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, 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 June 30, 1999.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1999 1998
(Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 564,703 $ 593,867
Accounts receivable, less accounts
receivable allowance 1999 -$71,782;
1998- $65,155; 4,299,510 3,709,447
Materials and supplies 1,734,276 1,598,443
Prepaid expenses 594,967 353,598
7,193,456 6,255,355
NONCURRENT ASSETS:
Unamortized debt issuance expense 29,708 36,042
Other deferred charges 124,727 180,606
Investments 2,164,662 2,302,747
2,319,097 2,519,395
PROPERTY, PLANT & EQUIPMENT:
Plant in service 42,446,606 40,188,147
Plant under construction 2,015,793 1,205,922
44,462,399 41,394,069
Less: Accumulated depreciation 18,200,971 16,927,427
TOTAL PLANT 26,261,428 24,466,642
TOTAL ASSETS $35,773,981 $33,241,392
Item 1. Financial Statements (Continued)
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current maturities-long term debt $ 3,000,000 $ 0
Notes payable 600,000 400,000
Accounts payable 3,510,028 2,620,858
Advance billing and payments 79,606 100,146
Customer deposits 136,374 133,433
Accrued taxes 198,025 87,183
Accrued interest 0 74,085
Accrued pension 410,268 310,232
Other accrued expenses 246,607 342,428
8,180,908 4,068,365
LONG-TERM DEBT 4,000,000 7,000,000
DEFERRED CREDITS:
Accumulated deferred federal income taxes 2,293,884 2,283,976
Unamortized investment tax credits 138,347 158,447
Other deferred credits 168,053 158,685
2,600,284 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 6/30/99 and
12/31/98, respectively 3,330,861 3,330,861
Retained earnings 19,942,218 18,521,348
23,773,079 22,352,209
Less: Treasury stock at cost,
173,352 shares 6/30/99 and
12/31/98, respectively 2,780,290 2,780,290
20,992,789 19,571,919
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,773,981 $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 AND SIX MONTHS ENDED June 30, 1999 AND 1998
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
OPERATING REVENUES:
Local network service $ 907,880 $ 734,289 $ 1,757,455 $ 1,485,688
Network access and long
distance network service 2,098,159 2,274,574 4,561,884 4,557,294
Other services and sales 2,693,300 2,170,699 5,058,519 4,252,570
5,699,339 5,179,562 11,377,858 10,295,552
Less: Provision for
uncollectibles (10,150) (10,000) (21,400) (20,000)
Total operating revenues 5,689,189 5,169,562 11,356,458 10,275,552
OPERATING EXPENSES:
Plant specific 619,045 641,943 1,166,988 1,168,215
Plant non-specific:
Depreciation 810,785 712,363 1,599,288 1,408,402
Other 145,177 161,924 297,972 306,782
Customer operations 1,118,990 1,079,164 2,367,490 2,071,848
Corporate operations 525,556 540,113 1,003,798 937,020
Cost of services and sales 431,850 431,529 940,621 862,794
Total operating expenses 3,651,403 3,567,036 7,376,157 6,755,061
OPERATING TAXES:
Federal income taxes 690,465 409,326 1,288,375 966,120
Property, revenue and
payroll 383,272 419,982 778,761 713,379
Total operating taxes 1,073,737 829,308 2,067,136 1,679,499
Operating income 964,049 773,218 1,913,165 1,840,992
NONOPERATING INCOME
(EXPENSES)-NET: 555,177 218,316 946,795 430,189
Income available for
fixed charges 1,519,226 991,534 2,859,960 2,271,181
FIXED CHARGES:
Interest on funded debt 138,375 138,375 276,750 276,750
Other interest charges 8,312 17,916 16,796 37,686
Amortization 3,167 3,167 6,334 6,334
Total fixed charges 149,854 159,458 299,880 320,770
NET INCOME 1,369,372 832,076 2,560,080 1,950,411
PREFERRED DIVIDENDS 6,250 6,250 12,500 12,500
INCOME APPLICABLE TO
COMMON STOCK $1,363,122 $ 825,826 $ 2,547,580 $ 1,937,911
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK $ 0.75 $ 0.46 $ 1.40 $ 1.07
CASH DIVIDENDS PAID
PER SHARE $ 0.31 $ 0.28 $ 0.62 $ 0.54
AVERAGE SHARES OF COMMON
STOCK OUTSTANDING 1,817,274 1,809,123 1,817,274 1,804,970
The accompanying notes are an integral part of the financial statements.
1. Financial Statements (Continued)
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1999 1998
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 2,560,080 $ 1,950,411
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,605,622 1,414,736
Deferred income tax and investment
tax credit (824) (15,526)
Interest charged to construction (72,537) (13,485)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (590,063) 1,014,060
(Increase) Decrease in materials and supplies (135,833) (636,407)
(Increase) Decrease in prepaid expenses (241,369) (208,319)
(Increase) Decrease in deferred charges 55,879 60,119
Increase (Decrease) in accounts payable 889,170 (627,766)
Increase (Decrease) in customers' deposits 2,941 2,695
Increase (Decrease) in advance billing and
payment (20,540) 0
Increase (Decrease) in accrued expenses 136,793 77,373
Increase (Decrease) in other liabilities (95,821) (69,052)
Net cash provided by operating activities 4,093,498 2,948,839
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,394,074) (1,558,886)
Interest charged to construction 72,537 13,485
Changes in other investments 138,085 (409,922)
Net cash used in investing activities (3,183,452) (1,955,323)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable 200,000 (200,000)
Dividends (1,139,210) (989,621)
Sale of common stock 0 382,426
Net cash provided by (used in) financing
activities (939,210) (807,195)
Increase (Decrease) in cash and cash
equivalents (29,164) 186,321
Cash and cash equivalents at beginning of year 593,867 482,534
Cash and cash equivalents at end of year $ 564,703 $ 668,855
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 June 30, 1999 and December 31, 1998,
its income for the three-month and six-month periods ended June 30, 1999 and
1998 and its cash flow for the six periods ended June 30, 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 of operations for a full year.
