SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------
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, 1998
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) 986-8080
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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 [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates as of March 30,
1999. [72,690,960]
Common shares outstanding, March 30, 1999 - 1,817,274
DOCUMENTS INCORPORATED BY REFERENCE
Name Incorporated Into
---- -----------------
Annual Report to Shareholders for the year
ended December 31, 1998 Parts II
Proxy statement for the 1999 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 35.
--
<PAGE>
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 16,908 access lines
in New York State and 9,878 in New Jersey at December 31, 1998. The Company
manages its operations as two business segments, telephone service (including
local, long distance and cellular) and internet service. Financial information
regarding the Company's two business segments is found in Note 16 to the
Consolidated Financial Statements incorporated in Part II hereof by reference.
The Company 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 (11,767 access lines), Florida
(3,569 access lines) and Pine Island (1,572 access lines), New York and Vernon
(6,900 access lines) and Upper Greenwood Lake (2,978 access lines), New Jersey.
On February 10, 1999 the Company activated its new switch in Middletown, New
York where it intends to provide extended local service beginning March 31,
1999. The Company's service area is primarily rural and has an estimated
population of 50,000.
In 1998, 25,059,702 toll calls were made on the Company's system,
representing an increase of 6.7% from 23,429,227 in 1997. Business customers
represent 21.1% 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 other specific 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 1999. The partnership began
offering cellular service in both counties in February 1988. The partnership's
pre-tax income for the year ended December 31, 1998 was $14,600,000, and the
Company's share of that pre-tax income was $1,095,000.
The Company has four wholly-owned subsidiaries, three of which belong to
the telephone segment of its operations. 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, 1998, WVMT had a pre-tax profit
of $97,344. 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 1998 of $658,470. 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
<PAGE>
operation during 1997 although not all members have become part of the system to
date. NYSINET had a net loss of $191,840 during 1998, of which Warwick Valley
Networks' (WVN) share was $7,890.
The Company's fourth subsidiary, Hometown Online, Inc. ('Online'), was
established to provide connectivity to the Internet as well as local and
regional information services to personal computer users. All of the activities
of the Company's internet service segment are conducted through Online. 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 $923,240 in 1998 and has approximately 16,000 customers.
In 1998 the Company filed an application to have its Common Stock listed
on the NASDAQ National Market. On April 28, 1998 the Company stock began trading
under the symbol WWVY.
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 first quarter of 1999 the
management of the Company expects to 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 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 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 has been
expensed and has not exceeded $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
2
<PAGE>
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 corrected, or that a failure to correct
by another company would not have a material adverse effect on the Company.
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. The markets affected first have been the regional
toll areas in both states. Regional toll competition was implemented in New York
on January 1, 1997 and in New Jersey in May 1997. The competition in these areas
has had the effect of reducing Warwick's revenues. The reduction in regional
toll revenues for 1998 was 5.7% in New York and 11.0% in New Jersey. Under the
Act 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. The New York State Public Service
Commission ("NYSPSC") approved the Company's application on December 23, 1998.
Based upon this 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 March 31, 1999. The Company is reviewing plans
to provide limited service in other surrounding areas in both New York and New
Jersey.
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 and with
personal communication service (PCS) providers.
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
3
<PAGE>
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.
There are numerous competitors throughout Online's market area whose
services are available to customers. Online 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 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 62.6% 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. On January 1, 1998, a new funding mechanism went into effect,
pursuant to which 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
for 1998 was $88,823 and for 1999 will be approximately $86,000. Quarterly
updates modify the amounts contributed. Management does not currently expect
that the amount contributed by the Company will change significantly.
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 received $2.6 million in 1998 and expects to receive $2.7 million in
1999.
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 contributed approximately $286,000 to the NYSASP for 1998 and is
expected to contribute approximately $230,000 for 1999.
In October 1998, the NYSPSC implemented the Targeted Accessibility Fund
("TAF") of New York to provide universal service in rural, high costs areas of
the state. The Company's contribution to the TAF for 1998 was $7,200 and is
expected to be approximately $22,000 for 1999.
In the Company's two New Jersey exchanges, intrastate toll revenues are
retained by toll carriers, of
4
<PAGE>
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 120 full-time and part-time employees, including 93 non-
management employees. Sixty of the non-management employees (primarily the
office staff and operators) are represented by the Warwick Valley Telephone
Company Employees' Association ('WVTEA'). A new three-year contract between the
Company and WVTEA went into effect on November 2, 1998. The agreement provides
for increases in wages, benefits and certain changes in working conditions.
Twenty-eight non-management employees (primarily plant employees) are
represented by Local 503 of the International Brotherhood of Electrical Workers
(IBEW). The current five-year agreement between the Company and IBEW Local 503
expires April 30, 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position and Period Served
- ---- --- --------------------------
Fred M. Knipp 68 President since 1988
Philip S. Demarest 62 Vice President 1989 - October 1998
Secretary 1972 - April 1998;
Treasurer 1989 - April 1998
Herbert Gareiss, Jr. 53 Vice President since 1989;
Assistant Treasurer 1989-1997;
Assistant Secretary 1980-1997;
Larry D. Drake 55 Vice President since August 1998;
Barbara Barber 56 Secretary since April 1998
Assistant Secretary 1997-1998;
Robert A. Sieczek 55 Treasurer since April 1998
Assistant Treasurer 1997-1998;
Bonnie A. Jackowitz 52 Assistant Secretary since 1998;
Colleen Shannon 42 Assistant Secretary since 1998;
Dorinda M. Masker 47 Assistant Treasurer since 1998;
There are no arrangements between any officer and any other person
pursuant to which he was selected an officer.
5
<PAGE>
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. The Company purchased a building at 24 John Street in Middletown, New
York in order to support its expanded dial tone operations in its Middletown
exchange. Of the Company's investment in telephone plant in service, central
office equipment represents approximately 42.1%; connecting lines and related
equipment, 35.8%; telephone instruments and related equipment, 3.0%; land and
buildings, 5.4%; and other plant equipment, 13.7%. A substantial portion of the
Company's properties is subject to the lien of the Company's Indenture of
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
The Company does not hold or issue derivatives instruments for any
purposes or other financial instruments for trading purposes. The Company's only
asset exposed to market risk is 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 1.0% below prime rate.
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)
6
<PAGE>
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, 1998, the relevant pages of which are incorporated by
reference herein.
2 With the exception of the identification of executive officers as
listed on page 5, the material called for by Items 10-13 is included in
the Company's definitive proxy statement, incorporated by reference
herein, for its 1999 Annual Meeting of Shareholders, to be filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934.
