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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____to____
Commission File No. 0-11174
WARWICK VALLEY TELEPHONE COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1160510
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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) 986-1101
Securities registered pursuant to Section 12(b) of the Act: None
Common Stock (Without Par Value)
--------------------------------
(Title of Class)
Indicate by check mark 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 ____ NO _____
Aggregate market value of voting stock held by non-affiliates as of March 20,
1998 - (no organized market exists)
Common shares outstanding, March 20, 1998 - 1,800,816
DOCUMENTS INCORPORATED BY REFERENCE
Name Incorporated Into
Annual Report to Shareholders for the year
ended December 31, 1998 Parts II and IV
Proxy statement for the 1998 Annual Meeting
of Shareholders Part III
The Exhibit Index for this report is located on page 11.
The total number of pages contained in this report is 117.
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Part 1.
Item 1. BUSINESS.
Warwick Valley Telephone Company (the 'Company') was incorporated in New
York on January 16, 1902 and is qualified to do business as a foreign
corporation in New Jersey. The Company's executive offices are located at 47
Main Street, Warwick, New York 10990 (Tel. No. 914-986-8080).
The Company is an independent telephone company with 15,568 access lines in
New York State and 9,219 in New Jersey at December 31, 1997. It provides
telephone service to customers in the contiguous towns of Warwick and Goshen,
New York, and the townships of West Milford and Vernon, New Jersey. The Company
operates exchanges in Warwick (10,737 access lines), Florida (3,331 access
lines) and Pine Island (1,500 access lines), New York and Vernon (6,490 access
lines) and Upper Greenwood Lake (2,729 access lines), New Jersey. The Company's
service area is primarily rural and has an estimated population of 50,000.
In 1997, 23,429,091 toll calls were made on the Company's system,
representing an increase of 5.1% from 22,297,227 in 1996. Business customers
represent 21.4% of total access lines, and no single customer's annual billings
represent a significant portion of the Company's gross revenues.
The Company has installed advanced digital switching equipment in all of
its exchanges and fiber optic routes between central offices and to most
neighboring telephone companies, and is currently constructing fiber optic
routes in certain other locations.
The Company sells, as well as leases, telephone equipment both within its
territory and within the territories of other telephone companies. Residential
telephone equipment sales are made through the Company's retail stores, which
are located in the Company's main office in Warwick, New York and at Route 515
and Guthrie Drive in Vernon, New Jersey. The Company also sells and leases
business telephone systems both in its own territory and elsewhere. At present,
the sale of telephone and other equipment does not constitute a material part of
the Company's business.
The Company holds a 7.5% limited partnership interest in a cellular mobile
telephone partnership which is licensed to operate as the wire-line licensee in
both Orange and Dutchess Counties, New York. The general partner is New York
Cellular Geographic Service Area, Inc. (an affiliate of Bell Atlantic Mobile),
and the other limited partners are Frontier Telephone Company and Taconic
Telephone Corporation. Since the inception of the partnership, the Company has
made capital contributions of $249,750; no further capital contributions are
expected to be required in 1998. The partnership began offering cellular service
in both counties in February 1988. The partnership's pre-tax income for the year
ended December 31, 1997 was $8,637,000, and the Company's share of that pre-tax
income was $647,775.
The Company has four wholly-owned subsidiaries. Warwick Valley Mobile
Telephone Company, Inc. ('WVMT') resells cellular telephone service to the
Company's subscribers as well as to others. WVMT also sells and installs
cellular telephone sets. For the year ended December 31, 1997, WVMT had a
pre-tax profit of $63,296. Warwick Valley Long Distance Company, Inc. ('WVLD')
resells toll telephone service to the Company's subscribers. WVLD commenced
operation in New Jersey in December, 1993 and in New York in May, 1994. WVLD had
a pre-tax profit in 1997 of $373,679. Warwick Valley Networks, Inc. ('WVN') was
established during 1994 and 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 a data connections network. NYSINET makes 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 become part of the system to date.
NYSINET had a net loss of $306,000 during 1997, of which Warwick Valley
Networks' share was $12,590.
Hometown Online, Inc. ('Online') was established during 1995. It is the entity
through which WVTC offers connectivity to the Internet as well as local and
regional information services to personal computer users. Service is offered
within WVTC's service area as well as in nearby areas in New York, New Jersey
and Pennsylvania. Online, which began business in July, 1995, had a pre-tax
profit of $389,009 in 1997.
The Company has recently filed an application to have its Common Stock
listed on the NASDAQ National Stock Market. The application is pending
currently. Approval and listing are anticipated during the second quarter of
1998.
