position, or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This standard amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement is effective prospectively for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. SFAS No. 149 did not have an impact upon initial adoption and currently is
not expected to have a material effect on our results of operations, financial
position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires issuers to classify financial instruments within its scope
as liabilities (or as assets in some cases). Prior to SFAS No. 150, many of
these instruments may have been classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective for the interim period beginning July 1, 2003.
However, on October 29, 2003, the FASB deferred the provisions of paragraphs 9
and 10 of FAS 150, as they apply to certain mandatorily redeemable financial
instruments. The initial adoption of FAS 150 did not have a significant impact
on the Company's results of operations, financial position, or cash flows. In
addition, the final document is not expected to have a significant impact on the
Company's results of operations, financial position, or cash flows.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables,"
related to the timing of revenue recognition for arrangements in which goods or
services or both are delivered separately in a bundled sales arrangement. The
EITF requires that when the deliverables included in this type of arrangement
meet certain criteria they should be accounted for separately as separate units
of accounting. This may result in a difference in the timing of revenue
recognition but will not result in a change in the total amount of revenue
recognized in a bundled sales arrangement. The allocation of revenue to the
separate deliverables is based on the relative fair value of each item. If the
fair value is not available for the delivered items then the residual method
must be used. This method requires that the amount allocated to the undelivered
items in the arrangement is their full fair value. This would result in the
discount, if any, being allocated to the delivered items. This consensus is
effective prospectively
-9-
for arrangements entered into in fiscal periods beginning after June 15, 2003,
which, for the Company, is July 1, 2003. EITF 00-21 did not have an impact upon
initial adoption and currently is not expected to have an impact to the
Company's ongoing results of operations, financial position or cash flows.
In May 2003, the EITF reached a consensus on EITF 01-8 "Determining
Whether an Arrangement Contains a Lease," relating to new requirements on
identifying leases contained in contracts or other arrangements that sell or
purchase products or services. The evaluation of whether an arrangement contains
a lease within the scope of SFAS No. 13 "Accounting for Leases," should be based
on the evaluation of whether an arrangement conveys the right to use property,
plant and equipment. This may result in a difference in the timing of revenue
recognition. The consensus requires sellers to report the revenue from the
leasing component of the arrangement as leasing or rental income rather than
revenue from product sales or services. Purchaser's arrangements which
previously would have been considered service or supply contracts, but are now
considered leases, could affect the timing of their expense recognition and the
classification of assets and liabilities on their balance sheet as well as
require footnote disclosure of lease terms and future minimum lease commitments.
This consensus is effective prospectively for contracts entered into or
significantly modified after July 1, 2003. EITF 01-8 did not have an impact upon
initial adoption and based on arrangements in place today, will not have a
material effect on our results of operations, financial position or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company began serving the communications needs of the local communities
which it serves over 100 years ago. Today, the Company provides a wide range of
traditional telephone services and equipment as well as vital communication
links such as internet, broadband and digital television.
OVERVIEW: RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
AND SEPTEMBER 30, 2002 -
REVENUE
Operating revenues increased by $422K (or 6.0%) to $7,420K for the
three-month period ended September 30, 2003 as compared to an increase of $131K
(or 1.9%) to $6,998K for the corresponding period of 2002. Network access
revenue increased $236K (or 10.4%) and was due primarily to price increases in
both switched access and end user fees. While year over year Long Distance
revenues continue to show a small overall decrease - due primarily to intense
competition from other long distance carriers as well as wireless providers
- -marketing efforts are bringing in new long distance customers. From June 30th
to September 30th, 653 new customers switched to Warwick Valley Long Distance.
In addition to the new customers, a more competitive price structure has been
established to retain our new and existing customers. Internet service revenues
have increased $98K (or 6.2%) due to increases of $195K (or 51.4%) in DSL
revenues (the result of an increase in DSL subscribers of 6.9% over 2002) and
increases of $203K in video revenues. These increases were offset by a decrease
of $286K (or 26.1%) in dial up services due to customers primarily outside of
our service territory migrating to other high speed Internet connections.
EXPENSES
Total operating expenses increased $807K (or 14.8%) for the three
month period ended September 30, 2003 as compared to the same period in 2002.