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, 1998, are included in Exhibit Number 3, filed herewith:
Reference Pages
Annual Report
On Form 10-K
Consolidated Statement of Income - Years
Ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheet - December 31,
1998 and 1997
Consolidated Statement of Stockholders'
Equity - Years Ended December 31, 1998,
1997 and 1996
Consolidated Statement of Cash Flows -
Years Ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Certified
Public Accountants on Financial
Statement Schedules
Schedules:
VIII. Valuation and Qualifying Accounts
7
<PAGE>
3. Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE
---------- ---------------------- ---------
3(a) Articles of Incorporation, Incorporated by reference to
as amended Exhibit 3(a) to the Company's
Annual Report on Form 10-K
for 1997
3(b) By-Laws Incorporated by reference to
as amended Exhibit 3(b) to the Company's
Annual Report on Form 10-K
for 1997
4(a) Form of Common Stock Incorporated by reference to
Certificate, as amended Exhibit 4(a) to the Company's
Annual Report on Form 10-K
for 1997
4(b) 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(c) 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(d) Ninth Supplemental Incorporated by reference to
Indenture, dated as of Exhibit 4(e) to the Company's
October 1, 1993, to the Annual Report on Form 10-K
Indenture of Mortgage, for 1997
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, 1998, 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, 1998.
8
<PAGE>
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 30, 1999 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 30th day of March, 1999.
SIGNATURE TITLE
--------- -----
/s/ FRED M. KNIPP President and Director
-------------------------- (Principal Executive Officer)
Fred M. Knipp
/S/ ROBERT A. SIECZEK Treasurer
-------------------------- (Principal Financial and Accounting
Robert A. Sieczek Officer)
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/ PHILIP S. DEMAREST Director
--------------------------
Philip S. Demarest
/S/ ROBERT J. DEVALENTINO Director
--------------------------
Robert J. DeValentino
Director
--------------------------
Corinna S. Lewis
/S/ HENRY L. NIELSEN, JR. Director
--------------------------
Henry L. Nielsen, Jr.
9
<PAGE>
<TABLE>
<CAPTION>
WARWICK VALLEY TELEPHONE COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
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:
<S> <C> <C> <C> <C> <C>
Year 1998 $65,155 $44,309 $58,780 $103,089 $65,155
Year 1997 $65,154 $46,289 $53,124 $ 99,412 $65,155
Year 1996 $65,154 $35,085 $15,695 $ 50,780 $65,154
</TABLE>
- ----------
(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.
10
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ----
13 Annual Report to Shareholders for the year
ended December 31, 1998
23 Consent of Independent Auditors
27 Financial Data Schedule
Exhibits 3(a), 3(b), 4(a) and 4(d) are incorporated by reference to Exhibits
3(a), 3(b), 4(a) and 4(e), respectively, to the Company's Annual Report on Form
10-K for the year ended December 31, 1997. Exhibit 4(b) is incorporated by
reference to Exhibit 4(d) to the Company's Registration Statement on Form 10
(File No. 0-11174), dated April 29, 1983. Exhibit 4(c) is incorporated by
reference to Exhibit 4(d) to the Company's Annual Report on Form 10-k for the
years ended December 31, 1995.
11
Highlights .................................................................. 1
President's Summary ......................................................... 2
Management's Discussion ..................................................... 4
Consolidated Balance Sheet .................................................. 6
Consolidated Statement of Income ............................................ 7
Consolidated Statement of Stockholder's Equity .............................. 8
Consolidated Statement of Cash Flows ........................................ 9
Notes to Financial Statements ............................................... 10
Report of Independent Certified Public Accountants .......................... 19
Board of Directors and Officers ............................................. 20
Performance Highlights ...................................................... 21
Concerning the Company's Common Stock ....................................... 21
<PAGE>
HIGHLIGHTS
1998 1997
---- ----
Total Revenues ......................... $21,362,100 $19,796,696
Net Income ............................. $ 4,042,497 $ 3,683,709
Earnings per Share ..................... $ 2.21 $ 1.97
Book Value ............................. $10.51 $ 9.01
Cash Dividend per
Common Share .......................... $ 1.12 $ .93
Access Lines in Service ................ 26,786 25,154
Cellular Subscribers ................... 851 837
Online Subscribers ..................... 15,841 10,625
WVLD Subscribers ....................... 9,000 7,929
LONG DISTANCE ACCESS [GRAPHICAL WAGES & BENEFITS
LOCAL SERVICE REPRESENTATION COST OF GOODS SOLD
WV LONG DISTANCE OF CHART] OTHER OPERATING EXPENSES
CELLULAR TAXES
WARWICK ONLINE DEPRECIATION
OTHER REVENUES DIVIDENDS
RETAINED EARNINGS
1
<PAGE>
PRESIDENT'S SUMMARY
1998 was another year of growth and change for Warwick
Valley Telephone Company. The most significant change was the
expansion of our service area for basic local telephone
PHOTO service. Public policy, ultimately legislated by the federal
Telecommunications Act of 1996, is for competition in all
aspects of the telecommunications industry. We have seen
GOES that competition develop over the past 20 years in long
distance service, equipment sales and service, wireless and
information services. The last trace of telecommunications
HERE monopoly has been the local service market and that too is now
becoming fully competitive. Our response to competition in our
market has been consistent -- we will be strong competitors.
So far we have no competition for local service in our traditional service area
and we feel competition will be discouraged as long as we competently satisfy
our customers. On the other hand we do see opportunities to provide service
outside our traditional area in competition with the incumbents. In July we
filed a petition with the New York Public Service Commission, and in August with
the New Jersey Board of Public Utilities, to be certified to provide telephone
service anywhere in those states. We were approved in New York in October and in
New Jersey this March.
Middletown, New York our nearest city, is a significant market and we
see opportunity there for WVTC to provide local telephone service. We already
had a considerable presence there with Warwick Online which itself is a major
user of local service for Middletown customers' access. We therefore decided to
establish a conventional telephone exchange in Middletown. We purchased
ACCESS LINES INCOME PER SHARE
[GRAPHICAL [GRAPHICAL
REPRESENTATION REPRESENTATION
OF CHART] OF CHART]
2
<PAGE>
a building in Middletown at 24 John Street and purchased and installed a
telephone central office there. Establishing such service requires
interconnection with the incumbent local carrier so that our customers can call
their customers and vice versa. In July we requested interconnection from
Citizens Telecommunication Company of New York, Inc., the incumbent. Citizens
was understandingly reluctant to agree to interconnection terms, but on
December 23 the New York PSC ordered interconnection and this February WVTC
Middletown was placed in service. We expect this venture to grow and become
profitable quickly.
In other areas we have had consistent growth. Local telephone service
has grown from 25 thousand to 27 thousand access lines showing the general
population growth in our area and the increased numbers of lines per household
for Internet and other services. Warwick Valley Long Distance grew from 8
thousand to 9 thousand access lines and in 1998 surpassed AT&T as the first
choice of our customers. Warwick Online grew by 36% to 16,000 customers, of
which almost 70% are outside our telephone service area. This strong business
growth has also required growth in our capabilities. Our capital expenditures
have increased by nearly 60% and we have added 30 jobs in the past three years.