The Company expects to incur costs during 1998 and 1999 to address the
impact of the so-called 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.
In addition, the Company has communicated with others, such as switching
manufacturers, software vendors, credit card processors and security system
companies, with whom it does significant business, to determine their Year 2000
compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The total cost to the Company of these Year 2000 compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
COMPETITION
Residential customers can purchase telephone sets (including cellular sets)
and equipment compatible and operational with the Company's telephone and
cellular systems at other retail outlets inside and outside the Company's
territory and not affiliated with the Company. Such outlets include other
telephone company telephone stores, department stores, discount stores and
mail-order services. Businesses in the Company's service area are also allowed
to purchase equipment compatible and operational with the Company's system from
other telephone and 'interconnect' companies. The Company's territory is
surrounded by the territories of Bell Atlantic, Citizens Utilities,
Sprint-United Telephone and Frontier Telephone, all of which offer residential
and business telephone equipment. There are also several interconnect companies
located within a 30-mile radius of Warwick, New York. WVMT competes against Bell
Atlantic Mobile Communication Retail Company, Orange County Cellular Telephone
Corporation and others offering either cellular service or the sale and
installation of cellular equipment.
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. Because the states are responsible for
implementing many of the Act's provisions, the impact on WVTC will be dependent
primarily on proceedings currently underway in New York and New Jersey. The
markets affected first have been the regional toll areas in both states.
Regional toll competition was implemented in New York on January 1,
2
1997 and in New Jersey in May 1997. The competition in these areas has had the
effect of reducing Warwick's revenues. The extent of such reductions has been
relatively small. 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 in the
Company's service area, which is defined as rural under provisions of the Act.
There are special provisions in the Act governing competition in rural areas but
it is the responsibility of the States to implement them. To prepare for
competition, which is expected to arise eventually, the Company has taken steps
such as establishing subsidiaries described above, reengineering its processes,
establishing a local business office in New Jersey and planning for cooperation
with providers of personal communications services.
The cellular partnership referred to above is in competition with two
non-wire-line licensees, one of which is currently operating a cellular system
in Dutchess County, New York, and the other in Orange County, New York.
The Company currently provides access to the national and international
calling markets as well as a significant portion of the intrastate calling
markets through all interested inter-exchange carriers, including WVLD. Equal
access ('one-plus') service to all toll carriers has been available to the
Company's customers since August 1, 1991. Access to the remainder of the
intrastate calling markets is provided through Bell Atlantic. WVLD, as an
inter-exchange carrier, competes against all such other carriers, providing full
toll services to its customers at discounted rates.
Online has numerous competitors whose services are available to customers
throughout our marketing area. The Company competes both on the basis of service
and price. Despite the presence of many competitors, it is experiencing rapid
growth. Whether growth and pricing levels can be maintained depends, in part, on
the actions of existing competitors, the possible entry into the market of new
competitors, the rate of technological change and the level of demand for
services.
Should NYSINET offer services to non-members, WVN will indirectly be
competing against Bell Atlantic and others.
STATE AND FEDERAL REGULATION
The Company's New York telephone service operations are subject to the
jurisdiction of the New York State Public Service Commission (the 'NYSPSC'); its
New Jersey telephone service operations, to the jurisdiction of the New Jersey
Board of Public Utilities (the 'NJBPU'). These two bodies have regulatory
authority over the Company with respect to rates, facilities, services, reports,
issuance of securities and other matters. Interstate toll and access services
are subject to the jurisdiction of the FCC.
The Company, like many other telephone companies of its size, depends
heavily for its revenues on inter- and intrastate toll usage, receiving
approximately 62.8% of its revenues from these sources.
With regard to interstate toll calls, the Company receives reimbursement
from toll carriers in the form of charges for providing toll carriers access to
and from the Company's local network.
Pursuant to FCC requirements, the Company was obligated to make
contributions to a long-term support fund of the National Exchange Carrier
Association. During 1997, the Company paid approximately $68,000 to that fund.
Beginning January 1, 1998, a new funding mechanism has begun, whereby all
carriers contribute to a Universal Service Fund established by the FCC to cover
high cost areas, low income customers, schools, libraries and rural health care
providers. The Company's obligation to this fund is approximately $46,000 in the
first six months of 1998. Updated information will result in a recalculation of
required contributions for the remainder of 1998. Management does not currently
expect that the amount contributed by the Company will change significantly.
3
Also as of January 1, 1998, the Company began receiving substantial funds
from the Universal Service Fund. As a result of the FCC order establishing the
Fund, all local exchange carriers were required to reduce access charges billed
to toll carriers. To offset this revenue reduction, the high cost portion of the
Universal Service Fund provides payments monthly to carriers satisfying the
characteristics set forth in the order. At the current level of support, the
Company will receive approximately $2.3 million during 1998.
