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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
---------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-11174
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WARWICK VALLEY TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
New York 14-1160510 .
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
47 Main Street, Warwick, New York 10990 .
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 986-8080
-------------------
Former name, former address and former fiscal year, if changed since last
report.
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
Indicate by check mark if registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO .
--- ---
Indicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date: 1,800,353 Common
Shares, no par value, outstanding at May 12, 2003.
INDEX TO FORM 10Q
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of 3/31/03 (Unaudited) and 12/31/02 (Audited).
Consolidated Statement of Income for the Three Months ended 3/31/03 and 3/31/02 (Unaudited).
Consolidated Statement of Cash Flows for the Three Months ended 3/31/03 and 3/31/02 (Unaudited).
Notes to Consolidated Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures.
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Securities Holders.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
2
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
($ in thousands)
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
- ------ -------- --------
Current Assets:
Cash $ 3,522 $ 1,641
Accounts receivable - net of reserve for uncollectibles 3,538 3,428
Refundable income taxes 0 313
Materials and supplies 1,364 1,468
Prepaid expenses 579 544
-------- --------
Total Current Assets 9,003 7,394
-------- --------
Noncurrent Assets:
Unamortized debt issuance expense 129 5
Intangible asset - pension 831 831
Other deferred charges 135 27
Investments 7,413 7,775
-------- --------
Total Noncurrent Assets: 8,508 8,638
-------- --------
Property, Plant and Equipment:
Plant in service 64,308 63,358
Plant under construction 1,688 1,974
-------- --------
65,996 65,332
Less: Accumulated depreciation 26,444 25,827
-------- --------
Total Property, Plant and Equipment 39,552 39,505
-------- --------
TOTAL ASSETS $ 57,063 $ 55,537
======== ========
LIABILITES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 2,500 $ 5,000
Current maturities of long term debt 4,000 4,000
Accounts payable 1,327 2,652
Advance billing and payments 209 230
Customer deposits 133 125
Accrued taxes 801 66
Accrued interest 105 74
Pension and post retirement benefits 579 516
Other accrued expenses 558 537
-------- --------
Total Current Liabilities 10,212 13,200
-------- --------
-------- --------
Long-term Debt 3,149 0
-------- --------
Deferred Credits and Other Long Term Liabilites:
Accumulated deferred federal income taxes 4,096 3,978
Unamortized investment tax credits 19 22
Other deferred credits 20 20
Post retirement benefit obligation: 2,927 2,812
-------- --------
Total Deferred Credits and Other Long Term Liabilites 7,062 6,832
-------- --------
Stockholders Equity:
Preferred stock - 5% cumulative; $100 par value;
Authorized 7,500 shares; Issued and outstanding 5,000 shares 500 500
Common stock - no par value; Authorized shares 2,160,000 3,492 3,481
Issued 1,994,423 for 3/31/03 and 1,994,270 for 12/31/02
Treasury stock at cost, 194,561 shares (3,598) (3,598)
Minimum pension liability (269) (269)
Retained earnings 36,515 35,391
-------- --------
Total Shareholders Equity 36,640 35,505
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,063 $ 55,537
======== ========
Please see the accompanying notes, which are an integral part of the
financial statements.
3
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD ENDING MARCH 31,
($ in thousands)
2003 2002
----------- -----------
OPERATING REVENUES:
Local network service $ 1,031 $ 1,105
Network access service 2,326 2,024
Long distance network service 493 499
Directory advertising 365 324
Long distance sales 463 478
Internet services 1,595 1,299
Other services and sales 872 856
----------- -----------
Total operating revenues 7,145 6,585
----------- -----------
OPERATING EXPENSES:
Plant specific 1,133 989
Plant non-specific:
Depreciation & Amortization 1,164 957
Other 645 585
Customer operations 1,036 1,107
Corporate operations 1,068 930
Cost of services and sales 467 341
Property, revenue and payroll taxes 389 345
----------- -----------
Total operating expenses 5,902 5,254
----------- -----------
OPERATING INCOME 1,243 1,331
OTHER INCOME (EXPENSES)
Interest expense (105) (129)
Interest income 1 2
Income from cellular partnership 1,887 1,383
Other income (expense) (21) 103
----------- -----------
Total other income (expense) - net 1,762 1,359
----------- -----------
INCOME BEFORE INCOME TAXES 3,005 2,690
FEDERAL INCOME TAXES 1,010 893
NET INCOME 1,995 1,797
PREFERRED DIVIDENDS 6 6
----------- -----------
INCOME APPLICABLE TO COMMON STOCK $ 1,989 $ 1,791
=========== ===========
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK $ 1.10 $ 0.99
=========== ===========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING 1,799,837 1,803,622
=========== ===========
Please see the accompanying notes, which are an integral part of the
financial statements.