Plant specific, plant non-specific, customer operations and corporate operations
benefit expenses increased by $327K (or 55.4%) primarily due to increased
pension costs. The increase in plant specific expenses was affected by a $252K
settlement with a large interconnection company for unbilled trunkline charges.
Depreciation expense increased $251K (or 25.2%) because of network upgrades put
into service during the last quarter of 2002. Corporate operations expenses were
also affected by increases of $52K (or 49.0%) in insurance expense - primarily
D&O insurance - due to higher premium costs and policy updates made in 2003.
Cost of services and sales decreased by $83K (or 12.6%) primarily due to a
decrease of $180K (or 86.0%) in bad debt reserve associated with the 2002
WorldCom bankruptcy.
OTHER INCOME AND EXPENSE, NET
Other income and expenses increased by $495K (or 26.5%) from $1,868K
in the three-month period ended September 30, 2002 to $2,363K in the
corresponding period of 2003 due to the increase in income from O-P. The
partnership's earnings increased 24.4% over the comparable period last year.
Continuing strong O-P call volume remains the primary factor behind the
increase.
OVERVIEW: RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
2002-
REVENUE
Operating revenues increased by $1,534K (or 7.6%) to $21,756K for the
nine-month period ended September 30, 2003 as compared to a decrease of $458K
(or 2.2%) to $20,222 for the corresponding period of 2002. The revenue increase
resulted in large part from Network Access revenues, which increased $1,031K (or
16.5%) as a result of price increases that took affect after July 1, 2002.
-10-
Directory advertising revenues increased 7.8% over the prior year due to price
increases and customer acceptance of directory promotions. Another contributor
to revenue growth has been an increase in Internet revenues of $454K (or 10.1%)
which is due in large part to a 13.6% increase in DSL subscribers over 2002. The
launch of our Video business has added a new revenue stream of $489K. Other
areas of our business have partially offset the overall revenue increase. Access
lines have decreased 2.9% due in large part to flat population growth and the
loss of second lines as a result of conversion to DSL. Although Long Distance
revenues continue to show small year over year decreases, the Company has
recently begun a marketing campaign in an effort to win back or gain new Long
Distance customers. During the first half of 2003, the Company averaged a net
decrease of 21 long distance customers a month. From June 30th to September 30th
there has been a net increase of 653 customers.
EXPENSES
Total operating expenses increased $2,532K (or 15.7%) for the nine
month period ended September 30, 2003 as compared to the same period in 2002.
Pension and post retirement expenses have risen $770K (or 43.7%) over the prior
year. This cost increase resulted from net investment losses recognized in 2002
and previous years. Another factor was our decision to use an expected long-term
rate of return on assets of 8.0% based upon our long-term view of future market
returns and to decrease the discount rate from 7.25% to 6.75%. Depreciation
expense is up $714K (or 24.3%) due to significant new network upgrades that were
not in service during the same period last year. Settlement with a large
interconnection company for prior unbilled trunkline charges resulted in a $492K
settlement. Insurance expenses continue to climb and are $107K higher than last
year due in large part to significant Directors and Officers ("D&O") premium
increase and policy updates. $215K of additional expense in proxy and legal fees
was incurred due to the complex proxy contest earlier in the year. Lastly, new
costs of $253K in content charges have been incurred as a result of our entry
into the Video business. Offsetting the above increases was a decrease of $453K
in bad debt expense - year over year - that was incurred in 2002 as a result of
bankruptcy of WorldCom.
The Company continues to take further steps in an effort to reduce
operating costs by renegotiating trunkline contracts, pursuing organizational
restructurings in order to control labor costs and seeking work process
efficiencies through updated computer systems.
OTHER INCOME AND EXPENSE, NET
Other income and expense increased by $1,167K (or 22.2%) from $5,254K
in the nine-month period ended September 30, 2002 to $6,421K in the
corresponding period of 2003 primarily due to the increase in income from O-P.
Year to date, the partnership earnings have increased 25.1% over the comparable
period last year. Strong O-P call volume remains the primary driver for the
increase.
CASH FROM OPERATING ACTIVITIES
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, 2003 net cash from operating activities was less
than our capital expenditures due to the Company's continuing growth of the
video business.
