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 June 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 June 30, 1998.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WARWICK VALLEY TELEPHONE COMPANY
BALANCE SHEET
June 30, December 31,
1998 1997
(Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 668,855 $ 482,534
Telecommunications accounts receivable,
less accounts receivable allowance 2,386,137 3,544,562
1998-$64,936; 1997-$65,155;
Other accounts receivable 565,163 420,798
Materials and supplies 1,770,044 1,133,637
Prepaid expenses 546,736 338,417
TOTAL CURRENT ASSETS 5,936,935 5,919,948
NON-CURRENT ASSETS
Unamortized debt issuance expense 42,376 48,710
Other deferred charges 157,456 217,575
Investment in non-affiliated company 2,074,504 1,664,582
TOTAL NON-CURRENT ASSETS 2,274,336 1,930,867
TELEPHONE PLANT, AT COST:
Land, buildings and equipment
in service 38,504,237 37,374,440
Under construction 1,133,619 824,595
39,637,856 38,199,035
Less: Accumulated depreciation 15,950,191 14,661,854
TOTAL PLANT 23,687,665 23,537,181
TOTAL ASSETS $ 31,898,936 $ 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
June 30, December 31,
STOCKHOLDERS' EQUITY AND LIABILITIES 1998 1997
(Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable 1,123,973 1,751,739
Notes payable 1,400,000 1,600,000
Advance billing and payments 310,407 163,882
Customer deposits 171,160 168,465
Accrued taxes 57,711 126,864
Other accrued liabilities 622,780 691,832
TOTAL CURRENT LIABILITIES 3,686,031 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 175,927 201,427
Net non-current deferred operating income
tax 2,385,679 2,301,418
Other deferred credits 104,943 179,230
TOTAL OTHER LIABILITIES & DEFERRED CREDITS 2,666,549 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 6/30/98 and 1,974,168 shares at
12/31/97 3,330,864 2,948,438
Retained earnings 17,495,782 16,534,991
21,326,646 19,983,429
Less: Treasury stock, at cost,
173,352 shares at 6/30/98 and
173,352 shares at 12/31/97 2,780,290 2,780,290
TOTAL STOCKHOLDERS' EQUITY 18,546,356 17,203,139
TOTAL LIABILITIES $ 31,898,936 $ 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 SIX MONTHS ENDED June 30, 1998 AND 1997
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Operating revenues:
Local network service $ 984,786 $ 915,203 $2,005,152 $1,877,328
Network access and long
distance network service 2,764,151 2,669,238 5,532,328 5,361,808
Miscellaneous 277,109 268,115 621,209 586,403
4,026,046 3,852,556 8,158,689 7,825,539
Less: Provisions for
uncollectibles 10,000 8,700 20,000 17,400
Operating revenues 4,016,046 3,843,856 8,138,689 7,808,139
Operating expenses:
Plant specific 641,944 553,643 1,168,215 1,089,479
Plant non-specific 777,281 724,919 1,531,171 1,436,556
Customer operations 856,068 822,821 1,673,028 1,602,376
Corporate operations 540,113 428,120 937,020 846,074
Operating expenses 2,815,406 2,529,503 5,309,434 4,974,485
Operating taxes:
Federal income taxes 284,323 331,038 767,222 702,091
Operating other taxes 385,400 280,579 605,828 606,360
Operating taxes 669,723 611,617 1,373,050 1,308,451
Income from operations 530,917 702,736 1,456,205 1,525,203
Non-operating income &
expenses - net (Note 2) 460,591 305,194 814,950 480,555
Income before fixed charges 991,508 1,007,930 2,271,155 2,005,758
Interest & related items:
Interest on funded debt 138,375 138,375 276,750 276,750
Other interest deductions 17,891 10,564 37,660 20,739
Amortization of debt
issuance expense 3,166 3,166 6,334 6,334
Total interest & related items 159,432 152,105 320,744 303,823
Net income all sources 832,076 855,825 1,950,411 1,701,935
PREFERRED DIVIDENDS 6,250 6,250 12,500 12,500
INCOME APPLICABLE TO COMMON
STOCK $ 825,826 $ 849,575 $1,937,911 $1,689,435
NET INCOME PER AVERAGE SHARE
OF OUTSTANDING COMMON STOCK 0.46 0.45 1.07 0.90
CASH DIVIDENDS PAID PER SHARE 0.28 0.20 0.54 0.42
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING 1,809,123 1,879,541 1,804,970 1,872,427
The accompanying notes to financial statements are an integral part of these
statements.