4
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDING MARCH 31,
($ in thousands)
2003 2002
------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 1,995 $ 1,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,164 957
Deferred income tax and investment tax credit 117 65
Interest charged to construction (21) (104)
Income from partnership (1,887) (1,383)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (111) (141)
(Increase) Decrease in materials and supplies 104 148
(Increase) Decrease in prepaid expenses (34) (133)
(Increase) Decrease in deferred charges (108) 60
Increase (Decrease) in accounts payable (1,325) 371
Increase (Decrease) in customers' deposits 7 (11)
Increase (Decrease) in advance billing and payment (21) (188)
Increase (Decrease) in accrued expenses 1,078 732
Increase (Decrease) in post retirement benefits obligations 177 9
Increase (Decrease) in other liabilities 20 46
------- -------
Net cash provided by operating activities 1,155 2,225
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,208) (2,988)
Interest charged to construction 21 104
Distribution from partnership 2,250 0
------- -------
Net cash used in investing activities 1,063 (2,884)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (2,500) 1,500
Proceeds from issuance of long term debt 3,149 4
Unamortized debt issuance (126) 0
Dividends (Common & Preferred) (870) (782)
Sale of common stock 10 0
------- -------
Net cash provided by (used in) financing activities (337) 722
------- -------
Increase (Decrease) in cash and cash equivalents 1,881 63
Cash and cash equivalents at beginning of period 1,641 581
------- -------
Cash and cash equivalents at end of period $ 3,522 $ 644
======= =======
Please see the accompanying notes, which are an integral part of the
financial statements.
5
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 months
period ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the entire year and such results are subject to year-end
adjustments and an annual independent audit.
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, 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.
In the financial statements, corresponding notes to financial
statements, and the management discussion and analysis of financial condition
and results of operations the dollar amounts presented are rounded to the
nearest thousand.
CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in the consolidated financial
statements. Certain prior year amounts have been reclassified to conform with
the financial statements in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to
have any material impact on its operating results or financial position.
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. Under specific customer agreements
the Company bills basic telephone and video services in advance under three
separate cycles ranging from fifteen to thirty days during the month. Internet
services are billed in arrears.
NOTE 2: EARNINGS PER SHARE
Earnings per share are based on the average number of actual shares
outstanding of 1,799,837 and 1,803,622 for the three-months ending March 31,
2003 and 2002, respectively.
NOTE 3: 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.
6
The wireline segment provides landline telecommunications services,
including local, network access, long distance services, and messaging and sells
customer premise, private business exchange equipment and yellow and white pages
advertising and electronic publishing.
The Internet segment provides high speed and dial up internet services,
help desk operations, and video over VDSL.
NOTE 4: 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, 2003 and
December 31, 2002, the Material and Supplies inventory consisted of the
following:
2003 2002
($ in thousands)
------------ ------------
Inventory for outside plant $ 293 $ 330
Inventory for inside plant 548 650
Inventory for online plant 287 257
Inventory of video equipment 71 56
Inventory of equipment held for sale or lease 165 175
------------ ------------
$ 1,364 $ 1,468
============ ============
NOTE 5: INVESTMENTS
The Company has a 7.5% investment interest in the Orange
County-Poughkeepsie Limited Partnership ("O-P"), which is accounted for under
the equity method. The majority owner and general partner is Verizon Wireless of
the East L.P.