2.Non-operating income and expenses for the three-month and six-month periods
ended June 30, 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Interest income $ 3,537 $ 703 $ 7,017 $ 1,994
Interest during construction 46,533 667 72,537 13,485
G/L disposition certain
property 52,606 311 53,491 14,510
Special charges (6,966) (6,994) (11,831) (9,292)
Other non-operating income 459,467 223,629 825,581 409,492
$555,177 $218,316 $946,795 $430,189
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, 1999 - The Company's net income
from all sources increased $609,669 (or 31.3%) to $2,560,080 for the six-
month period ended June 30, 1999, as compared to the same period in 1998.
Operating revenues increased by $1,080,906 (or 10.5%) after provision for
uncollectibles, to $11,356,458 for the six-month period ended June 30, 1999
as compared to $10,275,552 for the corresponding period of 1998. The change
in operating revenues was primarily the result of increases in local
network service of $271,767 (or 18.3%) and other services and sales of
$805,949 (or 18.9%) during the period as compared to the same six month
period of 1998.
Operating expenses increased by $621,096 (or 9.2%) to $7,376,157 for the
six-month period ended June 30, 1999 as compared to the same period in 1998.
Increased costs of salaries and benefits (approximately $195,000),
depreciation ($191,000), legal fees ($76,000) and trunkline agreements
($264,000) were partially offset by decreases in costs for employee recruiting
($34,000), regulatory agency expense ($31,000), directory commissions
($21,000) and stationery and printing ($22,000).
Non-operating income and expenses increased by $516,606 from $430,189 in
the six-month period ended June 30, 1998 to $946,795 in the same period of
1999 largely as a result ofimproved earnings in the Company's cellular
partnership. (See Liquidity and Capital Resources).
RESULTS OF OPERATIONS -THREE MONTHS ENDED JUNE 30, 1999 -The Company's net
income from all sources increased $537,296 (or 64.5%) to $1,369,372 for the
three-month period ended June 30, 1999, as compared to $832,076 for the same
period in 1998. Operating revenues increased by $519,627 (or 10.1%) after
provisions for uncollectibles, to $5,689,189 for the three-month period ended
June 30, 1999 as compared to $5,169,562 for the corresponding period of 1998.
The increase in operating revenues was caused mainly by the increase in
other services and sales over the 1998 period.
Operating expenses increased by $84,367 (or 2.4%) to $3,651,403 for the
three-month period ended June 30, 1999 as compared to the same period in 1998.
Increased costs of trunk line agreements ($139,000) and depreciation ($98,500)
were offset by decreases in costs for regulatory agency expense ($45,700),
employee recruiting ($34,000), material ($12,000), directory commissions
($21,000), stationery and printing ($22,000) and repairs and maintenance to
vehicles ($15,600).
Non-operating income and expenses increased by $336,861 to $555,177 in the
three month period ended June 30, 1999 as compared to the same period of 1998
largely as a result of increased earnings in our cellular partnership referred
to above under Results of Operations - Six Months ended June 30, 1999. (See
Liquidity and Capital Resources below.)
LIQUIDITY AND CAPITAL RESOURCES - The Company's working capital decreased to
($987,452) at June 30, 1999 from $2,250,904 at June 30, 1998. Increases in
current maturities-long term debt,accounts payable and 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 $828,000 during the first six
months of 1999, compared to $416,000 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 $182,000 in WVMT since
its operations began on April 1, 1989. WVMT earned approximately $38,000 during
the first six months of 1999, compared to $33,000 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 $201,000 during the first six
months of 1999, compared to $210,000 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 $1,059,000 in
ONLINE since its inception. ONLINE earned approximately $249,000 during the
first six months of 1999, compared to $143,000 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 June 7, 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 has provided extended
local service since June 10, 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 has incurred 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 has been upgraded 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 was expensed and did not exceed
$18,000. The cost of upgrading the NorTel DMS 100/200, anticipated to total
approximately $660,000, was incurred during the second quarter of 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 0.75% below prime rate.
PART II - OTHER INFORMATION
ITEMS 1. (Legal Proceedings), 2 (Changes in Securities), and 3 (Defaults Upon
Senior Securities), 4 (Submission of Matters to a Vote of Securities Holders)
and 5 (Other Information) are inapplicable.
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 August 13, 1999 /S/
Herbert Gareiss, Jr., Vice President
(Duly Authorized Officer)
Date August 13, 1999 /S/
Robert A. Sieczek, Treasurer
(Principal Financial and Chief
Accounting Officer)
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