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, 1998
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
WARWICK VALLEY TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
New York 14-1160510
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
47 Main Street, Warwick, New York 10990
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
1,990,581 common shares, no par value, outstanding at September 30,
1998.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WARWICK VALLEY TELEPHONE COMPANY
BALANCE SHEET
September 30, December 31,
1998 1997
(Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 463,437 $ 482,534
Telecommunications accounts receivable,
less accounts receivable allowance
1998-$62,729; 1997-$65,155; 2,475,087 3,544,562
Other accounts receivable 580,262 420,798
Materials and supplies 1,388,985 1,133,637
Prepaid expenses 433,634 338,417
TOTAL CURRENT ASSETS 5,341,405 5,919,948
NON-CURRENT ASSETS
Unamortized debt issuance expense 39,209 48,710
Other deferred charges 149,347 217,575
Investment in non-affiliated company 2,423,253 1,664,582
TOTAL NON-CURRENT ASSETS 2,611,809 1,930,867
TELEPHONE PLANT, AT COST:
Land, buildings and equipment
In service 38,845,170 37,374,440
Under construction 2,045,950 824,595
40,891,120 38,199,035
Less: Accumulated depreciation 16,742,486 14,661,854
TOTAL PLANT 24,148,634 23,537,181
TOTAL ASSETS $ 32,101,848 $ 31,387,996
The accompanying notes to financial statements are an integral part of these
statements.
-2-
Item 1. Financial Statements (Continued)
WARWICK VALLEY TELEPHONE COMPANY
BALANCE SHEET
September 30, December 31,
STOCKHOLDERS' EQUITY AND LIABILITIES 1998 1997
(Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable $ 970,283 $ 1,751,739
Notes payable 900,000 1,600,000
Advance billing and payments 225,750 163,882
Customer deposits 175,324 168,465
Accrued taxes 148,541 126,864
Other accrued liabilities 801,075 691,832
TOTAL CURRENT LIABILITIES 3,220,973 4,502,782
LONG TERM DEBT:
Funded debt 7,000,000 7,000,000
TOTAL LONG TERM DEBT 7,000,000 7,000,000
OTHER LIABILITIES & DEFERRED CREDITS:
Unamortized operating investment
tax credit - net 163,177 201,427
Net non-current deferred operating
income tax 2,390,655 2,301,418
Other deferred credits 105,239 179,230
TOTAL OTHER LIABILITIES & DEFERRED CREDITS 2,659,071 2,682,075
STOCKHOLDERS' EQUITY
Preferred stock - 5% cumulative, $100 par value;
7,500 shares authorized
5,000 shares issued and outstanding 500,000 500,000
Common stock, without par value;
2,160,000 shares authorized;
Issued and outstanding: 1,990,581 shares
at 9/30/98 and 1,974,168 shares at
12/31/97 3,330,864 2,948,438
Retained earnings 18,171,230 16,534,991
22,002,094 19,983,429
Less: Treasury stock, at cost,
173,352 shares at 9/30/98 and
173,352 shares at 12/31/97 2,780,290 2,780,290
TOTAL STOCKHOLDERS' EQUITY 19,221,804 17,203,139
TOTAL LIABILITIES $ 32,101,848 $ 31,387,996
The accompanying notes to financial statements are an integral part of these
statements.
