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, 1999
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.)
47-49 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:
1,817,274 common shares, no par value, outstanding at March 31, 1999.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1999 1998
(Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 766,039 $ 593,867
Accounts receivable, less accounts
receivable allowance 1999 -$68,423;
1998- $65,155; 3,344,670 3,709,447
Materials and supplies 1,174,905 1,598,443
Prepaid expenses 469,876 353,598
5,755,490 6,255,355
NONCURRENT ASSETS:
Unamortized debt issuance expense 32,875 36,042
Other deferred charges 120,625 180,606
Investments 2,678,531 2,302,747
2,832,032 2,519,395
PROPERTY, PLANT & EQUIPMENT:
Plant in service 41,184,333 40,188,147
Plant under construction 1,982,598 1,205,922
43,166,931 41,394,069
Less: Accumulated depreciation 17,503,172 16,927,427
25,663,759 24,466,642
TOTAL ASSETS $34,251,281 $33,241,392
1. FINANCIAL STATEMENTS (Continued)
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
(Unaudited) (Audited)
CURRENT LIABILITIES:
Notes payable $ 1,100,000 $ 400,000
Accounts payable 1,848,037 2,620,858
Advance billing and payments 56,438 100,146
Customer deposits 137,115 133,433
Accrued taxes 586,901 87,183
Accrued interest 74,085 74,085
Accrued pension 360,250 310,232
Other accrued expenses 295,993 342,428
4,458,818 4,068,365
LONG-TERM DEBT 7,000,000 7,000,000
DEFERRED CREDITS:
Accumulated deferred federal income taxes 2,288,930 2,283,976
Unamortized investment tax credits 148,397 158,447
Other deferred credits 162,613 158,685
2,599,940 2,601,108
STOCKHOLDERS' EQUITY:
Preferred stock - 5% cumulative; $100 par value;
Authorized 7,500 shares;
Issued and outstanding 5,000 shares 500,000 500,000
Common stock - no par value;
Authorized shares 2,160,000
Issued 1,990,626 for 3/31/99 and
12/31/98, respectively 3,330,861 3,330,861
Retained earnings 19,141,951 18,521,348
22,972,812 22,352,209
Less: Treasury stock at cost,
173,352 shares 3/31/99 and
12/31/98, respectively 2,780,290 2,780,290
20,192,522 19,571,919
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,251,281 $33,241,392
The accompanying notes are an integral part of the financial statements.
Item 1. FINANCIAL STATEMENTS (Continued)
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
OPERATING REVENUES:
Local network service $ 849,575 $ 751,399
Network access and long distance
network service 2,463,725 2,282,720
Other services and sales 2,364,719 2,081,871
5,678,019 5,115,990
Less: Provision for uncollectibles (11,250) (10,000)
Total operating revenues 5,666,769 5,105,990
OPERATING EXPENSES:
Plant specific 547,943 526,272
Plant non-specific:
Depreciation 788,503 696,039
Other 152,795 144,858
Customer operations 1,248,500 992,684
Corporate operations 478,242 396,907
Cost of services and sales 508,771 431,265
Total operating expenses 3,724,754 3,188,025
OPERATING TAXES:
Federal income taxes 597,910 556,794
Property, revenue and payroll 395,489 293,397
Total operating taxes 993,400 850,191
Operating income 948,616 1,067,774
NONOPERATING INCOME (EXPENSES)-NET: 391,618 211,873
Income available for fixed charges 1,340,233 1,279,646
FIXED CHARGES:
Interest on funded debt 138,375 138,375
Other interest charges 8,484 19,770
Amortization 3,167 3,167
Total fixed charges 150,026 161,312
NET INCOME 1,190,208 1,118,335
PREFERRED DIVIDENDS 6,250 6,250
INCOME APPLICABLE TO COMMON STOCK $ 1,183,958 $ 1,112,085
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK $ 0.65 $ 0.62
CASH DIVIDENDS PAID PER SHARE $ 0.31 $ 0.26
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING 1,817,274 1,800,816
The accompanying notes are an integral part of the financial statements.