Our financial results have been consistent with our growth and it was a
very profitable year. Revenues increased by 8% and earnings increase by nearly
10%. One-third of our income now is from our newer services---Online, Long
Distance and Cellular. Dividends to our shareholders increased 18% to $1.12
per share.
I believe 1998 demonstrates that our Company has successfully made the
transformation from a regulated telephone company to an entrepreneurial
competitive information services provider. I am confident in its future.
(Signed) Fred M. Knipp
President and Chief Executive Officer
March 1, 1999
DIVIDENDS PER SHARE BOOK VALUE
[GRAPHICAL [GRAPHICAL
REPRESENTATION REPRESENTATION
OF CHART] OF CHART]
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS -- 1998 vs. 1997
The Company's net income from all sources increased $358,788 (or 9.7%) to
$4,042,497 for the twelve-month period ended December 31, 1998, as compared to
the same period in 1997.
Operating revenues increased $1,565,404 (or 7.9%) to $21,362,100 for the year
ended December 31, 1998, as compared to $19,796,696 for 1997, primarily as a
result of a $1,093,634 (or 53.1%) increase in online revenue. This increase was
primarily due to customers interest in and use of the internet nationwide. Local
revenues increased $281,007 (or 10.0%), primarily as a result of an increase in
the number of access lines and increased use of newly marketed services. Long
distance services and sales revenue increased $240,288 (or 14.2%), primarily as
the result of a marketing campaign.
Operating expenses increased $1,013,732 (or 7.6 %) to $14,409,432 for the year
ended December 31, 1998, as compared to $13,395,700 for the previous year. An
increase in wages and benefits of $485,505 (or 8.9%), an increase in internet
facilities of $320,003 (or 55.0%) and an increase in depreciation expense of
$263,587 (or l0.0%) were the main factors in the increase.
Nonoperating income increased to $770,135 in 1998 from $495,082 in 1997. This
increase resulted largely from an increase in income of the Bell Atlantic Orange
County/Poughkeepsie Limited Partnership, a cellular partnership in which the
Company has a 7.5% interest, which earned $1,085,499 in 1998 compared to
$632,245 in 1997.
Comparative financial information regarding the operation of the Company's two
business segments for the period from 1996 through 1998 can be found in Note 16
of the consolidated financial statements.
RESULTS OF OPERATIONS -- 1997 vs. 1996
The Company's net income from all sources increased $588,288 (or 19.0%) to
$3,683,709 for the twelve-month period ended December 31, 1997, as compared to
the same period in 1996.
Operating revenues increased $1,922,581 (or 10.7%) to $19,796,696 for the year
ended December 31, 1997, as compared to $17,874,115 for 1996, primarily as a
result of a $1,320,150 (or 278.5%) increase in online revenue. This increase was
primarily due to customers interest in and use of the internet. Network access
and toll revenue increased $459,324 (or 5.1%) to $9,589,942 for the year ended
December 31, 1997 as compared to $9,080,618 for 1996. This increase resulted
largely from increased state toll revenue in New York of $1,394,484 as a result
of the Company becoming the intralata toll carrier in its service area on
January 1, 1997, offset by reduced state access revenue of $933,353 previously
received from Bell Atlantic, who had been the New York toll carrier. Local
revenues decreased $298,168 (or 10.0%), as a result of inside wire revenue and
public telephone revenue being reclassified to Miscellaneous Revenues due to a
deregulation order in 1997. Prior to that time both were considered part of
Local Network Service Revenue. Long distance services and sales revenue
increased $212,587 (or 14.4%), primarily as the result of a marketing campaign.
Telephone operating expenses increased $989,136 (or 8.0%) to $13,395,700 for the
year ended December 31, 1997, as compared to $12,406,564 for the previous year.
An increase in wages and benefits of $438,686 (or 7.5%), an increase in internet
facilities of $207,085 (or 55.3%) and an increase in depreciation expense of
$363,661 (or 16.0%) accounted for most of the increase.
4
<PAGE>
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Nonoperating income decreased to $495,082 in 1997 from $503,888 in 1996,
primarily as a result of a decrease in interest income and income of Bell
Atlantic Orange County/Poughkeepsie Limited Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended 1998 with working capital of $2,186,990 as compared to
$1,417,166 at December 31, 1997. This difference was largely due to a decrease
in notes payable of $1,200,000. The telephone operation's capital expenditures
for 1998 were $3,059,117 compared to $2,874,681 in 1997 and were primarily
financed by internally generated funds.
The Company issued 16,715 shares of its common stock on April 1, 1998 to
employees participating in retirement savings plans at $23.30 per share (a 15%
discount from the appraised price of $27.41). On April 28, 1998 the Company
began publicly trading under the symbol WWVY on the NASDAQ National Market.
Eligible employees may apply accumulated contributions from their retirement
savings plans towards the purchase of shares of the Company's common stock.
Bell Atlantic Orange County/Poughkeepsie Limited Partnership 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. 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.
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
currently has no external financial requirements due to the positive cash flow
it generates.
Another 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 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 became operational
in 1997. Warwick Valley Telephone Company connected to the network in July of
1997, although not all members have been added. WVN has invested approximately
$43,000 in NYSINET to date. Moderate additional investment requirements are
anticipated during 1999.