-3-
Item 1. Financial Statements (Continued)
WARWICK VALLEY TELEPHONE COMPANY
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED September 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Operating revenues:
Local network service $ 1,010,809 $ 964,337 $ 3,015,961 $ 2,841,665
Network access and long
distance network service 2,818,406 2,823,929 8,350,734 8,185,737
Miscellaneous 333,153 334,940 954,362 921,343
4,162,368 4,123,206 12,321,057 11,948,745
Less: Provisions for
uncollectibles 11,500 8,700 31,500 26,100
Operating revenues 4,150,868 4,114,506 12,289,557 11,922,645
Operating expenses:
Plant specific 588,348 509,299 1,756,563 1,598,778
Plant non-specific 786,247 728,658 2,317,418 2,165,214
Customer operations 863,760 747,563 2,536,788 2,349,939
Corporate operations 553,476 405,945 1,490,496 1,252,019
Operating expenses 2,791,831 2,391,465 8,101,265 7,365,950
Operating taxes:
Federal income taxes 418,723 459,928 1,185,945 1,162,019
Operating other taxes 314,050 288,673 919,878 895,033
Operating taxes 732,773 748,601 2,105,823 2,057,052
Income from operations 626,264 974,440 2,082,469 2,499,643
Non-operating income & expenses -
net (Note 2) 723,835 310,194 1,538,785 790,749
Income before fixed charges 1,350,099 1,284,634 3,621,254 3,290,392
Interest & related items:
Interest on funded debt 138,375 138,375 415,125 415,125
Other interest deductions 18,020 9,826 55,679 30,564
Amortization of debt issuance
expense 3,166 3,166 9,501 9,501
Total interest & related items 159,561 151,367 480,305 455,190
Net income all sources 1,190,538 1,133,267 3,140,949 2,835,202
PREFERRED DIVIDENDS 6,250 6,250 18,750 18,750
INCOME APPLICABLE TO COMMON
STOCK $ 1,184,288 $ 1,127,017 $ 3,122,199 $ 2,816,452
NET INCOME PER AVERAGE SHARE
OF OUTSTANDING COMMON STOCK 0.65 0.60 1.72 1.50
CASH DIVIDENDS PAID PER SHARE 0.28 0.26 0.82 0.68
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING 1,817,229 1,878,276 1,812,639 1,874,377
The accompanying notes to financial statements are an integral part of these
statements.
- 4 -
WARWICK VALLEY TELEPHONE COMPANY
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 3,140,949 $ 2,835,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,855,460 1,736,195
Deferred income tax and investment tax credit (23,004) (80,300)
Interest charged to construction (32,970) (37,270)
CHANGE IN ASSETS AND LIABILITIES:
(Increase) Decrease in accounts receivable 910,011 267,879
(Increase) Decrease in materials and supplies (255,348) (444,258)
(Increase) Decrease in prepaid expenses (95,217) (416,700)
(Increase) Decrease in deferred charges 68,228 47,643
Increase (Decrease) in accounts payable (781,456) (399,013)
Increase (Decrease) in customers' deposits 6,859 20,346
Increase (Decrease) in accrued expenses 83,546 78,273
Increase (Decrease) in other liabilities 109,243 73,489
Net Cash provided by operating activities 4,986,301 3,681,486
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,466,916) (1,667,143)
Interest charged to construction 32,970 37,270
Change in unamortized debt issuance expense 9,501 9,501
Change in other investment (758,671) (489,090)
Net Cash used in investing activities (3,183,116) (2,109,462)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (700,000) 1,050,000
Dividends (1,504,708) (1,270,341)
Purchase of treasury stock 0 (1,955,090)
Sale of common stock 382,426 508,776
Net Cash used by financing activities (1,822,282) (1,666,655)
Increase (Decrease) in cash and cash equivalents (19,097) (94,631)
Cash and cash equivalents at beginning of year 482,534 728,520
Cash and cash equivalents at end of the period $ 463,437 $ 633,889
The accompanying notes to financial statements are an integral part of these
statements.
-5-
Item 1. Financial Statements (Continued)
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the management of the Warwick Valley Telephone Company,
the accompanying financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
Company's financial position as of September 30, 1998 and December 31,
1997, its income for the three-month and nine-month periods ended
September 30, 1998 and 1997 and its cash flow for nine-month periods
ended September 30, 1998 and 1997.
These financial statements should be read in conjunction with the
financial statements and the notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The results of operations for any interim period are not necessarily
indicative of the results of operations for a full year.