The Company also receives access charges from toll carriers for all
intrastate toll usage. The Company is obligated to make contributions to the New
York State Access Settlement Pool (the 'NYSASP') but does not pool its toll or
access revenues therein. The NYSASP began operations on October 1, 1992 and
supports the operations of certain telephone companies other than the Company.
The Company is obligated to contribute approximately $285,000 to the NYSASP on
an annual basis. A current proceeding before the NYSPSC will determine the
future of the NYSASP and the Company's obligation to make further contributions.
In the Company's two New Jersey exchanges, intrastate toll revenues are
retained by 33 toll carriers of which the Company is one. The associated access
charges are retained by the Company. Revenues resulting from traffic between the
Company and Bell Atlantic and United Telephone are adjusted by charges payable
to each company for terminating traffic.
In addition to charging for access to and from the Company's local network,
the Company bills and collects charges for most inter- and intrastate toll
messages carried on its facilities. Interstate billing and collection services
provided by the Company are not regulated. They are provided under contract by
the Company. Intrastate billing and collection remain partly regulated in New
York and fully regulated in New Jersey. The regulated services are provided
under tariff. Some carriers provide their own billing and collection services.
EMPLOYEES
The Company has 109 full-time and part-time employees, including 87
non-management employees. Sixty (60) of the non-management employees (primarily
the office staff and operators) are represented by the Warwick Valley Telephone
Company Employees' Association ('WVTEA'). The current three-year agreement
between the Company and WVTEA expires November 5, 1998.
Twenty-seven (27) non-management employees (primarily plant employees) are
represented by Local 503 of the International Brotherhood of Electrical Workers
(IBEW). A new five-year contract between the Company and Local 503 effective May
1, 1998 has been agreed to and signed. The agreement provides increases in
wages, benefits and for certain changes in working conditions.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position and Period Served
Fred M. Knipp 67 President since 1988
Philip S. Demarest 61 Vice President since 1989;
Secretary since 1972; Treasurer since 1989
Herbert Gareiss, Jr. 52 Vice President since 1989;
Assistant Treasurer 1989-1997;
Assistant Secretary 1980-1997
Barbara Barber 55 Assistant Secretary since 1997
Robert A. Sieczek 54 Assistant Treasurer since 1997
There are no arrangements between any officer and any other person pursuant
to which he was selected an officer.
4
Item 2. PROPERTIES.
The Company owns an approximately 22,000 square-foot building in Warwick,
New York, which houses its general offices, operators, data processing equipment
and the central office switch for the Warwick exchange. In addition, the Company
owns several smaller buildings which serve as workshops, storage space or
garages or which house switching equipment at the Company's other exchanges. Of
the Company's investment in telephone plant in service, central office equipment
represents approximately 44.6%; connecting lines and related equipment, 37.2%;
telephone instruments and related equipment, 3.3%; land and buildings, 6.0%; and
other telephone plant, 8.9%. A substantial portion of the Company's properties
is subject to the lien of the Company's Indenture or Mortgage.
Item 3. LEGAL PROCEEDINGS
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Part II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS. (1)
Item 6. SELECTED FINANCIAL DATA. (1)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (1)
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (1)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
Part III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (2)
Item 11. EXECUTIVE COMPENSATION. (2)
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.(2)
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (2)
1 The material called for by Items 5, 6, 7, and 8 is included on the
Company's Annual Report to its Shareholders for the year ended December
31, 1997, the relevant pages of which are incorporated by reference
herein.
2 With the exception of the identification of executive officers as listed
on page 4, the material called for by Items 10-13 is included in the
Company's definitive proxy statement, incorporated by reference herein,
for its 1998 Annual Meeting of Shareholders, to be filed pursuant to
Section 14(a) of the Securities Exchange Act of 1934.
5
Part IV.