An additional wholly-owned subsidiary, 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's total capital
investments from its inception through 1998 aggregates $1,837,000, and were
financed principally by advances from the Company.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
ASSETS 1998 1997
CURRENT ASSETS ----------- -----------
<S> <C> <C>
Cash $ 593,867 $ 482,534
Accounts receivable-net of reserve for uncollectibles 3,709,447 3,965,360
Materials and supplies 1,598,443 1,133,637
Prepaid expenses 353,598 338,417
6,255,355 5,919,948
NONCURRENT ASSETS:
Unamortized debt issuance expense 36,042 48,710
Other deferred charges 180,606 217,575
Investments 2,302,747 1,664,582
2,519, 395 1,930,867
PROPERTY, PLANT & EQUIPMENT: (Notes 1, 2 and 5)
Plant in service 40,188,147 37,374,440
Plant under construction 1,205,922 824,595
41,394,069 38,199,035
Less: Depreciation reserve (Notes 1 and 3) 16,927,427 14,661,854
24,466 642 23,537,181
TOTAL ASSETS $33,241,392 $31,387,996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 6) $ 400,000 $ 1,600,000
Accounts payable 2,620,858 1,751,739
Advance billing and payments 100,146 163,882
Customer deposits 133,433 168,465
Accrued taxes 87,183 126,864
Accrued interest 74,085 75,829
Accrued pension 310,232 279,494
Other accrued expenses 342,428 336,509
4,068,365 4,502,782
LONG-TERM DEBT (Note 5) 7,000,000 7,000,000
DEFERRED CREDITS: (Notes 1 and 7)
Accumulated deferred federal income taxes 2,283,976 2,301,418
Unamortized investment tax credits 158,447 201,427
Other deferred credits 158,685 179,230
2,601,108 2,682,075
STOCKHOLDERS' EQUITY: (Notes 5, 11, 12 and 13)
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 3,330,861 2,948,438
Issued 1,990,626 (1998) and 1,974,168 (1997) 18,521,348 16,534,991
Retained earnings 22,352,209 19,983,429
Less: Treasury stock at cost, 173,352 shares for 1998
and 1997, respectively 2,780,290 2,780,290
19,571,919 17,203,139
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,241,392 $31,387,996
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES:
Local network service $ 2,967,644 $ 2,686,637 $ 2,984,805
Network access and long distance network service 9,458,776 9,539,942 9,080,618
Other services and sales (Note 1) 8,935,679 7,570,117 5,808,692
21,362,100 19,796,696 17,874,115
Less: Provision for uncollectibles (44,309) (46,289) (35,085)
Total operating revenues 21,317,791 19,750,407 17,839,030
OPERATING EXPENSES:
Plant specific 2,321,621 2,241,742 2,339,213
Plant non-specific:
Depreciation 2,898,958 2,635,371 2,271,709
Other 635,165 590,825 590,210
Customer operations 4,322,763 3,854,804 3,412,521
Corporate operations 2,159,331 1,729,943 1,711,146
Cost of services and sales 2,071,593 2,343,015 2,081,765
Total operating expenses 14,409,432 13,395,700 12,406,564
OPERATING TAXES:
Federal income taxes (Note 7) 1,588,333 1,269,542 1,156,502
Property, revenue and payroll 1,412,839 1,268,471 1,026,136
Total operating taxes 3,001,172 2,538,013 2,182,638
Operating income 3,907,187 3,816,694 3,249,828
NONOPERATING INCOME (EXPENSES)-NET: (Note 10) 770,135 495,082 503,888
Income available for fixed charges 4,677,322 4,311,776 3,753,716
FIXED CHARGES:
Interest on funded debt 553,500 553,500 575,581
Other interest charges 68,658 61,899 68,862
Amortization 12,668 12,668 13,792
Total fixed charges 634,825 628,067 658,235
NET INCOME 4,042,497 3,683,709 3,095,481
PREFERRED DIVIDENDS 25,000 25,000 25,000
INCOME APPLICABLE TO
COMMON STOCK $ 4,017,497 $ 3,658,709 $ 3,070,481
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK (Note 11) $2.21 $1.97 $1.65
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Note 11) 1,813,792 1,853,298 1,865,091
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Treasury Preferred Common Retained
Stock Stock Stock Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ (775,200) $ 500,000 $ 2,281,238 $12,738,174 $14,744,212
Net income for the year 0 0 0 3,095,481 3,095,481
Dividends:
Common ($ .65 per share) 0 0 0 (1,212,570) (1,212,570)
Preferred ($5.00 per share) 0 0 0 (25,000) (25,000)
Sale of Common Stock 0 0 158,425 0 158,425
Purchase of Treasury Stock (50,000) (50,000)
Balance, December 31, 1996 $ (825,200) $ 500,000 $ 2,439,663 $14,596,085 $16,710,548
Net income for the year 0 0 0 3,683,709 3,683,709
Dividends:
Common ($ .93 per share) 0 0 0 (1,719,803) (1,719,803)
Preferred ($5.00 per share) 0 0 0 (25,000) (25,000)
Sale of Common Stock 0 0 508,775 0 508,775
Purchase of Treasury Stock (1,955,090) (1,955,090)
Balance, December 31, 1997 $(2,780,290) $ 500,000 $ 2,948,438 $16,534,991 $17,203,139
Net income for the year 0 0 0 4,042,497 4,042,497
Dividends:
Common ($1.12 per share) 0 0 0 (2,031,140) (2,031,140)
Preferred ($5.00 per share) 0 0 0 (25,000) (25,000)
Sale of Common Stock 0 0 382,423 0 382,423
Balance, December 31, 1998 $(2,780,290) $ 500,000 $ 3,330,861 $18,521,348 $19,571,919
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 4,042,497 $ 3,683,709 $ 3,095,481
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,911,626 2,648,039 2,285,501
Deferred income tax and investment tax credit (80,967) (127,266) (144,229)
Interest charged to construction (44,292) (57,562) (25,272)
Income from partnership (1,085,499) (632,244) (666,375)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable 255,913 (674,646) 369,276
(Increase) Decrease in materials and supplies (464,806) 318,221 64,500
(Increase) Decrease in prepaid expenses (15,181) (31,885) 10,553
(Increase) Decrease in deferred charges 36,969 10,124 (87,372)
Increase (Decrease) in accounts payable 869,119 150,795 (758,397)
Increase (Decrease) in customers' deposits (35,032) 15,322 (20,574)
Increase (Decrease) in advance billing and payment (63,736) (24,983) (18,121)
Increase (Decrease) in accrued expenses (10,687) (148,377) 158,088
Increase (Decrease) in other liabilities 5,919 36,334 112,454
Net cash provided by operating activities 6,321,843 5,165,581 4,375,513
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,828,418) (3,350,063) (2,944,069)
Interest charged to construction 44,292 57,562 25,272
Distribution from partnership 450,000 337,500 393,750
Changes in other investments (2,668) (15,448) (4,850)
Net cash used in investing activities (3,336,794) (2,970,449) (2,529,897)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in Notes Payable (1,200,000) 750,000 (100,000)
Repayment of long-term debt 0 0 (370,000)
Dividends (2,056,140) (1,744,803) (1,237,570)
Sale of Common Stock 382,423 508,775 158,425
Purchase of Treasury Stock 0 (1,955,090) (50,000)
Net cash provided by (used in) financing activities (2,873,716) (2,441,118) (1,599,145)
Increase (Decrease) in cash and cash equivalents 111,333 (245,986) 246,471
Cash and cash equivalents at beginning of year 482,534 728,520 482,049
Cash and cash equivalents at end of year $ 593,867 $ 482,534 $ 728,520
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
The Company is an independent telephone company providing telephone service
to customers in the Towns of Warwick and Goshen, New York and the Townships
of Vernon and West Milford, New Jersey. Its services include providing
local, toll and cellular telephone service to residential and business
customers, access and billing and collection services to interexchange
carriers, the sale and leasing of telecommunications equipment, paging and
internet access. On February 10, 1999 the Company activated its new switch
in Middletown, New York where it intends to provide extended local service.
(See Note 16 for information regarding the Company's business segments.)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
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 1998
financial statement presentation.
Depreciation
Depreciation is based on the cost of depreciable plant in service and is
calculated on the straight-line method using estimated service lives of the
various classes of telephone plant. Depreciation as a percent of average
depreciable telephone plant was 7.51%, 6.66%, and 6.53%, for the years 1998,
1997 and 1996, respectively.