Item 1. FINANCIAL STATEMENTS (Continued)
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 1,190,208 $ 1,118,335
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 791,670 751,913
Deferred income tax and investment
tax credit (1,168) (7,789)
Interest charged to construction (26,004) (12,818)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable 364,777 1,063,366
(Increase) Decrease in materials and
supplies 423,538 (112,652)
(Increase) Decrease in prepaid expenses (116,278) (118,132)
(Increase) Decrease in deferred charges 59,981 52,010
Increase (Decrease) in accounts payable (772,821) (625,816)
Increase (Decrease) in customers' deposits 3,682 863
Increase (Decrease) in advance billing
and payment (43,708) (100,298)
Increase (Decrease) in accrued expenses 549,736 436,817
Increase (Decrease) in other liabilities (46,435) 41,448
Net cash provided by operating activities 2,377,176 2,487,247
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,985,620) (1,096,965)
Interest charged to construction 26,004 12,818
Changes in other investments (375,784) (186,292)
Net cash used in investing activities (2,335,399) (1,270,439)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable 700,000 (800,000)
Dividends (569,605) (474,462)
Net cash provided by (used in) financing
activities 130,395 (1,274,462)
Increase (Decrease) in cash and cash
equivalents 172,172 (57,654)
Cash and cash equivalents at beginning
of year 593,867 482,534
Cash and cash equivalents at end of year $ 766,039 $ 424,880
The accompanying notes are an integral part of the financial statements.
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 March 31, 1999 and
December 31, 1998, its income for the three-month periods ended March
31, 1999 and 1998 and its cash flow for the three-month periods ended
March 31, 1999 and 1998.
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, 1998.
The results of operations for any interim period are not necessarily
indicative of the results for a full year.
2. Non-operating income and expenses for the three-month periods ended
March 31, 1999 and 1998 were as follows:
Three Months Ended
March 31,
1999 1998
Interest income $ 3,480 $ 1,291
Interest during construction 26,004 12,818
G/L disposition certain
property 885 14,199
Special charges (4,865) (2,298)
Other non-operating income 366,114 185,863
$ 391,618 $ 211,873
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Three Months Ended March 31, 1999 - The Company's net
income from all sources increased $71,873 (or 6.4%) to $1,190,208 for the
three-month period ended March 31, 1999, as compared to the same period in
1998. Operating revenues increased by $560,779 (or 11.0%) after provision for
uncollectibles, to $5,666,769 for the three-month period ended March 31, 1999
as compared to $5,105,990 for the corresponding period of 1998. The change in
operating revenues was primarily the result of increases of $98,176 (or
13.1%)in local network service, $181,005 (or 7.9%) in toll and $282,848 (or
13.6%) in other services and sales.
Operating expenses increased by $536,729 (or 16.8%) to $3,724,754 for
the three-month period ended March 31, 1999 as compared to the same period in
1998. Increases in payroll and benefits ($178,534), trunkline agreements
($119,939), depreciation ($92,464), legal fees ($33,204), product advertising
($27,293) and regulatory agency expenses ($14,719) contributed to this
increase.
Non-operating income and expenses increased by $179,745 from $211,873 in
the three-month period ended March 31, 1998 to $391,618 in the same period of
1999 largely as a result of improved earnings in the Company's cellular
partnership. (See Liquidity and Capital Resources).
LIQUIDITY AND CAPITAL RESOURCES - The Company's working capital decreased to
$1,296,672 at March 31, 1999 from $1,573,917 at March 31, 1998. Increases in
cash and accounts receivables offset by larger increases in notes payable and
accounts 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 $367,500 during the first
three months of 1999, compared to $188,700 for the corresponding 1998 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 $198,000 in WVMT since
its operations began on April 1, 1989. WVMT earned approximately
$22,000 during the first three months of 1999, compared to $16,000 for the
corresponding 1998 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 $103,000 during the first three
months of 1999, compared to $101,000 for the corresponding 1998 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 $52,000 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 $1,042,000
in ONLINE since its inception. ONLINE earned approximately $34,000 during the
first three months of 1999, compared to $26,000 for the corresponding 1998
period.
The Telecommunications Act of 1996 (the Act') creates 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 Company itself can provide competitive
local exchange telephone service outside its franchised territory.
