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| WWVY > SEC Filings for WWVY > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Warwick Valley Telephone Company (the "Company", "we", "our", or "us") provides communication services to customers in the contiguous Towns of Warwick, Goshen and Wallkill, New York, and the Townships of West Milford and Vernon, New Jersey. Our service area is primarily rural and has an estimated population of 50,000. Our services include providing local and toll telephone service to residential and business customers, access and billing and collection services to interexchange carriers, Internet access and video service. We have installed advanced digital switching equipment in all of our exchanges and fiber optic routes between our central office and all neighboring telephone companies. We report our results in two operating segments: telephone and online. The telephone segment provides telecommunications services, including local, network access and long distance services and messaging, and yellow and white pages advertising and electronic publishing. The Online segment provides video as well as broadband and dial-up Internet services.
Within the telephone business unit, the resells toll telephone services to its subscribers. The Company began operating as a Competitive Local Exchange Carrier ("CLEC") in Middletown, New York in 1999, in Scotchtown, New York in 2001 and Vernon, New Jersey in 2002. The Company also resells wireless service.
The sections that follow provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and include discussions of our results of operations, liquidity and capital resources, financial position and sources and uses of cash. Additionally, we have highlighted key trends and uncertainties to the extent practicable. The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this quarterly report on Form 10-Q and our Consolidated Financial Statements and Notes contained in our annual report on Form 10-K for the year ended December 31, 2007.
The financial information in the Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except per share amounts.
Overview
During the three-month period ended September 30, 2008, operating income increased by $183 (or 128%) to $40 from an operating loss of $143 for the three-month period ended September 30, 2007. This increase was primarily attributable to additional Universal Service Fund revenues received and a decrease in depreciation expense.
The following sets forth the Company's business objectives, and explains how management believes these objectives will affect the future business of the Company:
· Grow revenues - The Company's greatest challenge continues to be maintaining and growing revenues in an increasingly competitive Incumbent Local Exchange Carrier ("ILEC") environment. As ILEC access lines continue to decrease, we are focusing on adding new revenue sources including introducing new services to existing customers as well as expansion into new CLEC geographic markets we believe we can serve effectively and efficiently. We have continued to strengthen our "win-back" and "retention" programs by enhancing our bundled voice, broadband and video offering known as "Triple Play". The Company has become a reseller of DirecTV and has launched a marketing campaign to include DirecTV as part of our competitive triple play offering enabling us to expand our base of potential triple play customers to include our previously dark television areas. By the end of the third quarter of 2008, we entered into 67 VoiceNet Complete contracts. VoiceNet Complete is our hosted Voice over Internet Protocol ("VoIP") service, primarily targeting small and medium sized business customers. We believe that these combined efforts will help offset the effects of competition and technology substitution that have resulted in access line losses and revenue declines.
· Expense control - During the third quarter of 2008 the Company saw a substantial reduction in employee benefit costs attributable to the union contracts negotiated in the second quarter. In addition, depreciation expense went down. Offsetting these lower expenses were higher wages due to the increase in sales staff and support associated with our growth initiatives.
· Capital allocation - We have a long history of successfully deploying new technology. We were one of the first rural telephone companies to install digital switching which enables us to offer Internet access as an Internet Service Provider ("ISP"), and to offer video service as an alternative to cable television companies. We have continued to invest in our operations to gain enhanced operating efficiencies and to enable the introduction of new services to our customers. During the third quarter of 2008, we deployed capital to upgrade our broadband services and expand our VoIP deployment.
· Shareholder value creation - We are firmly committed to creating value for our shareholders by the successful planning and deployment of the above initiatives. We remain committed to expansion of our CLEC activities through either building or acquiring additional capability.
Results of Operations for the three months ended September 30, 2008 and 2007
OPERATING REVENUES
Operating revenues for the three months ended September 30, 2008 increased by $108 (or 2%) to $6,245 from $6,137 in the same quarter in 2007. This increase was due primarily to:
· An increase in network access revenues of $531 (or 26%) mainly due to additional Universal Service Fund revenues.