2. Non-operating income and expenses for the three-month and nine-month
periods ended September 30, 1998 and 1997 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Interest income $ 6,154 $ 116 $ 6,812 $ 359
Interest during construction 19,485 12,660 32,970 37,270
G/L disposition certain
property 28,855 (15,856) 43,365 8,805
Special charges (17,396) (1,895) (26,688) (15,575)
Other non-operating income 346,514 174,616 756,005 480,107
Equity in earnings of
affiliated companies 340,223 140,553 726,321 279,783
$723,835 $310,194 $1,538,785 $790,749
- 6 -
WARWICK VALLEY TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Nine months ended September 30, 1998 - The Company's
net income from all sources increased $305,746 (or 10.8%) to $3,140,949
for the nine-month period ended September 30, 1998, as compared to the same
period in 1997. Operating revenues increased by $366,911 (or 3.1%) after
provision for uncollectibles, to $12,289,555 for the nine-month period ended
September 30, 1998 as compared to $11,922,645 for the corresponding period of
1997. The change in operating revenues was primarily the result of increases
in local network service revenues of $174,296 (or 6.1%) and toll revenues of
$164,997 (or 2.0%) during the period, as compared to the same nine months of
1997.
Operating expenses increased by $735,315 (or 10.0%) to $8,101,265 for
the nine-month period ended September 30, 1998 as compared to the same period
in 1997. Increased costs of salaries and benefits (approximately $311,547),
depreciation ($119,265), employee recruiting ($64,837), regulatory agency
expense ($48,199), computer operating costs ($25,370), labor other than
company ($21,112) and pole attachments ($18,747) were partially offset by
decreases in costs for legal fees ($10,728) and directory reprints ($28,900).
Non-operating income and expenses increased by $748,036 to $1,538,785
in the nine-month period ended September 30, 1998 as compared to the same
period of 1997. Increased earnings of the Company's subsidiaries of $284,552,
in Hometown Online, $148,203 in Warwick Valley Long Distance and $273,600 in
Orange County Poughkeepsie Limited Partnership were the major factors in the
change.
RESULTS OF OPERATIONS -THREE MONTHS ENDED September 30, 1998 - The Company's
net income from all sources increased $57,271 (or 5.1%) to $1,190,538 for the
three-month period ended September 30, 1998, as compared to $1,133,267 for the
same period in 1997. Operating revenues increased by $36,362 (or 0.9%) after
provision for uncollectibles, to $4,150,868 for the three-month period ended
September 30, 1998 as compared to 4,114,506 for the corresponding period of
1997. The increase in operating revenues was caused mainly by the increases
in local network service revenues over the 1997 period.
Operating expenses increased by $400,366 (or 16.7%) to $2,791,831
for the three-month period ended September 30, 1998 as compared to the same
period in 1997. Increased costs of salaries and benefits ($205,177),
depreciation ($40,905), school expense ($29,031), computer operating costs
($11,707) employee recruiting ($17,575) and legal fees ($11,787) were largely
responsible for the increase.
Non-operating income and expenses increased by $413,641 to $723,835
in the three month period ended September 30, 1998 as compared to the same
period of 1997, largely as a result of the increases in net income of
subsidiaries referred to above under Results of Operations - Nine months ended
September 30, 1998. (See Liquidity and Capital Resources below.)
-7-
LIQUIDITY AND CAPITAL RESOURCES - The Company's working capital increased to
$2,120,432 at September 30, 1998 from $1,729,287 at September 30, 1997.
Decreases in material and supplies and prepaid expenses offset by larger
decreases in notes payable and accounts payable were the main factors
contributing to this increase.
The Company holds a 7.5% limited partnership interest in the cellular
mobile telephone partnership which is licensed to operate as the wire-line
licensee in both Orange and Dutchess Counties, New York. Since the inception
of the partnership, the Company has made capital contributions of $249,750.
No further capital contributions are currently scheduled. The Company's share
in the partnership's earnings was approximately $764,000 during the first nine
months of 1998, compared to $491,000 for the corresponding 1997 period.