Capitalization of Certain Costs and Expenses
The Company has consistently followed the practice of capitalizing certain
costs related to construction, including payroll and payroll related costs
and significant costs of capital incurred during construction. The income
which results from capitalizing interest during construction is not
currently realized but, under the regulatory rate-making process, is
recovered by revenues generated from higher depreciation expense over the
life of the related plant.
Federal Income Taxes
The Company records deferred taxes according to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109").
Under SFAS 109 deferred income taxes arise from temporary differences
resulting from differences between the financial statement and tax basis of
assets and liabilities. Deferred taxes are classified as current or
non-current, depending on the classification of the assets and liabilities
to which they relate. Deferred taxes arising from temporary differences that
are not related to an asset or liability are classified as current or
non-current depending on the periods in which the temporary differences are
expected to reverse. The Company's deferred taxes result principally from
differences in depreciation methods for financial reporting and tax
reporting.
Investment tax credits have been normalized and are being amortized to
income over the average life of the related telephone plant and other
equipment.
Investments
Investments consisted of the following at December 31:
1998 1997
----------- -----------
Investment in cellular partnership $ 2,282,385 $ 1,637,386
Other investments 20,362 27,196
$ 2,302,747 $ 1,664,582
The partnership investment represents the Company's 7.5% interest as a limited
partner in a cellular telephone operation. Other investments are recorded at
cost.
10
<PAGE>
Cash Flow Statement
Cash and cash equivalents consists principally of demand deposits and are in
accounts which are insured by the Federal Deposit Insurance Corporation
(F.D.I.C.) up to $100,000 at each financial institution. As of December
31,1998 the amount of cash in excess of these F.D.I.C. insured limits was
approximately $775,000. The following is a list of interest and federal
income tax payments for each of the three years in the period ending
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
Interest $ 623,902 $ 615,124 $ 635,528
Federal Income Taxes $ 2,064,867 $ 1,776,178 $ 1,343,151
Material and Supplies
New material and reusable materials are carried at average original cost,
except that specific costs are used in the case of large individual items.
As of December 31, 1998 and 1997 the Material and Supplies inventory
consisted of the following:
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Inventory for outside plant construction $ 461,616 $ 335,206
Inventory for central office equipment 869,890 521,842
Inventory of equipment held for sale or lease 266,937 276,589
$ 1,598,443 $ 1,133,637
</TABLE>
Retirement and/or Disposition of Property
When depreciable property is retired, the amount at which it is carried plus
the cost of removal is charged to the depreciation reserve and any salvage
is credited thereto. Expenditures for maintenance and repairs are charged
against income; renewals and betterments are capitalized.
Miscellaneous Revenues
Miscellaneous revenues consisted of the following for each of the three
years in the period ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Directory advertising revenue $ 941,714 $ 936,787 $ 854,940
Rent revenue 208,179 201,575 199,021
Billing and collection revenue 1,154,150 1,138,323 1,153,032
Long distance services and sales 1,932,111 1,691,823 1,479,236
Internet services and sales 3,153,020 2,059,386 739,236
Other services and sales 1,546,505 1,542,223 1,383,227
$ 8,935,679 $ 7,570,117 $ 5,808,692
</TABLE>
2. Property, Plant and Equipment
Plant in service, at cost, consisted of the following at December 31:
1998 1997
----------- -----------
Land, buildings, furniture and
office equipment $ 4,469,180 $ 4,254,257
Vehicles and work equipment 1,150,083 1,103,446
Central office equipment 16,920,270 16,111,391
Customer premise equipment 1,209,591 1,187,939
Outside plant equipment 14,380,676 13,428,360
Other equipment 2,058,347 1,289,047
$40,188,147 $37,374,440
11
<PAGE>
3. Depreciation Reserve
Depreciation reserve consisted of the following at December 31:
1998 1997
------------ ------------
Buildings, furniture and
office equipment $ 2,337,127 $ 1,983,607
Vehicles and work equipment 727,095 725,489
Central office equipment 8,098,368 7,259,737
Customer premise equipment 715,385 687,033
Outside plant equipment 4,038,785 3,553,306
Other equipment 1,010,667 452,682
$16,927,427 $14,661,854
4. Accounts Receivable
The Company uses the reserve method to record uncollectible accounts. The
reserve for uncollectibles was $65,155 as of December 31, 1998 and 1997,
respectively.
5. Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Redemption Redemption
Price Plus Price Plus
First Mortgage Bonds Amount Premium Amount Premium
-------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
9.05% Series "I"
(due 05/01/2000) $ 3,000,000 N/A $ 3,000,000 N/A
7.05% Series "J"
(due 12/01/2003) 4,000,000 N/A 4,000,000 N/A
7,000,000 7,000,000
Less: Current maturities
of long-term debt 0 0
Total Long-term debt $ 7,000,000 $ 7,000,000
</TABLE>
Telephone properties have been pledged as collateral on the first mortgage
bonds. Under provisions of the bond indentures, as amended, the payment of
dividends or a distribution of assets to stockholders to the extent of 75%
of the Company's net income earned during the calendar year will be allowed,
providing "net operating income" exceeds interest expense 1.5 times.
Maturities and sinking fund requirements for the five years subsequent to
1998 for long-term debt outstanding as of December 31, 1998, are as follows:
1999 0 2002 0
2000 $3,000,000 2003 $4,000,000
2001 0
The first mortgage bonds, Series "I" and "J" bonds, may not be redeemed
prior to their maturity date.
6. Notes Payable
The Company has an unsecured line of credit with the Warwick Savings Bank,
which expires in June,1999. Any borrowings under this line of credit are on
a demand basis and are without restrictions, at a variable lending rate. The
total unused line of credit available at December 31, 1998 was $2,100,000.
The balances outstanding as of December 31, 1998 and 1997 were $400,000 and
$1,600,000, respectively, bearing interest at rates of 6.75% and 7.5%,
respectively.