Partially offset by:
· A decrease in long distance revenue of $231 (or 23%) due to losses in our customer base as our access lines continue to decrease, a direct effect of customers switching to our promotional prices, and a decline in minutes of use.
· A decrease in data service revenues of $112 (or 8%) mainly due to a decrease in dial-up service revenues from the continued migration of customers to broadband providers other than the Company.
· A decrease in local network service revenues of $48 (or 6%) mainly as a result of the loss of second access lines that were being utilized by our customers for dial-up Internet service, as our customers continue to switch to broadband services, and the loss of customers switching to wireless services or our competitor's telephone service.
· A decrease in other services and sales revenues of $22 (or 4%) due primarily to our declining customer base resulting in lower revenues for leased equipment, inside wire and other ancillary services billed to customers.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2008 decreased $75 (or 1%) to $6,205 from $6,280 for the same quarter in 2007. This decrease was due primarily to:
· Selling, general and administrative expenses decreased $312 (or 10%) to $2,672 from $2,984 in 2007 due mainly to lower benefit costs and professional fees partially offset by higher sales force wages.
· Depreciation expense decreased $304 (or 22%) to $1,106 from $1,410 in 2007 primarily due to some types of broadband equipment fully depreciating during 2007.
Partially offset by:
· Cost of services and products increased $541 (or 29%) to $2,427 from $1,886 in 2007 due mainly to higher content costs for video services, access costs for long distance services, trunk line, plant maintenance and utility costs have also increased.
OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended September 30, 2008 increased $100 (or 4%) to $2,584 from $2,484 for the same quarter in 2007. This increase is due primarily to:
· An increase in income from equity method investments of $37 to $2,663 from $2,626 in the same quarter 2007 as a result of increased earnings from O-P.
· A reduction of interest expense by $43 for the current quarter mainly due to the accrued interest for the company's FIN 48 liability which was recorded during fiscal year 2007 and not accrued in fiscal year 2008, due to the approval by the IRS to allow the reporting of its taxable income in future periods.
EXTRAORDINARY ITEM
The Company has recorded a non-cash extraordinary loss of $73, net of a tax effect of $39, upon discontinuance of the provisions of SFAS 71, as required by the provisions of Statement of Financial Accounting Standard No. 101. For more information see Note 2 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Results of Operations for the nine months ended September 30, 2008 and 2007
OPERATING REVENUES
Operating revenues for the nine months ended September 30, 2008 decreased by $640 (or 4%) to $17,266 from $17,906 during the same nine-month period in 2007. This decrease was due primarily to:
· A decrease in data service revenues of $346 (or 8%) mainly due to a decrease in dial-up service revenues from the continued migration of customers to broadband providers other than the Company.
· A decrease in local network service revenues of $158 (or 7%) mainly as a result of the loss of additional access lines that were being utilized for dial-up Internet service, as customers continue to switch to high speed broadband services for Internet access, and the loss of customers switching to our competitor's telephone service.
· A decrease in long distance revenue of $350 (or 13%) due mainly to losses in our customer base as our access lines continue to decrease, a direct effect of customers switching to our promotional prices, and declining minutes of use.
Partially offset by:
· An increase in other services and sales revenues of $97 (or 7%) due primarily to sales of business telephone systems offset by a decrease in ancillary revenues.
· An increase in network access revenues of $151 (or 2%) mainly due to additional Universal Service Fund revenues.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2008 decreased $556 (or 3%) to $18,349 from $18,905 for the same quarter nine-month period in 2007. This decrease is due primarily to:
· Selling, general and administrative expenses decreased $1,062 (or 12%) to $8,041 from $9,103 in the same nine-month period 2007. This reduction was due mainly to a postretirement liability curtailment gain of $469 resulting from the elimination of benefits of certain union employees as a result of the new union agreement. Lower wages and benefits, professional fees, insurance and hiring costs also contributed to the decrease.
· Depreciation expense decreased $466 (or 12%) to $3,532 from $3,998 in 2007 due mainly to some types of broadband equipment fully depreciating during 2007, partially offset by an increase associated with the creation of a business operating support system during fiscal year 2007.
