CONSOLIDATED STATEMENT OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

CONSOLIDATED STATEMENT OF CASH FLOWS

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, 1999 and 1998, its income for the three-month and nine-month periods ended September 30, 1999 and 1998 and its cash f

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 nine-month periods ended September 30, 1999 and 1998 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		1999		1998			1999						1998
Interest income	$	4,850	$	10,797		$	11,867					$	12,791
Interest during construction		44,095		19,485			116,632						32,970
G/L disposition certain property		(18,811)		28,855			34,680						43,365
Special charges		(19,181)		(17,396)			(31,012)						(26,688)
Other non-operating income		573,665		346,513			1,399,246						756,005
	$	584,618	$	388,254		$	1,531,413					$	818,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 1999 - The Company's net income from all sources increased $933,413(or 29.7%) to $4,074,361 for the nine-month period ended September 30, 1999, as compared to the same period in 1998. Operating revenues increased by $1,844,781 (or 11.4%) after provision for uncollectibles, to $18,045,114 for the nine-month period ended September 30, 1999 as compared to $16,200,333 for the corresponding period of 1998. The change in operating revenues was primarily the result of increases in local network service of $424,271 (or 18.8%) and other services and sales of $1,277,494 (or 19.5%) during the period as compared to the same nine month period of 1998.

Operating expenses increased by $1,045,822 (or 9.7%) to $11,821,267 for the nine-month period ended September 30, 1999 as compared to the same period in 1998. Increased costs of salaries and benefits (approximately $398,000), depreciation ($302,000), legal fees ($50,000), trunkline agreements ($374,000), advertising ($56,000) and material ($59,000) were partially offset by decreases in costs for employee recruiting ($24,000), regulatory agency expense ($27,000), directory commissions ($87,000), servicing machines ($29,000) and filing tariffs ($29,000).

Non-operating income and expenses increased by $712,970 from $818,443 in the nine-month period ended September 30, 1998 to $1,531,413 in the same period of 1999 largely as a result of improved earnings in the Company's cellular partnership. (See Liquidity and Capital Resources).

RESULTS OF OPERATIONS -THREE MONTHS ENDED September 30, 1999 -The Company's net income from all sources increased $323,744 (or 27.2%) to $1,514,281 for the three-month period ended September 30, 1999, as compared to $1,190,537 for the same period in 1998. Operating revenues increased by $763,875 (or 12.9%) after provisions for uncollectibles, to $6,688,656 for the three-month period ended September 30, 1999 as compared to $5,924,781 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 $424,726 (or 10.6%) to $4,445,110 for the three-month period ended September 30, 1999 as compared to the same period in 1998. Increased costs of trunk line agreements ($122,000), depreciation ($113,000), salaries and benefits ($97,000), repairs and maintenance to vehicles ($21,000), insurance ($15,000), material ($14,000), and employee recruiting ($10,000) were slightly offset by a decrease in costs for directory commissions ($63,000).

Non-operating income and expenses increased by $196,364 to $584,618 in the three month period ended September 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 - Nine Months ended September 30, 1999. (See Liquidity and Capital Resources below.)

LIQUIDITY AND CAPITAL RESOURCES - The Company's working capital decreased to ($1,196,750) at September 30, 1999 from $2,120,870 at September 30, 1998. Increases in accounts receivable and prepaid expenses were offset by larger increases in current maturities-long term debt(current mortgage bond matures May 1, 2000), accounts payable and notes payable.

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 $1,401,000 during the first nine months of 1999, compared to $764,000 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 $164,000 in WVMT since its operations began on April 1, 1989. WVMT earned approximately $56,000 during the first nine months of 1999, compared to $47,000 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 $313,000 during the first nine months of 1999, compared to $334,000 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 $867,000 in ONLINE since its inception. ONLINE earned approximately $544,000 during the first nine months of 1999, compared to $345,000 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 completed a specific work plan to address this issue. The Company currently believes it has been able to modify or replace its affected systems to minimize any detrimental effects on operations.

 

 

 

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 has since replaced 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, totaled approximately $660,000, was incurred during the second quarter of 1999 and was 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 are transmitted in tape form and are 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 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), 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 11/12/99

Herbert Gareiss, Jr., Vice President

(Duly Authorized Officer)

 

 

Date 11/12/99

Robert A. Sieczek, Treasurer

(Principal Financial and Chief

Accounting Officer)