12
<PAGE>
7. Federal Income Taxes
The following tabulation is a reconciliation of the federal income tax
expense as reported in these financial statements with the tax expense
computed by applying the statutory federal income tax rate of 34% to pre-tax
income.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating federal income taxes:
Current portion $ 1,670,896 $ 1,404,115 $ 1,306,243
Deferrals, net of reversals:
Depreciation (17,736) (22,352) (18,393)
Cost of removal (2,813) 2,037 1,275
Tax savings due to TRA of 1986 0 (45,494) (89,760)
Other (19,034) (17,764) 8,137
Investment tax credit, net of amort. (42,980) (51,000) (51,000)
(82,563) (134,573) (149,741)
Operating F.I.T. expense $ 1,588,333 $ 1,269,542 $ 1,156,502
Nonoperating federal income taxes $ 368,316 $ 217,386 $ 219,866
Total F.I.T. expense, as reported 1,956,649 1,486,928 1,376,368
Reversals of deferred taxes 67,485 74,029 122,917
Tax savings of TRA of 1986, net 0 45,494 89,760
Other 15,576 151,567 (68,617)
Federal Income Tax at
Statutory Rate $ 2,039,710 $ 1,758,018 $ 1,520,428
</TABLE>
The following components comprise the net deferred tax liability reported
as of December 31:
1998 19976
----------- ------------
Deferred tax liabilities $ 2,366,194 $ 2,405,183
Deferred tax assets 82,218 103,765
Net deferred tax liability $ 2,283,976 $ 2,301,418
The deferred tax liability consists principally of temporary differences due
to differences in depreciation methods for financial reporting and tax
reporting. The deferred tax asset is due to the unamortized investment tax
credit being deemed a temporary difference in the basis of the related
assets.
The adoption of SFAS 109, Accounting for Income Taxes, has required certain
reclassifications of deferred tax balances and the establishment of
regulatory assets and liabilities. This is due to the rate-making treatment
of deferred taxes and unamortized investment tax credits, whereby future
reversals can be expected to be recovered or returned to customers through
future rates. The balance of unamortized investment tax credits is a
temporary difference and a deferred tax asset has been established for this.
The offsetting regulatory liability associated with this reflects the future
amounts due to customers as reversals of these balances occur. These
regulatory liabilities are included in other deferred credits and amounted
to $84,279 and $103,765 as of December 31, 1998 and 1997, respectively. As
reversals of the deferred tax balances occur in the future, these regulatory
liabilities will also decrease.
13
<PAGE>
8. Pension Plans and Other Postretirement Benefits
The Company has two defined benefit pension plans covering all management
and non-management employees who are at least 21 years of age and have
completed one year of service. Benefits are based on years of service and
the average of the employee's three highest consecutive years' base
compensation. The Company's policy is to fund the minimum required
contribution disregarding any credit balance arising from excess amounts
contributed in the past.
The Company sponsors a non-contributory, defined benefit postretirement
medical benefit plan that covers all employees that retire directly from
active service on or after age 55 with at least 10 years of service or after
age 65 with at least 5 years of service. The projected unit credit actuarial
method was used in determining the cost of future benefits. The Company's
funding policy is to contribute the maximum allowed under current Internal
Revenue Service regulations. Due to regulatory requirements the Company is
allowed to expense the amount actually funded, with any difference between
the funding amount and the SFAS 106 expense amount being deferred as a
regulatory asset or liability. Assets of the plan are invested in common
stocks and a money market fund.
The components of the pension and postretirement expense (credit) were as
follows for the years ended December 31:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 238,977 $ 200,862 $ 210,213 $ 42,117 $ 43,425 $ 65,873
Interest cost on
benefit obligation 601,153 558,396 524,866 58,618 55,367 138,186
Amortization of
transition obligation 53,263 53,263 53,263 51,496 51,496 51,496
Amortization of prior
service (credit) cost 50,611 50,611 50,611 (21,494) (21,494) 0
Recognized net
actuarial (gain) loss (98,490) (62,274) 37,928 (40,835) (83,743) (47,410)
Expected return on
plan assets (692,142) (594,971) (499,231) (61,313) (47,605) (33,364)
Net periodic (credit)
expense $ 153,372 $ 205,887 $ 377,650 $ 28,589 $ (2,554) $ 174,781
<CAPTION>
The following table presents a summary of plan assets, projected benefit
obligation and funded status of the plans at December 31:
Pension Benefits Postretirement Benefits
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $ 8,739,040 $ 7,460,136 $ 875,892 $ 680,073
Employer contributions 122,634 216,085 0 76,809
Actual return on plan assets 356,917 1,302,715 86,365 119,010
Benefits paid (251,641) (239,896) 0 0
Fair value of plan assets
at end of year 8,966,950 8,749,040 962,257 875,892
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
------------------------ ------------------
1998 1997 1998 1997
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Projected benefit obligation
at beginning of year ............... 8,385,536 7,505,941 795,291 699,372
Benefits earned ..................... 238,977 200,862 32,891 43,425
Interest cost on projected
benefit obligation ................. 601,153 558,396 60,490 55,367
Actuarial (gain) loss ............... 346,432 360,133 (57,413) (2,873)
Benefits paid ....................... (251,641) (239,896) 0 0
Projected benefit obligation
at year end ........................ 9,320,457 8,385,436 831,259 795,291
Plan assets in excess of (less than)
projected benefit obligation ....... (353,507) 353,604 130,998 80,601
Unrecognized actuarial (gain) loss .. (312,852) (1,092,999) (254,968) 303,308
Unrecognized prior service (credit)
cost ............................... 196,334 246,945 (404,783) 451,365
Unrecognized net transition
obligation ......................... 159,793 213,056 720,940 (772,436)
Prepaid (accrued) benefit cost ...... ($310,232) ($279,394) $192,187 $62,838
</TABLE>
Actuarial assumptions used to calculate the projected benefit obligation were
as follows for the years ended December 31:
Postretirement
Pension Benefits Benefits
------------------------ ------------------
1998 1997 1998 1997
--------- --------- ------- -------
Discount rate ........ 7.25% 7.50% 7.00% 7.00%
Expected return
on plans ............ 8.00% 8.00% 7.00% 7.00%
Rate of compensation
increase ............ 5.50% 5.50% 0 0
Healthcare cost
trend ............... 0 0 10.00% 10.00%
For measurement purposes, a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998. The health care cost trend
rate assumption has a significant effect on the amounts reported. A change in
the assumed health care cost trend rate by one percentage point would change the
accumulated postretirement benefit obligation as of December 31, 1998 by
approximately $81,800 and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by approximately
$4,600.
The Company also has a Defined Contribution 401(K) Profit Sharing Plan covering
substantially all employees. Under the plan, employees may contribute up to 15%
of compensation, subject to certain legal limitations. In 1998 the Company made
a matching contribution up to 6.0% of an eligible participant's compensation for
management, clerical and traffic employees and up to 4.5% for plant employees.
The Company contributed and expensed $236,597, $180,255 and $135,386 for the
years ended December 31, 1998, 1997 and 1996, respectively.
15
<PAGE>
9. Related Party Transactions
The Company expended approximately $221,880, $170,731 and $193,976 during
1998, 1997 and 1996, respectively, in insurance premiums for required
insurance coverage. These expenditures were made to an insurance agency in
which a member of the Board of Directors has a financial interest. Two Board
of Director members are also trustees of the Warwick Savings Bank, at which
the Company has its principal bank accounts and temporary investments.