The partnership is individually significant as defined by applicable
SEC regulations. The following summarizes its income statement (unaudited):
Three months ended March 31,
($ in thousands)
2003 2002
------- -------
Net sales $31,687 $23,722
Costs & expenses
Cellular service cost 5,436 3,423
Operating expenses 602 1,400
------- -------
6,038 4,823
Net operating income 25,649 18,899
Other income 616 313
------- -------
Net income 26,265 19,212
======= =======
WVT income share $ 1,970 $ 1,441
======= =======
Partnership financial statements are typically received well after the
Company's books are closed. Consequently, the Company relies upon Partnership
income estimates (as well as its own estimates) in order to close the Company's
books on a timely basis. Historically, differences between conservatively booked
income and subsequent Partnership reported income have been minor. The Company
typically treats such differences as a timing difference with adjustments taking
place immediately in the next financial period. (Also see Other Income and
Expense.)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEWS: RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2003 -
---------------------------------------------------------
NET INCOME
- ----------
The Company's net income from all sources increased $198K (or 11.0%)
to $1,995K for the three-month period ended March 31, 2003, as compared to an
increase of $73K (or 4.2%) to $1,797K for the corresponding period in 2002.
Net income for the three month period ending March 31, 2003 ($ in
thousands):
Intercompany Consolidated
Telephone Internet Elimination Total
------------- ------------- ----------------- -----------------
Operating revenues 6,028 1,595 (478) 7,145
Operating expenses 4,860 1,520 (478) 5,902
Other income (expenses) 1,761 1 1,762
Federal income taxes 967 43 1,010
------------- ------------- ----------------- -----------------
Net income 1,962 33 1,995
============= ============= ================= =================
Net income for the three month period ending March 31, 2002:
Intercompany Consolidated
Telephone Internet Elimination Total
------------- ------------- ------------------- ---------------
Operating revenues 5,908 1,299 (622) 6,585
Operating expenses 4,579 1,297 (622) 5,254
Other income (expenses) 1,358 1 1,359
Federal income taxes 910 (17) 893
------------- ------------- ------------------- ---------------
Net income 1,777 20 1,797
============= ============= =================== ===============
The Company's net income for the three month period ending March 31,
2003 was affected by an increase in access revenues due to switched access price
increases, increased DSL revenues and by a substantial increase in income from
O-P.
REVENUE
- -------
Operating revenues increased by $560K (or 8.5%) to $7,145K for the
three-month period ended March 31, 2003 as compared to a decrease of $395K (or
5.7%) to $ $6,585K for the corresponding period of 2002. The change in operating
revenues was primarily the result of increases of $213K (or 80.2%) in DSL
revenues, $137K (or 66.8%) in interstate switched access revenues, $94K (or
21.1%) in end user revenues and new revenues in the amount of $122K in video
during the period as compared to the same three-month period of 2002. While a
significant part of the DSL revenue increase was due to additional customers, a
portion of the increase is a result of timing adjustments. Switched access
revenues increased primarily as a result of price increases.
For the three month period ending March 31, 2003 ($ in thousands):
Revenues From: Intercompany Consolidated
Telephone Internet Elimination Total
-------------- -------------- ----------------- ----------------
Local network services 1,058 (27) 1,031
Network access revenues 2,649 (323) 2,326
Long distance network service 493 493
Directory advertising 365 365
Long distance sales 463 463
Internet services 1,595 1,595
Other services and sales 1,000 (128) 872
-------------- -------------- ----------------- ----------------
Total operating revenues 6,028 1,595 (478) 7,145
============== ============== ================= ================
8
For the three month period ending March 31, 2002 ($ in thousands):
Revenues From: Intercompany Consolidated
Telephone Internet Elimination Total
------------- --------------- ----------------- ----------------
Local network services 1,195 (90) 1,105
Network access revenues 2,556 (532) 2,024
Long distance network service 499 499
Directory advertising 324 324
Long distance sales 478 478
Internet services 1,299 1,299
Other services and sales 856 856
------------- --------------- ----------------- ----------------
Total operating revenues 5,908 1,299 (622) 6,585
============= =============== ================= ================
Long Distance revenues continue to show small decreases due primarily
to intense competition from other long distance carriers as well as wireless
providers. Internet service revenues have increased $296K (or 22.8%) due to
increases of $213K (or 80.2%) in DSL revenues (the result of an increase in DSL
subscribers of 61.0% over 2002) and additional revenues of $122K in video. The
Company's video service was not operational during the same period last year.