A wholly-owned subsidiary of the Company, Warwick Valley Mobile
Telephone Company (WVMT), resells cellular telephone service to the Company's
subscribers as well as to others. WVMT also sells and installs cellular
telephone sets. The Company has invested approximately $237,000 in WVMT since
its operations began on April 1, 1989. WVMT earned approximately
$47,000 during the first nine months of 1998, compared to $33,000 for the
corresponding 1997 period.
A second wholly-owned subsidiary, Warwick Valley Long Distance Company,
Inc. (WVLD), began business in December 1993 in New Jersey and in May 1994 in
New York. WVLD resells toll service to customers of Warwick Valley Telephone.
WVLD achieved positive retained earnings prior to the end of 1994 and has been
profitable since then, earning approximately $334,000 during the first nine
months of 1998, compared to $185,000 for the corresponding 1997 period.
An additional wholly-owned subsidiary, Warwick Valley Networks, Inc.
(WVN), was established during 1994. WVN is a partner in the New York State
Independent Network (NYSINET), which was created by the independent telephone
companies of New York to build and operate its own data connections network.
NYSINET will make it unnecessary for its member companies to rely on outside
companies for these services and may also offer services to companies who are
not members, creating a potential source of additional revenue. The NYSINET
network was in operation during 1997 with Warwick Valley Telephone Company
connecting in July of that year. To this date not all members have been added
to the network. WVN has invested approximately $43,000 in NYSINET to date.
Another wholly-owned subsidiary, Hometown Online, Inc. (ONLINE) was
organized during 1995. ONLINE is the corporate entity through which WVTC
provides personal computer users connectivity to the Internet as well as local
and regional information services. Service is offered within WVTC's service
area as well as in nearby areas of New York, New Jersey and Pennsylvania.
ONLINE began service in July 1995. WVTC has invested approximately $1,206,000
in ONLINE since its inception. ONLINE earned approximately $345,000 during
the first nine months of 1998, compared to $61,000 for the corresponding 1997
period.
The Telecommunications Act of 1996 (the Act) created a nationwide
structure in which competition is allowed and encouraged between local
exchange carriers and other entities. The markets affected first have been
the regional toll areas in New York and New Jersey where competitive service
began in 1997. The competition in these areas is expected to have the effect
of reducing Warwick's revenues. The extent of such reductions cannot yet be
determined, but is expected to be small in New York, where carrier access
previously was the main revenue source. Competition has resulted in a modest
reduction in market share retained by the Company and may in the future also
affect the level of its toll rates required in order to remain competitive.
The Company anticipates that local competition, as permitted by the Act, will
occur first in major cities. It is impossible, at this time, to determine the
extent, or the timing, of the advent of competition (providing local exchange
telephone service) in the Company's service area, which is defined as rural
under provisions of the Act.
-8-
Under the Act, Warwick Valley Telephone Company itself can ultimately
provide competitive local exchange telephone service in other areas. On July
1, 1998 WVTC filed with the New York Public Service Commission and on
September 23, 1998 with the New Jersey Board of Public Utilities applications
for certification as a common carrier in the States of New York and New
Jersey, allowing it to negotiate interconnection agreements with incumbent
local exchange carriers throughout both states. Upon approval of its
application and completion of the necessary negotiations with local exchange
carriers the Company will provide competitive local exchange telephone service
in specifically selected areas. In conjunction with filing this application,
the Company entered negotiations for interconnection with Citizens
Communications in their, Middletown, New York service area. The negotiations
regarding interconnection rates have not been successful. The New York Public
Service Commission is resolving this issue in a current proceeding. Providing
local service in areas outside the Company's local service area will require
additional expenditures in an amount yet to be determined.