Certification as a common carrier in the State of New York was received on
October 2, 1998 and in the State of New Jersey on March 3, 1999. As a
result, the Company has negotiated agreements for local wireline network
interconnection with Citizens Telecommunications of New York, Inc. in the
Middletown, New York area. On December 23, 1998 The New York State Public
Service Commission ( NYPSC') issued an order requiring Citizens
Telecommunications of New York, Inc. to provide local wireline network
interconnection to the Company by March 31, 1999. This date was subsequently
postponed by the NYPSC to May 31, 1999. Based upon the above agreement the
Company installed a central office at 24 John Street in Middletown, New York
on February 10, 1999, where it intends to provide extended local service
beginning May 31, 1999. The Company is reviewing plans to provide limited
service in other surrounding areas in both New York and New Jersey.
DEALING WITH THE IMPACT OF YEAR 2000 ON INFORMATION PROCESSING SYSTEMS - The
Company incurred costs during 1998 and expects to incur additional costs
during 1999 addressing the impact of the Year 2000 problem on its information
systems. The Year 2000 problem, which affects most corporations to varying
degrees, concerns the inability of information systems, primarily computer
software programs, to properly recognize and process date sensitive
information as the year 2000 approaches. This inability results largely from
the use in earlier software of two, rather than four digits to identify years.
The Company has completed an assessment of its systems and has developed a
specific work plan to address this issue. The Company currently believes it
will be able to modify or replace its affected systems in time to minimize any
detrimental effects on operations. If it cannot, the Company could, in the
worst case, have inaccurate dating of its telephone toll records or be unable
to provide internet service.
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 second quarter of 1999 the Company finished 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 main computer
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 has been upgraded to a version that IBM has certified as Year 2000
compliant. The NorTel DMS 100/200 software will be upgraded during the second
quarter of 1999 to a version that NorTel has certified as Year 2000 compliant.
The Company was 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 did not exceed $18,000. The cost of upgrading the
NorTel DMS 100/200, anticipated to total approximately $660,000, will be
incurred in 1999 and capitalized. The cost for upgrading the AS/400 software
was included with the price of the new AS/400 system installed in the first
quarter of 1999.
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 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 corrected, or that a failure
to correct by another company would not have a material adverse effect on the
Company.
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, 1998.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - The
Company does not hold or issue derivatives 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 rates. If the
Company refinances its liabilities when they mature the nature and amount of
the applicable interest rate or rates will be determined at that time. The
Company also has a line of credit which accrues interest at 1.0% below prime
rate.
PART II - OTHER INFORMATION
ITEMS 1. (Legal Proceedings), 2 (Changes in Securities), and 3 (Defaults Upon
Senior Securities) are inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - At the
Company's 1999 Annual Meeting of Common Shareholders held on April 30, 1999,
Philip S. Demarest, Robert J. DeValentino, Herbert Gareiss, Jr. and Corinna S.
Lewis were elected as directors for three-year terms. The terms of Fred M.
Knipp, Howard Conklin, Jr., Henry L. Nielsen, Jr., Wisner H. Buckbee and
Joseph E. DeLuca continued after the meeting.
Matters voted on at the meeting and the results of each vote are as
follows:
For Against Abstain
1. Set the number of directors 1,043,664 860 0
at nine until the next
annual meeting
For Against Abstain
2. Election of directors -
Philip S. Demarest 1,044,029 0 495
Robert J. DeValentino 1,043,526 503 495
Herbert Gareiss, Jr. 1,044,026 3 495
Corinna S. Lewis 1,037,626 6,403 495
For Against Abstain
3. Ratify the appointment of 1,043,594 300 630
Bush and Germain as the
independent public account-
ants of the Company
Item 5. Other Information
a) Election of Officers
At its reorganizational meeting on April 30, 1999, the Board of
Directors elected the following persons to the positions set forth opposite
their names:
Howard Conklin, Jr. - Chairman of the Board
Henry L. Nielsen, Jr. - Vice Chairman of the Board
Fred M. Knipp - President
Herbert Gareiss, Jr. - Vice President
Larry Drake - Vice President
Barbara Barber - Secretary
Robert A. Sieczek - Treasurer
Bonnie A. Jackowitz - Assistant Secretary
Colleen M. Shannon - Assistant Secretary
Dorinda M. Masker - Assistant Treasurer
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - Not applicable
b) Reports on Form 8-K - Not applicable
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 5/14/99 /S/ Herbert Gareiss, Jr.
Herbert Gareiss, Jr., Vice President
(Duly Authorized Officer)
Date 5/14/99 /S/ Robert A. Sieczek
Robert A. Siezcek, Treasurer
(Principal Financial and Chief
Accounting Officer)
<PAGE>
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