CASH FROM INVESTING ACTIVITIES
Capital expenditures totaled $3,489K during the nine month period
ending September 30, 2003 as compared to $5,748K for the corresponding period of
2002. Capital expenditures are budgeted to be approximately 30% less in 2003
than in 2002 due to the nearly complete rollout of our video business.
O-P is licensed to provide cellular services in both Orange and
Dutchess Counties, New York. The Company's equity in the partnership's earnings
increased by approximately $1,359K (or 25.1%) to $6,771K during the first nine
months of 2003, compared to $5,412K for the corresponding 2002 period.
Partnership earnings are distributed to the Company on a quarterly basis.
CASH FROM FINANCING ACTIVITIES
Dividends declared by the Board of Directors of the Company were $0.55
per share for the three-month period ending September 30, 2003, $0.43 for the
corresponding period in 2002. The total dividends paid for the nine month period
ended September 30, 2003 on its common shares by the Company were $2,775K,
compared to $2,346K for the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $4,783K of cash and cash equivalents available at
September 30, 2003. The Company has a $4,000K line of credit with a bank, of
which the entire amount remained unused at September 30, 2003. Interest is at a
variable rate and borrowings are on a demand basis without restrictions. In
addition, on February 18, 2003, the Company closed a commitment with CoBank, ACB
with respect to an $18,475K unsecured term credit facility at a variable rate.
Under conditions set by the New York Public Service Commission, the Company was
allowed to use a portion of the proceeds from this loan to refinance $4,000K of
existing long-term debt and repay $3,000K under an existing line of credit. The
Company may use the remaining amount available under the facility - $11,475K -
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to finance capital expenditures and pay expenses and fees associated with
borrowings made under the facility. The Company may also re-borrow amounts
repaid under the facility which will remain available to the Company until
September 30, 2004. In February 2003, the Company used $3,149K of the credit
facility funds to pay off an existing $3,000K line of credit, plus accrued
interest, and closing costs associated with the facility. The Company intends to
make an additional draw to repay $4,000K in long-term debt which matures in
December 2003. The Company has no present requirements that necessitate the
immediate use of the remaining unused credit.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities--an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN
46 requires the primary beneficiary to consolidate a variable interest entity
(VIE) if it has a variable interest that will absorb a majority of the entity's
expected losses if they occur, receive a majority of the entity's expected
residual returns if they occur, or both. FIN 46 was initially effective July 1,
2003 for VIEs created after January 31, 2003, and to VIEs in which the entity
obtained an interest after that date. However on October 8, 2003, the FASB
deferred the latest date by which all public entities must apply FIN 46, to the
first reporting period ending after December 15, 2003. The adoption of FIN 46 is
not expected to have a significant impact on the Company's results of
operations, financial position, or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This standard amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement is effective prospectively for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. SFAS No. 149 did not have an impact upon initial adoption and currently is
not expected to have a material effect on our results of operations, financial
position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires issuers to classify financial instruments within its scope
as liabilities (or as assets in some cases). Prior to SFAS No. 150, many of
these instruments may have been classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective for the interim period beginning July 1, 2003.
However, on October 29, 2003, the FASB deferred the provisions of paragraphs 9
and 10 of FAS 150, as they apply to certain mandatorily redeemable financial
instruments. The initial adoption of FAS 150 did not have a significant impact
on the Company's results of operations, financial position, or cash flows. In
addition, the final document is not expected to have a significant impact on the
Company's results of operations, financial position, or cash flows.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables,"
related to the timing of revenue recognition for arrangements in which goods or
services or both are delivered separately in a bundled sales arrangement. The
EITF requires that when the deliverables included in this type of arrangement
meet certain criteria they should be accounted for separately as separate units
of accounting. This may result in a difference in the timing of revenue
recognition but will not result in a change in the total amount of revenue
recognized in a bundled sales arrangement. The allocation of revenue to the
separate deliverables is based on the relative fair value of each item. If the
fair value is not available for the delivered items then the residual method
must be used. This method requires that the amount allocated to the undelivered
items in the arrangement is their full fair value. This would result in the
discount, if any, being allocated to the delivered items. This consensus is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003, which, for the Company, is July 1, 2003. EITF
00-21 did not have an impact upon initial adoption and currently is not expected
to have an impact to the Company's ongoing results of operations, financial
position or cash flows.