Item 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements: The following financial statements of the Company,
included in the Annual Report of the Company to its Shareholders for the year
ended December 31, 1997, are incorporated herein by reference:
Reference Pages
Annual Report
On Form 10-K
Consolidated Statement of Income - Years
Ended December 31, 1997, 1996 and 1995 105
Consolidated Balance Sheet - December 31,
1997 and 1996 104
Consolidated Statement of Stockholders'
Equity - Years Ended December 31, 1997,
1996 and 1995 106
Consolidated Statement of Cash Flows - Years
Ended December 31, 1997, 1996 and 1995 107
Notes to Consolidated Financial Statements 108 - 113
2. Financial Statement Schedules:
Report of Independent Certified
Public Accountants on Financial
Statement Schedules 114
Schedules:
VIII. Valuation and Qualifying Accounts 10
6
3. Exhibits:
Exhibit No. Description of Exhibit Reference
3(a) Articles of Incorporation, Filed herewith
as amended
3(b) By-Laws Filed herewith
4(a) Form of Common Stock Filed herewith
Certificate, as amended
4(c) Indenture of Mortgage, dated Incorporated by reference to
November 1, 1952, and all Exhibit 4(d) to the Company's
indentures supplemental Registration Statement on
thereto, except the Eighth Form 10 (File No. 0-11174),
Supplemental Indenture dated April 29, 1983
4(d) Eighth Supplemental Incorporated by reference to
Indenture, dated as of Exhibit 4(d) to the Company's
May 1, 1990, to the Annual Report on Form 10-K
Indenture of Mortgage, for 1995
dated November 1, 1952,
including form of 9.05%
First Mortgage Bond,
Series I, Due May 1, 2000
4(e) Ninth Supplemental Filed herewith
Indenture, dated as of
October 1, 1993, to the
Indenture of Mortgage,
dated November 1, 1952,
including form of 7.05%
First Mortgage Bond,
Series J, Due October
1, 2003
13 Annual Report to Share- Filed herewith
holders for the year ended
December 31, 1996, together
with separate manually
executed Independent
Auditor's Report.
23 Consent of Independent Filed herewith
Auditor
(b) No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1997.
7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March ____, 1998 By: /s/ FRED M. KNIPP
----------------------------
Fred M. Knipp
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated and on the ____ day of March, 1998.
Signature Title
/s/ FRED M. KNIPP
- --------------------------------------- President and Director
Fred M. Knipp (Principal Executive Officer)
/s/ PHILIP S. DEMAREST
- --------------------------------------- Vice President, Treasurer,
Philip S. Demarest Secretary and Director
(Principal Financial
and Accounting Officer)
/s/ EARL V. BARRY
- --------------------------------------- Director
Earl V. Barry
/s/ WISNER H. BUCKBEE
- --------------------------------------- Director
Wisner H. Buckbee
/s/ HOWARD CONKLIN, JR.
- --------------------------------------- Director
Howard Conklin, Jr.
/s/ JOSEPH E. DELUCA
- --------------------------------------- Director
Joseph E. DeLuca
/s/ CORINNA S. LEWIS
- --------------------------------------- Director
Corinna S. Lewis
/s/ VICTOR J. MAROTTA
- --------------------------------------- Director
Victor J. Marotta
/s/ HENRY L. NIELSEN, JR.
- --------------------------------------- Director
Henry L. Nielsen, Jr.
8
WARWICK VALLEY TELEPHONE COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
(Note a) (Note b) (Note c)
Allowance for
uncollectibles:
Year 1997 $65,154 $46,289 $53,124 $99,412 $65,155
Year 1996 $65,154 $35,085 $15,695 $50,780 $65,154
Year 1995 $65,155 $59,956 $18,509 $79,466 $65,154
(a) Provision for uncollectibles as stated in statements of income.
(b) Amounts previously written off which were credited directly to this account
when recovered.
(c) Amounts written off as uncollectible.
9
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
3 (a) Articles of Incorporation, as amended 12
3 (b) By-Laws 82
4 (a) Form of Common Stock Certificate,
as amended 91
4 (c) Indenture of Mortgage, dated November 1,
1952, and all indentures supplemental
thereto, except the Eighth Supplemental
Indenture
4 (d) Eighth Supplemental Indenture, dated as of
May 1, 1990, to the Indenture of Mortgage,
dated November 1, 1952, including form of
9.05% First Mortgage Bond, Series I,
Due May 1, 2000
4 (e) Ninth Supplemental Indenture, dated as of
October 1, 1993, to the Indenture of Mortgage,
dated November 1, 1952, including form of
7.05% First Mortgage Bond, Series J, Due
October 1, 2003. 92
13 Annual Report to Shareholders for the year
ended December 31, 1997 99
23 Consent of Independent Auditor
27 Financial Data Schedule
Exhibit 4(c) is incorporated by reference to Exhibit 4(c) to the Company's
Registration Statement on Form 10 (File No. 0-11174), dated April 29, 1983.
Exhibit 4(d) is incorporated by reference to Exhibit 4(d) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. Exhibit 10 is
incorporated by reference to Exhibit 10 to the Company's Annual Report on Form
10-K for the year ended December 31, 1989.
10