10. Nonoperating Income and Expenses
<TABLE>
Nonoperating income (expense) for the years ended December 31, are as
follows:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest charged to construction $ 44,292 $ 57,562 $ 25,272
Interest income 22,401 16,009 25,545
Income from cellular partnership 1,085,499 632,245 666,375
Other nonoperating income (expense) (13,741) 6,652 6,562
Nonoperating federal income taxes (368,316) (217,386) (219,866)
$ 770,135 $ 495,082 $ 503,888
</TABLE>
11. Common Stock
Earnings per share are based on the weighted average number of shares
outstanding of 1,813,792, 1,853,298 and 1,865,091 for the years ended
December 31, 1998, 1997 and 1996, respectively. Effective November 10, 1997,
there was a 3-for-1 stock split, increasing the number of shares authorized
to 2,160,000 and the number issued to 1,974,168. All references in the
accompanying financial statements to the number of shares and per-share
amounts have been restated to reflect the stock split.
The following schedule summarizes the changes in the number of shares issued
of capital stock for the year ended December 31, 1998:
Treasury Preferred Common
Stock Stock Stock
-------- --------- ----------
Balance, January 1, 1998 173,352 5,000 1,974,168
Additional shares issued 0 0 16,715
Shares redeemed 0 0 (257)
Balance, December 31, 1998 173,352 5,000 1,990,626
12. Treasury Stock
The Company accounts for treasury stock using the cost method of accounting.
13. Preferred Stock
The preferred stock may be redeemed by the Company on any dividend payment
date at par plus accumulated dividends. Preferred stock ranks prior to the
common stock both as to dividends and on liquidation, but has no general
voting rights. However, if preferred stock dividends are in default in an
amount equal to six quarterly dividends, the holder of preferred stock shall
have the right to elect a majority of the Board of Directors and such voting
rights would continue until all dividends in arrears have been paid.
14. Commitments
The Company is required to make certain contributions to national and state
associations as part of the industry practice of pooling revenues and
redistributing to members based on cost to provide services or some other
method. Due to recent changes in the structure of these pools, the Company's
responsibility is to contribute certain fixed amounts during a transition
period, after which time the amounts may change.
16
<PAGE>
The Company's contribution to the New York State Access Settlement Pool was
$285,635 for 1998 and is expected to be $229,224 for 1999. In October of
1998 the New York State Public Service Commission implemented the Targeted
Accessibility Fund (TAF) of New York to provide support of universal service
in rural, high costs areas of the state. The amount the Company contributed
to TAF for 1998 was $7,200 and the expected contribution for 1999 is
approximately $22, 000. The Company also contributes to the Universal
Service Administration Co. (USAC). For 1998 the Company's contribution to
USAC was $88,823 and for 1999 it will be approximately $86,000. Quarterly
updates modify the amounts contributed. The amounts paid to these pools are
considered part of the cost of providing access service to interexchange
carriers and are included in the rates charged to them.
15. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of the instruments. The fair value of the Company's
long-term debt approximates the carrying value of $7,000,000 due to the
short maturity of the debt. The fair value of other financial instruments is
estimated by management to approximate the carrying value.
16. Business Segments
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which requires reporting segment information consistent with the way
management internally disaggregates an entity's operations to assess
performance and to allocate resources. As required, the Company adopted the
provisions of SFAS 131 in its year-end 1998 financial statements and has
restated its prior-year segment information to conform to SFAS 131's
requirements.
The Company's segments consist of a local telephone operation and an
internet access provider. The telephone operation offers local, long
distance and cellular telephone service to customers in its service
territory in the rural areas surrounding the towns of Warwick, New York and
Vernon, New Jersey, as well as providing access services to interexchange
carriers and the selling and leasing of equipment. Hometown Online, Inc.
("Online"), the internet access segment 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 New York,
New Jersey and Pennsylvania.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 1. The Company evaluates
performance of the segments based on segment operating income. The Company
accounts for intersegment sales at current market prices or in accordance
with regulatory requirements. The following information summarizes the
Company's business segments for the years 1998, 1997 and 1996:
17
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
1998
----------------------------------------------------------------
Intercompany Consolidated
Telephone Internet Elimination Total
----------- ----------- ------------ ------------
Revenues from:
<S> <C> <C> <C> <C>
Unaffiliated customers $18,164,771 $ 3,153,020 $ 0 $21,317,791
Intersegment revenues 78,356 0 (78,356) 0
Total revenues 18,243,127 3,153,020 (78,356) 21,317,791
Operating expenses 11,188,595 1,813,073 (78,356) 12,923,312
Depreciation 2,477,980 420,979 0 2,898,959
Federal income taxes 1,274,431 313,902 0 1,588,333
Other income (expenses) 131,037 4,273 0 135,310
Net income $ 3,433,158 $ 609,339 $ 0 $ 4,042,497
Assets $32,499,044 $ 1,650,052 $ (907,704) $33,241,392
Capital expenditures $ 3,059,117 $ 769,301 $ 0 $ 3,828,418
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
1997
----------------------------------------------------------------
Intercompany Consolidated
Telephone Internet Elimination Total
----------- ----------- ------------ ------------
Revenues from:
<S> <C> <C> <C> <C>
Unaffiliated customers $17,691,021 $ 2,059,386 $ 0 $19,750,407
Intersegment revenues 51,178 0 (51,178) 0
Total revenues 17,742,199 2,059,386 (51,178) 19,750,407
Operating expenses 10,728,456 1,351,524 (51,178) 12,028,802
Depreciation 2,316,518 318,853 0 2,635,371
Federal income taxes 1,137,279 132,263 0 1,269,542
Other income (expenses) (132,985) 0 0 (132,985)
Net income $ 3,426,961 256,746 $ 0 $ 3,683,707
Assets $31,440,173 $ 1,256,467 $(1,308,644) $31,387,996
Capital expenditures $ 2,874,681 $ 475,382 $ 0 $ 3,350,063
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
1996
----------------------------------------------------------------
Intercompany Consolidated
Telephone Internet Elimination Total
----------- ---------- ------------ ------------
Revenues from:
<S> <C> <C> <C> <C>
Unaffiliated customers $17,099,794 $ 739,236 $ 0 $17,839,030
Intersegment revenues 18,371 0 (18,371) 0
Total revenues 17,118,165 739,236 (18,371) 17,839,030
Operating expenses 10,180,680 998,682 (18,371) 11,160,991
Depreciation 2,151,147 120,562 0 2,271,709
Federal income taxes 1,285,705 (129,203) 0 1,156,502
Other income (expenses) (154,347) 0 0 (154,347)
Net income $ 3,346,286 $(250,805) $ 0 $ 3,095,481
Assets $30,783,854 $ 821,572 $(1,361,846) $30,243,580
Capital expenditures $ 2,351,589 $ 592,480 $ 0 $ 2,944,069
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors February 4, 1999
Warwick Valley Telephone Company
P.O. Box 592
Warwick, New York 10990
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Warwick Valley
Telephone Company as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warwick Valley
Telephone Company as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
(Signed) BUSH & GERMAIN, P.C.