Partially offset by:
· Cost of services and products which increased $972 (or 17%) to $6,776 from $5,804 in 2007 due mainly to increased content costs for video services, access costs for long distance services, trunk line, plant maintenance and utility costs.
OTHER INCOME (EXPENSE)
Other income (expense) for the nine months ended September 30, 2008 increased $868 (or 13%) to $7,371 from $6,503 in the same quarter 2007. This increase is due primarily to:
· An increase in income from equity method investments of $623 (or 9%) to $7,384 from $6,761 as a result of increased earnings from the Company's investment in O-P in fiscal year 2007.
· A reduction of interest expense of $274 (or 114%) mainly as a result of the reversal of accrued interest for the Company's FIN 48 liability which was de-recognized due to the approval by the IRS to allow the reporting if its taxable income in future periods.
Partially offset by:
· An increase in other expenses of $29 (or 161%) from $18 to $47 due mainly to increases in donations and taxes.
EXTRAORDINARY ITEM
The Company has recorded a non-cash extraordinary loss of $73, net of a tax effect of $39, upon discontinuance of the provisions of SFAS 71, as required by the provisions of Statement of Financial Accounting Standard No. 101 (see Note 2 to the Condensed Consolidated Financial Statements in this Form 10-Q).
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5,574 of cash and cash equivalents available at September 30, 2008 as compared with $5,385 at September 30, 2007.
The Company has a $4,000 line of credit with Provident Bank, (the "Bank") of which the entire amount remained unused at September 30, 2008. In the event of a drawdown, interest would be applied based on a variable rate that is a function of the Prime Commercial Lending Rate as listed in the Wall Street Journal. Borrowings are on a demand basis with limited restrictions relating to written notification to the Bank requesting a drawdown, the use of requested funds, and the expected means for repayment.
As of September 30, 2008, $6,075 in principal was outstanding under the CoBank ACB term credit facility. The final payment is due July 20, 2012. We are required to make interest and outstanding principal payments in quarterly installments under the term debt facility.
CASH FROM OPERATING ACTIVITIES
The Company's primary source of funds continues to be generated from operations, supplemented by cash distributions from O-P. The Company's cash distributions from O-P for the Company's share of O-P earnings totaled $7,054 and $6,225 for the nine months ended September 30, 2008 and 2007, respectively. O-P's cash distributions are made to the Company on a quarterly basis at the discretion of the general partner. The increase in O-P's revenues discussed above reflects revenues as accrued for accounting purposes. The amounts discussed in this paragraph reflect actual cash receipts by the Company from O-P.
CASH FROM INVESTING ACTIVITIES
Capital expenditures totaled $2,978 during the nine months ended September 30, 2008 as compared to $3,131 for the corresponding period of 2007. During the third quarter of 2008, we deployed capital to upgrade our broadband services and expand our VoIP deployment.
CASH FROM FINANCING ACTIVITIES
Dividends declared on our shares of common stock by the Board of Directors were $0.20 per share for the three months ended September 30, 2008 and 2007. The total amount of dividends paid on our shares of common and preferred stock for each of the nine months period ended September 30, 2008 and 2007 was $3,230.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No.141(R), "Business Combinations," ("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,"Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51" ("SFAS 160"), which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for annual periods beginning after December 15, 2008. The Company is currently assessing the potential impact that adoption of SFAS 160 would have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). This statement is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008, with early application encouraged. SFAS 161 is intended to improve financial reporting by requiring transparency about the nature, purpose, location and amounts of derivative instruments in an entity's financial statements; how derivative instruments and related hedged items are accounted for under SFAS 133; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows. The Company is currently evaluating the effects that SFAS 161 may have on its financial statements.
CAUTIONARY LANGUAGE CONCERNING 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. For a further discussion of the matters described above, see Item 1A, "Risk Factors" in our Annual Report on Form 10K for the year ended December 31, 2007 and our Quarterly Reports on Form 10-Q for the quarterly periods ending March 31 and June 30, 2008.
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