- 4 -
Item 1. Financial Statements (Continued)
WARWICK VALLEY TELEPHONE COMPANY
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $1,950,411 $1,701,935
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,230,722 1,152,362
Deferred income tax and investment tax credit (15,526) (52,347)
Interest charged to construction (13,485) (24,610)
CHANGE IN ASSETS AND LIABILITIES:
(Increase) Decrease in accounts receivable 1,014,060 241,070
(Increase) Decrease in materials and supplies (636,407) (277,565)
(Increase) Decrease in prepaid expenses (208,319) (290,450)
(Increase) Decrease in deferred charges 60,119 1,295
Increase (Decrease) in accounts payable (627,766) (333,183)
Increase (Decrease) in customers' deposits 2,695 14,920
Increase (Decrease) in accrued expenses 77,373 (7,715)
Increase (Decrease) in other liabilities (69,052) 28,802
Net Cash provided by operating activities 2,764,825 2,154,514
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,381,206) (1,193,481)
Interest charged to construction 13,485 24,610
Change in unamortized debt issuance expense 6,334 6,334
Change in other investment (409,922) (311,426)
Net Cash used in investing activities (1,771,309) (1,473,963)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (200,000) (350,000)
Dividends (989,621) (795,879)
Sale of common stock 382,426 508,776
Net Cash used by financing activities (807,195) (637,103)
Increase (Decrease) in cash and cash
equivalents 186,321 43,448
Cash and cash equivalents at beginning of year 482,534 728,520
Cash and cash equivalents at end of the period $ 668,855 $ 771,968
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 June 30, 1998 and December 31, 1997,
its income for the three-month and six-month periods ended June 30, 1998
and 1997 and its cash flow for the six-month periods ended June 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 six-month
periods ended June 30, 1998 and 1997 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest income $ 330 $ 112 $ 658 $ 243
Interest during construction 667 11,407 13,485 24,610
G/L disposition certain
property 311 8,950 14,510 24,661
Special charges (7,002) (1,592) (9,292) (13,680)
Other non-operating income 223,630 173,005 409,491 305,491
Equity in earnings of
affiliated companies 242,655 113,312 386,098 139,230
$460,591 $305,194 $814,950 $480,555
- 6 -
WARWICK VALLEY TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 - The Company's net
income from all sources increased $248,476 (or 14.6%) to $1,950,411 for the
six-month period ended June 30, 1998, as compared to the same period in 1997.
Operating revenues increased by $330,550 (or 4.2%) after provision for
uncollectibles, to $8,138,689 for the six-month period ended June 30, 1998 as
compared to $7,808,139 for the corresponding period of 1997. The change in
operating revenues was primarily the result of increases in local network
service revenues of $127,824 (or 6.8%) and toll revenues of $170,520 (or
3.2%) during the period, as compared to the same six months of 1997.
Operating expenses increased by $334,949 (or 6.7%) to $5,309,434 for
the six-month period ended June 30, 1998 as compared to the same period in
1997. Increased costs of salaries and benefits (approximately $147,000),
depreciation ($78,000), employee recruiting ($47,000), regulatory agency
expense ($46,000), computer operating costs ($20,000) and pole attachments
($18,000) were partially offset by decreases in costs for legal fees
($34,000) and directory reprints ($25,000).
Non-operating income and expenses increased by $334,395 to $814,950 in
the six-month period ended June 30, 1998 as compared to the same period of
1997. Increased earnings of the Company's subsidiaries of $141,817, in
Hometown Online, $88,418 in Warwick Valley Long Distance and $101,625 in
Orange County Poughkeepsie Limited Partnership were the major factors in the
change.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 - The Company's net
income from all sources decreased $23,749 (or 2.8%) to $832,076 for the
three-month period ended June 30, 1998, as compared to $855,825 for the same
period in 1997 due largely to the increase in operating taxes described
below. Operating revenues increased by $172,190 (or 4.5%) after provision
for uncollectibles, to $4,016,046 for the three-month period ended June 30,
1998 as compared to $3,843,856 for the corresponding period of 1997. The
increase in operating revenues was caused mainly by increases in access and
toll revenues over the 1997 period.