- -----------------------------
Bush & Germain, P.C.
Syracuse, New York
19
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS AND OFFICERS
[page of photos]
<S> <C> <C> <C>
Howard Conklin, Jr. Henry L. Nielsen, Jr. Fred M. Knipp Philip S. Demarest
Chairman of the Board Vice Chairman of the Board Board Director, Board Director,
of the Company of the Company, President, President & CEO Retired, Former Vice
Nielsen Construction Co., of the Company President, Secretary &
Inc., Warwick, N.Y. Treasurer of the
Company
Earl V. Barry Wisner H. Buckbee Joseph E. DeLuca, M.D. Corinna S. Lewis
Board Director, Board Director, Board Director, Board Director,
Retired, Former Vice President, Wisher Farm, Physician, Vernon Retired Public Relations
President of the Company Inc., Warwick, N.Y. Urgent Care Center, Consultant
Vernon, N.J.
Robert J. DeValentino Herbert Gareiss, Jr. Larry Drake Robert A. Sieczek
Board Director, Vice President of the Vice President of the Treasurer of the
Executive Director Horton Company Company Company
Healthcare Foundation,
Middletown, N.Y.
Barbara Barber Colleen Shannon Bonnie Jackowitz Dorinda Masker
Secretary of the Assistant Secretary of Assistant Secretary of Assistant Treasurer of
Company the Company the Company the Company
</TABLE>
20
<PAGE>
<TABLE>
PERFORMANCE HIGHLIGHTS
<CAPTION>
- ---------------------------------- ------------------------------------------------------------------------------------
For years ended or at December 31, 1998 1997 1996 1995 1994
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Total revenues $ 21,362,100 $ 19,796,696 $ 17,874,115 $ 14,969,872 $ 13,570,409
Telephone operating revenues 16,189,377 15,590,455 15,161,873 13,315,940 12,277,948
Total expenses 14,409,432 13,395,700 12,406,564 11,022,037 10,165,019
Telephone operating expenses 11,079,344 10,081,196 9,761,435 8,217,733 8,850,222
Net income 4,042,497 3,683,709 3,095,481 2,153,372 1,749,450
Total assets 33,241,392 31,387,996 30,243,580 29,418,023 27,657,579
Current assets 6,255,355 5,919,948 5,777,625 5,975,482 4,690,034
Current liabilities 4,068,365 4,502,782 3,723,691 4,720,240 3,801,653
Long-term obligations 7,000,000 7,000,000 7,000,000 7,000,000 7,370,000
Percentage of debt to
total capital 27.4 33.3 31.96 36.07 38.3
Shareholders' equity 19,571,919 17,203,139 16,710,548 14,744,212 13,499,242
COMMON STOCK DATA
Income applicable to
common stock 4,017,497 3,658,709 3,070,481 2,128,372 1,724,450
Income per share* 2.21 1.97 1.65 1.15 .94
Book value* 10.51 9.01 8.69 7.69 7.08
Cash dividends per
common share* 1.12 .93 .65 .58 .56
Shareholders of record 648 616 612 607 591
Shares outstanding* 1,813,792 1,853,298 1,865,091 1,852,752 1,836,744
GENERAL
Access lines in service 26,786 25,154 23,719 22,132 21,126
Carrier access minutes 151,797,771 138,984,054 150,708,737 134,534,480 125,081,670
*Adjusted for 3-for-1 common stock split in 1997.
</TABLE>
CONCERNING THE COMPANY'S COMMON STOCK
On April 28, 1998 Warwick Valley Telephone Company's common stock began
trading on the NASDAQ National Market under the symbol WWVY. Private sales are
also made by holders of the Company's common stock from time to time. At March
1, 1999 there were 648 holders of the Company's common stock.
The Company has paid consecutive cash dividends on its common stock
quarterly since April 1, 1931 and semi-annually from July 1, 1907 until December
31, 1930. The practice of the Company has been to reinvest a substantial portion
of its earnings in its capital plant. While the present intention of the Board
of Directors is to continue declaring cash dividends, future dividends will
necessarily depend on the Company's earnings, capital requirements, developments
in the telephone industry and general economic conditions, among other factors.
In 1997, the Company paid a dividend on its common stock of $.93 per share. In
1998, the common stock dividend was $1.12 per share.
The NASDAQ high and low bid prices for the Company's common stock for the
second, third and fourth quarters of 1998 were as follows:
PRICE OF THE COMPANY'S COMMON STOCK
QUARTER ENDED
June 30, September 30, December 31,
1998 1998 1998
---- ---- ----
High $43.50 $40.00 $42.25
Low $37.25 $36.125 $36.50
21
BUSH & GERMAIN, PC
CERTIFIED PUBLIC ACCOUNTANTS
901 LODI STREET
SYRACUSE, NEW YORK 13203
PHONE: (315) 424-1145
CONSENT OF INDEPENDENT AUDITORS
February 4, 1999
We consent to the incorporation by reference in this Annual Report (Form 10-K)
for the year ended December 31, 1998 of Warwick Valley Telephone Company of our
report dated February 4, 1999, included in the 1998 Annual Report to
Shareholders of Warwick Valley Telephone Company.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-46836) pertaining to the Warwick Valley Telephone Company of
our report dated February 4, 1999 with respect to the consolidated financial
statements of Warwick Valley Telephone Company incorporated herein by reference
and our report dated February 4, 1999 with respect to schedules of Warwick
Valley Telephone Company included in this Annual Report (Form 10-K) for the year
ended December 31, 1998.
Bush & Germain, P.C.
Syracuse, New York
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 24,466,642
<OTHER-PROPERTY-AND-INVEST> 2,302,747
<TOTAL-CURRENT-ASSETS> 6,255,355
<TOTAL-DEFERRED-CHARGES> 216,648
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 33,241,392
<COMMON> 3,330,861
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 22,352,209
<TOTAL-COMMON-STOCKHOLDERS-EQ> 25,683,070
0
500,000
<LONG-TERM-DEBT-NET> 7,000,000
<SHORT-TERM-NOTES> 400,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 3,489,183
<GROSS-OPERATING-REVENUE> 21,317,791
<INCOME-TAX-EXPENSE> 1,588,333
<OTHER-OPERATING-EXPENSES> 1,412,839
<TOTAL-OPERATING-EXPENSES> 14,409,432
<OPERATING-INCOME-LOSS> 3,907,187
<OTHER-INCOME-NET> 770,135
<INCOME-BEFORE-INTEREST-EXPEN> 4,677,322
<TOTAL-INTEREST-EXPENSE> 634,825
<NET-INCOME> 4,042,497
25,000
<EARNINGS-AVAILABLE-FOR-COMM> 4,017,497
<COMMON-STOCK-DIVIDENDS> 2,031,140
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 6,321,843
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 0
</TABLE>