DEALING WITH THE IMPACT OF THE YEAR 2000 ON INFORMATION PROCESSING SYSTEMS -
As a telephone company and provider of other telecommunications services, the
Company depends for its operations on various kinds of hardware and software
that may require modification or replacement in order to properly treat
certain dates, including dates beginning on January 1, 2000. Since 1994, the
Company has been making the necessary modifications in all software that it
has generated internally. In 1997, it began a broader program to address the
readiness of its systems for Year 2000 date-change issues. In the second
quarter of 1997, the Company created a continually updated document that is
intended to contain all procedures and plans related to the Company's Year
2000 remediation efforts. The first part of the planning and implementation
document to be created was an inventory of all computer applications and a
ranking of those applications by potential business impact. The management of
the Company reviewed and adopted this document in the third quarter of 1997.
In the fourth quarter of 1997, the Company's Management Information Systems
Department began a more detailed analysis of the software and hardware in each
of the applications identified in the inventory. This analysis was completed
in the second quarter of 1998. In the third quarter of 1998, the Company
began making the software modifications identified as being necessary and is
replacing all date-dependent computer chips in its personal computers. In the
fourth quarter of 1998 the management of the Company expects to finish making
all necessary modifications to the software programs for which upgrades will
not be purchased from outside suppliers.
The Company's operations depend largely on two different systems, an
IBM AS/400 operating system used for processing orders, billing and
accounting, and a NorTel DMS 100/200 telephone switching system, which
performs all telephone switching operations. The IBM AS/400 operating system
software will be upgraded within the next three months to a version that IBM
has certified as Year 2000 compliant. The NorTel DMS 100/200 software will be
upgraded during the first quarter of 1999 to a version that NorTel has
certified as Year 2000 compliant. The Company will be able to test the
software of the AS/400 systems for compliance in the program test environment
of the system, but it must rely on NorTel's certification with respect to the
NorTel DMS 100/200 system, since the Company has no effective means of
shutting down its switches for testing. During 1998 the cost of upgrading the
Company's personal computers and operating systems has been expensed and has
not exceeded $10,000. The additional costs of planning, analysis and program
modification for the remainder of 1998 are estimated at approximately $8,000.
The cost of upgrading the NorTel DMS 100/200, anticipated to total
approximately $414,000, will be incurred in 1999 and capitalized. The cost
for upgrading the AS/400 software is expected to be insignificant.
The Company does not directly interface with third parties in
connection with the operations that are run on its AS/400 system. All third-
party data utilized on the AS/400 is transmitted in tape form and is in a
standard format, for which the Company has plans to make programming
adaptations as necessary. The operating systems of the Company's internet and
local area network servers have also been represented to be Year 2000
compliant by the systems providers.
-9-
The Company is able to handle partial failures of AS/400 system and
would utilize normal back-up procedures in the event of such partial failures.
The Company, however, has no contingency plan for the eventuality that its
NorTel DMS 100/200 switches could fail, both because management considers the
likelihood of such a failure to be very low and because switching equipment
is built with totally parallel hardware to deal with hardware, but not
software, failure.
The Company's ability to supply long-distance and internet service to
its customers in the future will depend in part on the effectiveness of the
Year 2000 remediation efforts of the companies with which it interconnects.
The Company has communicated with most of those companies and will continue to
communicate with them. In addition, there can be no guarantee that the
systems of those other companies will be timely remediated, or that a failure
to remediate by another company would not have a material adverse effect on
the Company.
Item 3. Quantative and Qualitative Disclosures About Market Risk
Not applicable
PART II - OTHER INFORMATION
Items 1. (Legal Proceedings), 2 (Changes in Securities), 3 (Defaults Upon
Senior Securities) and 4 (Submission of Matters to a Vote of Securities
Holders) are inapplicable.
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - Not applicable
b) Reports on Form 8-K - Not applicable
-10-
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 11/13/98 (Signed) Herbert Gareiss, Jr.
Herbert Gareiss, Jr., Vice President
(Duly Authorized Officer)
Date 11/13/98 (Signed) Robert A. Sieczek
Robert A. Sieczek, Treasurer
(Principal Financial and Chief
Accounting Officer)
-11-
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