Directory advertising has increased 12.7% over the prior period primarily due to
efficiencies gained by full incorporation of our sales force in house and
successful solicitation/retention of customers.
Competitive local exchange (CLEC) services and full inter-exchange long
distance service are provided by WVTC in selected areas outside of its own
servicing territory. CLEC revenues are generated by providing local service to
customers located in certain Frontier - a Citizens Communications Company - and
Sprint areas giving the customer a choice of service providers.
EXPENSE
- -------
Total operating expenses increased $686K (or 12.3%) for the three
month period ended March 31, 2003 as compared to the same period in 2002. An
increase of $207K (or 21.6%) in depreciation expenses was due to network
upgrades. Benefit expenses increased in the amount of $267K (or 44.0%) primarily
due to increased pension costs. Increases of $41K (or 98.5%) in proxy expenses
and $230K (or 77.0%) in legal fees resulted from a complex proxy contest and
solicitation during 2003. Additional operating costs in the amount of $167K were
associated with the launch of our Video product during the first quarter of
2003.
For the three month period ending March 31, 2003 ($ in thousands):
Expenses From: Intercompany Consolidated
Telephone Internet Elimination Total
--------------- --------------- ----------------- ------------------
Plant specific 1,003 130 1,133
Plant non-specific:
Depreciation 928 236 1,164
Other 207 438 645
Customer operations 992 44 1,036
Corporate operations 1,032 36 1,068
Cost of services and sales 316 629 (478) 467
Property, revenue and payroll tax 382 7 389
--------------- --------------- ----------------- ------------------
Total operating expenses 4,860 1,520 (478) 5,902
=============== =============== ================= ==================
9
For the three month period ending March 31, 2002 ($ in thousands):
Expenses From: Intercompany Consolidated
Telephone Internet Elimination Total
---------------- --------------- ----------------- ------------------
Plant specific 980 9 989
Plant non-specific:
Depreciation 761 196 957
Other 273 312 585
Customer operations 1,046 61 1,107
Corporate operations 925 5 930
Cost of services and sales 260 703 (622) 341
Property, revenue and payroll tax 333 12 345
---------------- --------------- ----------------- ------------------
Total operating expenses 4,578 1,298 (622) 5,254
================ =============== ================= ==================
OTHER INCOME AND EXPENSE
- ------------------------
Other income and expenses increased by $403K (or 29.7%) from $1,359K in
the three-month period ended March 31, 2002 to $1,762K in the corresponding
period of 2003 primarily due to the increase in income from O-P. Year to date,
the partnership earnings increased 36.4% over the same comparable period last
year. O-P call volume remains the primary factor for the year over year
increase, and is on a par with the fourth quarter of 2002 volume.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had $3,522K of cash and cash equivalents available at March
31, 2003. The Company has a $4,000K line of credit with a bank, of which,
$1,500K remained unused at March 31, 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 - 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.
CASH FROM OPERATING ACTIVITIES
- ------------------------------
During 2003 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, 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 $1,208K during the three-month period
ending March 31, 2003 as compared to $2,989K for the corresponding period of
2002. Capital expenditures are expected to be approximately 30% less in 2003
than in 2002 due to the near completion of our video business.
In order to provide the high-quality communications services expected
by our customers, the Company continued to invest in and upgrade its property,
plant and equipment. The amount of investment is influenced by demand for
services and products, ongoing growth, regulatory commitments and plant
refurbishment.
O-P is licensed to provide cellular services in both Orange and
Dutchess Counties, New York. The Company's share in the partnership's earnings
increased by approximately $529K (or 36.7%) to $1,970 during the first three
months of 2003, compared to $1,441 for the corresponding 2002 period.
Partnership earnings are distributed to the Company on a quarterly basis.