In May 2003, the EITF reached a consensus on EITF 01-8 "Determining
Whether an Arrangement Contains a Lease," relating to new requirements on
identifying leases contained in contracts or other arrangements that sell or
purchase products or services. The evaluation of whether an arrangement contains
a lease within the scope of SFAS No. 13 "Accounting for Leases," should be based
on the evaluation of whether an arrangement conveys the right to use property,
plant and equipment. This may result in a difference in the timing of revenue
recognition. The consensus requires sellers to report the revenue from the
leasing component of the arrangement as leasing or rental income rather than
revenue from product sales or services. Purchaser's arrangements which
previously would have been considered service or supply contracts, but are now
considered leases, could affect the timing of their expense recognition and the
classification of assets and liabilities on their balance sheet as well as
require footnote disclosure of lease terms and future minimum lease commitments.
This consensus is effective prospectively for contracts entered into or
significantly modified after July 1, 2003. EITF 01-8 did not have an impact upon
initial adoption and based on arrangements in place today, will not have a
material effect on our results of operations, financial position or cash flows.
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OTHER FACTORS:
COMPETITION
The Company's residential customers can purchase telephone sets
(including cellular sets) and equipment compatible and operational with the
Company's telephone system at other retail outlets inside and outside the
Company's territory and not affiliated with the Company. Such outlets include
other telephone company telephone stores, department stores, discount stores,
mail-order services and Internet websites. Businesses in the Company's service
area are also allowed to purchase equipment compatible and operational with the
Company's system from other telephone and "interconnect" companies. The
Company's territory is surrounded by the territories of Verizon, Frontier - A
Citizen's Communications Company, and Sprint-United Telephone, all of which
offer residential and business telephone equipment. There are also several
interconnect companies located within a 30-mile radius of Warwick, New York.
The Telecommunications Act of 1996 (the "Act") created 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 of the company that were affected
first have been the regional toll areas in both states. Regional toll
competition has had the effect of reducing the Company's revenues. The Company
itself can provide competitive local exchange telephone service outside its
franchised territory.
The Company is currently competing with Frontier - A Citizen's
Communications Company in the Middletown, New York area as well as Sprint-United
Telephone in the Vernon, New Jersey area for local service through access lines.
The Company is reviewing plans to provide limited service in other surrounding
areas in both New York and New Jersey. There can be no assurances that the
Company will effect any such additional plans, or that other companies will not
begin providing competitive local exchange telephone service in the Company's
franchise territory. Cablevision is currently rolling out a telephony product in
Bethpage, New York and announced that it will be offered in the Warwick area by
the end of the fourth quarter 2003.
The Company currently provides access to the national and
international calling markets as well as intrastate calling markets through all
interested inter-exchange carriers, including Warwick Valley Long Distance
("WVLD") access to the remainder of the intrastate calling markets is provided
by the Company as well as other exchange carriers. WVLD, as an inter-exchange
carrier, competes against all such other carriers, including accelerating
wireless competition, providing full toll services to its customers at
discounted rates.
Hometown Online competes both on the basis of service and price. There
are numerous competitors throughout Online's market area whose services are
available to customers. During the third quarter of 2003, the Company's DSL
product has increased its penetration level to 25.0% of establishments passed.
Conversely, Online's dial-up product has decreased 22.4% due to the migration of
customers to high speed internet provided not only by the Company itself but
also by the competition primarily outside of our service territory. Whether
growth and pricing levels can be maintained depends, in part, on the actions of
existing competitors, the possible entry into the market of new competitors, the
rate of technological change and the level of demand for services.
In addition, our digital TV product was launched in April of 2002 and
is competing against entrenched cable and satellite TV companies.
On November 10, 2003 the Federal Communications Commission ("FCC")
issued an order requiring intermodal portability (wireline to wireless) in the
top one hundred metropolitan service areas ("MSA") by November 23, 2004 where
the requesting wireless carrier's "coverage area" overlaps that of the local
exchange carrier. Local Number Portability ("LNP") may assist a competitor in
obtaining our customers because customers can keep their current telephone
number, even when they switch their telephone service from their local carrier
to another carrier. As of the end of the quarter, LNP is not posing a
significant competitive risk within the Company's service territory.