Operating expenses increased by $285,903 (or 11.3%) to $2,815,406 for
the three-month period ended June 30, 1998 as compared to the same period in
1997. Increased costs of salaries and benefits ($94,000), depreciation
($41,000),regulatory agency expense ($47,000), employee recruiting ($39,000)
and material ($28,000) were largely responsible for the increase.
Operating taxes increased by $58,000. The increase of $105,000 in
operating other taxes resulted largely from a one-time transitional tax
adjustment in the amount of $136,000 due to the initial application to the
Company of the New Jersey corporation business tax rather than the New Jersey
franchise tax. This was partially offset by a decrease in federal income
taxes of $47,000.
Non-operating income and expenses increased by $155,397 to $460,591 in
the three month period ended June 30, 1998 as compared to the same period of
1997, largely as a result of the increases in net income of subsidiaries
-7-
referred to above under Results of Operations - Six Months ended June 30,
1998. (See Liquidity and Capital Resources below.)
LIQUIDITY AND CAPITAL RESOURCES - The Company's working capital decreased to
$2,250,904 at June 30, 1998 from $3,071,503 at June 30, 1997. A decrease in
cash and accounts receivable and an increase in notes payable were the main
factors contributing to this decrease.
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 $416,000 during the
first six months of 1998, compared to $314,000 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 $251,000 in WVMT
since its operations began on April 1, 1989. WVMT earned approximately
$33,000 during the first six months of 1998, compared to $16,000 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 $210,000 during the
first six months of 1998, compared to $121,000 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 although not all members have been added
to the network. WVN has invested approximately $40,000 in NYSINET to date.
Moderate additional investment requirements are anticipated during 1998.
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 $1,580,000 in ONLINE since its inception, of which $270,000 was
invested in the first six months of 1998. ONLINE earned approximately
$143,000 during the first six months of 1998, compared to $1,300 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
-8-
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.
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 an application
for certification as a common carrier in the State of New York, allowing it
to negotiate interconnection agreements with incumbent local exchange
carriers throughout New York State.
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 has notified
Citizens Communications that the Company wishes to begin negotiations for
interconnection in Citizens, Middletown, New York service area.
Providing local service in areas outside the Company's local service area
will require additional expenditures in amounts 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 the inventory and evaluation 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. The management of the Company expects that outside
contractors will by the end of the fourth quarter of 1998 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
coordinates all telephone switching operations. The IBM AS/400 software will
be upgraded in the fourth quarter of 1998 to a version that IBM has certified
as Year 2000 compliant. The NorTel DMS 100/200 software will be upgraded
-9-
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 have been expensed and have not
exceeded $10,000. The additional costs of planning, analysis and program
modification for the remainder of 1998 are estimated at approximately
$25,000, including the costs of outside consultants. 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 plan however, for
unrelated reasons, to replace the existing AS/400 within the next eighteen
months.
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.
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 - The Securities and Exchange Commission recently
made a change in the proxy rules limiting the circumstances under which the
proxy voting card distributed by registered companies to their shareholders
may permit those companies to cast the votes represented by the proxy voting
cards in their sole discretion. As applied to the Company, the most
important limitation is as follows: For proposals to be made by a shareholder
at the 1999 annual meeting, that are not properly submitted by the
shareholder for inclusion in the Company's own proxy materials, the Company
may vote proxies in its discretion about those proposals unless it receives
notice from the shareholder by February 25, 1999 at the latest that the
-10-
shareholder intends to make those proposals at the meeting.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - Not applicable
b) Reports on Form 8-K - Not applicable
-11-
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 8/14/98 (Signed) Herbert Gareiss, Jr.
Herbert Gareiss, Jr., Vice President
(Duly Authorized Officer)
Date 8/14/98 (Signed) Robert A. Sieczek
Robert A. Sieczek, Treasurer
(Principal Financial and Chief
Accounting Officer)
-12-
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