10
CASH FROM FINANCING ACTIVITIES
- ------------------------------
Dividends declared by the Board of Directors of Warwick Valley
Telephone Company were $0.48 per share for the three-month period ending March
31, 2003, compared to $0.43 for the corresponding period in 2002. The total
dividends paid for the first quarter of 2003 for common stock by Warwick Valley
Telephone Company were $864K, compared to $776K for the same period in 2002.
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 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 Bell Atlantic, 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 affected first have been the regional
toll areas in both states. Regional toll competition has had the effect of
reducing the Company's revenues. Under the Act, 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 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.
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 WVLD. Equal access ("one-plus") service to
all toll carriers has been available to the Company's customers since August 1,
1991. 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.
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 first quarter of 2003, the Company's DSL
product has enjoyed strong expansion, growing to a 10.0% penetration level of
establishments passed. Conversely, Online's dial-up product has decreased 21.5%
due to migration of customers to higher speed internet in areas that are not in
the Company's serving 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 heavily against entrenched cable
and satellite TV companies.
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 (NJBPU) and its shareholders.
11
On February 19, 2003 the Company's Board of Directors resolved to
restate and amend, pursuant to Business Corporation Law Section 807, 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 have been filed with the NYSPSC and the New Jersey
Board of Public Utilities ("NJBPU") seeking approval of the restated and amended
Certificate of Incorporation including the issuance of the additional shares to
accommodate the split. Approval is expected to be received by September of 2003
at which point the new Certificate of Incorporation will be filed with the
Secretary of State of the State of New York and, a record date will be set
for the split.
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. (Also see also Liquidity and
Capital Resources.)
ITEM 4. CONTROLS AND PROCEDURES -
- ----------------------------------
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934
(Exchange Act). These rules refer to the controls and other procedures
of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief
Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of a date within 90 days before the filing
of this quarterly report (the Evaluation Date), and they have concluded
that, as of the Evaluation Date, such controls and procedures were
effective at ensuring that required information will be disclosed on a
timely basis in our reports filed under the Exchange Act.
(b) Changes in internal controls
We maintain a system of internal accounting controls that are designed
to provide reasonable assurance that our books and records accurately
reflect our transactions and that our established policies and
procedures are followed. For the quarter ended March 31, 2003, there
were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS-
- --------------------------
As previously reported in a Report on Form 8-K dated March 28, 2003,
the suit brought in September 2002 by a shareholder against the Company in the
U.S. District Court for the Southern District of New York was dismissed with
prejudice on March 27, 2003 by order of the Court based upon a stipulation of
counsel to the parties. The suit had alleged, among other things, that the
Company was required to either register as an investment company under the
Investment Company Act of 1940 or divest its 7.5% limited partnership interest
in Orange County - Poughkeepsie Limited Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
- --------------------------------------------------------------
At the Company's 2003 Annual Meeting of Common Shareholders held on
April 25, 2003. Rafael Collado, Robert J. DeValentino and Lynn M. Pike, were
elected as directors for three-year terms. The terms of Fred M. Knipp, Wisner H.
Buckbee, Philip S. Demarest, Corrina S. Lewis, Joseph E. DeLuca, and Herbert
Gareiss, Jr continued after the meeting.