REGULATION
The Company has filed a petition with the New York State Public
Service Commission ("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
the NYSPSC, the New Jersey Board of Public Utilities and its shareholders. The
Company is actively pursuing the resolution of this petition before the two
public service commissions.
On February 19, 2003 the Company's Board of Directors resolved to
restate and amend the Company's Certificate of Incorporation. All restatements
and amendments were approved by required percentages of the Company's
outstanding Common and Preferred Shares at the Annual Meeting of the Company's
shareholders held on April 25, 2003, including the split of the Company's Common
Shares in a ratio of three for one. Petitions filed with the NYSPSC and the New
Jersey Board of Public Utilities regarding issuance of additional shares for the
stock split have been approved. The new Certificate of Incorporation has been
filed with the Secretary of State of the State of New York and the split took
place on October 6, 2003. The date the new shares were made available was
October 13, 2003.
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OTHER INFORMATION
Should the security markets continue to perform as in the prior two
fiscal years and medical and prescription costs increase, net pension and
postretirement costs are likely to continue to increase year over year. If
actual experience differs from actuarial assumptions, net pension and
postretirement costs will be affected in future years.
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
obligation 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.
Investors should also be aware that while the Company does, from time
to time, communicate with securities analysts, it is against the Company's
policy to disclose to them any material non-public information or other
confidential commercial information. Accordingly, investors should not assume
that the Company agrees with any statement or report issued by an analyst
irrespective of the content of the statement or report. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the Company's responsibility.
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 rate. Refinancing of
mortgage liabilities must be done through CoBank. The Company has the option of
choosing the following rate options from CoBank: Weekly Quoted Variable Rate,
Long-Term Fixed Quote and a Libor Option. The Company does not believe that its
exposure to interest rate risk is material.
ITEM 4. CONTROLS AND PROCEDURES
1. Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e)
and 15d-15(e) under 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 the end of
the period covered by this report, and they have concluded that, 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.
2. 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 financial reporting purposes as they relate to disclosures and
procedures. For the quarter ended September 30, 2003, there were no changes
in our internal controls or in other factors that materially affected or
were reasonably likely to materially affect such controls as they relate to
disclosure controls.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND PROCEEDS
During the quarter, the Company's Certificate of Incorporation was
restated and amended. As part of that amendment, the Company's Common Shares, no
par value, were changed to Common Shares par value $0.01 per share, and were
split three-for-one.
ITEM 5. OTHER INFORMATION
SHAREHOLDERS IN 401(k) PLAN
As of September 30, 2003 3.3% of the Company's outstanding Common
Shares were held by employees in the Company's 401(k) plan. These percentages
fluctuate quarterly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
3(i) Restated and amended Certificate of Incorporation
3(ii) By-Laws
4 New form of certificate representing common shares
31.1 Chief Executive Officer Certification
31.2 Chief Financial Officer Certification
32.1 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-principal Executive Officer.
32.2 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-principal Financial Officer.
b) Reports on Form 8-K -
August 1, 2003. Item Reported: The Company reported a change in
Registrant's Certifying Accountant, announcing that the Company had
engaged PricewaterhouseCoopers LLP ("PwC") as its new independent
accountants as of May 30, 2003.
September 19, 2003. Item Reported. The Company announced that both the
New York State Public Service Commission and the New Jersey Board of
Public Utilities had approved the changes to Warwick Valley Telephone
Company's restated and amended Certificate of Incorporation (including
the three-for-one stock split) that had been approved by Warwick
Valley Telephone Company shareholders at the Annual Meeting on April
25, 2003. The restated and amended Certificate of Incorporation had
been accepted by the New York Secretary of State, which enabled the
Company to set the record date for the three-for-one stock split of
its Common Shares. That record date was set at October 6, 2003. The
date the new shares were made available was October 13, 2003.
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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 11/14/03 /S/ M. Lynn Pike
M. Lynn Pike, President
(Chief Executive Officer)
Date 11/14/03 /S/ Philip A. Grybas
Philip A. Grybas, Vice President, Treasurer
(Principal Financial and Chief Accounting Officer)
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