Matters voted on at the meeting and the results of each vote are as
follows:
Proposal IA. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
Set the number of directors at nine until the 1,359,847 3,966 95,303
next annual meeting:
Proposal I. For Against Withhold
----------------------------------------------------- ------------ --------- -----------
To elect three (3) directors to Class I:
Rafael Collado 1,312,165 8,948
Robert J. DeValentino 1,447,511 9,705
M. Lynn Pike 1,447,101 10,115
Gerald Hellerman 137,354 649
Proposal IIA. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
To approve amendment to increase the number of
authorized Common Shares and change from no-par
to $0.01 par: 1,347,432 9,317 102,367
Proposal IIB. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
To approve amendment to effect 3-for-1 split of
Company's Common Shares: 1,348,321 22,626 88,169
Proposal IIC. For Against Abstain For Against Abstain
- ----------------------------------------------------------------------------------------------------------------------------
COMMON PREFERRED
To approve amendment to increase authorized
Preferred Shares, change the par value of
unissued Preferred Shares and increase
flexibility in establishing terms of series: 1,235,596 218,202 5,318 3,434 380 24
Proposal IID. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
To approve amendment to revise the Purpose
Clause: 1,302,593 30,033 126,490
Proposal IIE. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
To approve amendment to change the number of
Directors: 1,289,965 39,292 129,859
13
Proposal IIF. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
To approve right to remove Directors for cause: 1,321,972 19,120 118,024
Proposal IIG. For Against Abstain
----------------------------------------------------- ------------ --------- -----------
To approve amendment to make various other
changes to the Certificate of Incorporation: 1,313,380 23,392 122,344
Proposal III. For Against Abstain
----------------------------------------------------- ------------ ------------- ---------
To recommend that the Company spin off its
interest in the Orange County-Poughkeepsie
Limited Partnership: 176,219 1,248,497 35,606
Proposal IV. For Against Abstain
----------------------------------------------------- ------------ ------------- ---------
To recommend that the Company register with the
Securities Exchange Commission as an investment
company under the Investment Company Act of 1940: 192,535 1,262,201 5,586
ITEM 5. OTHER INFORMATION
- -------------------------
a) Election of Officers
At its reorganizational meeting on April 25, 2003, the Board of
Directors elected the following persons to the positions set forth
opposite their names:
Wisner H. Buckbee Chairman of the Board
Fred M. Knipp 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
b) Early Retirement
During the first quarter of 2003 an early retirement package was
offered to sixteen employees of the Company. Six of these
employees accepted the package.
c) Labor Relations
The Company's non-management employees are represented by Local
503 of the International Brotherhood of Electrical Workers
("IBEW"). On May 13, 2003 IBEW members voted in favor of a
five-year agreement (retroactive to May 1, 2003) with the Company.
The highlights of this contract included wage increases of 3% for
years 2003, 2004 and 2005 as well as wage increases of 3.5% for
years 2006 and 2007. Cost controls were established in regard to
both the Company's pension and medical plans. IBEW has agreed to
continue to work with the Company to control pension and medical
costs.
14
d) Shareholders in 401(k) Plan
As of March 31, 2003 3.7% of the Company's outstanding Common
Shares were held by employees in the Company's 401(k) plan. These
amounts fluctuate quarterly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibits -
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed
by M. Lynn Pike-principal Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed
by Philip A. Grybas-principal Financial Officer.
b) Reports on Form 8-K -
April 29, 2003. Item Reported: The Company reported a press
release in which the principal results of the votes held at its
Annual Meeting of Shareholders on April 23, 2003 were announced.
March 28, 2003. Item Reported: The suit filed against the Company
in the Southern District of New York alleging that the Company
should register as an investment company under the Investment
Company Act of 1940 was dismissed with prejudice on March 27, 2003
by order of the Court based upon a stipulation of counsel to the
parties.
February 28, 2003. Item Reported: On February 18, 2003, the
Company closed a commitment with CoBank, ACB with respect to an
$18,475,000 unsecured term credit facility.
February 3, 2003. Item Reported: Withdrawn by the Company its
Application for Order of Exemption Pursuant to Section 3(b)(2) of
the Investment Company Act of 1940 as Amended.
15
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 5/15/03 /S/ M. Lynn Pike
M. Lynn Pike, President
(Chief Executive Officer)
Date 5/15/03 /S/Philip A. Grybas
Philip A. Grybas, Vice President, Treasurer
(Principal Financial and Chief Accounting
Officer)
16
CERTIFICATIONS
I, M. LYNN PIKE, Chief Executive Officer of WARWICK VALLEY TELEPHONE COMPANY,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of WARWICK VALLEY
TELEPHONE COMPANY;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date May 15, 2003 /s/ M. Lynn Pike
------------ ------------------
Name: M. Lynn Pike
Title: President, Chief Executive Officer
17
I, PHILIP A. GRYBAS, Chief Financial Officer of WARWICK VALLEY TELEPHONE
COMPANY, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WARWICK VALLEY
TELEPHONE COMPANY;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date May 15, 2003 /s/ Philip A. Grybas
------------ ----------------------
Name: Philip A. Grybas
Title: Vice President, Chief Financial Officer
18