-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tm/VVRql1aiXH0Lh70dSsunx/CsDCOvC3u4nFjxlochegUpqgauf+AOhtW6kT/0y pWKyATTQM+6PjFHgvgMPhQ== 0000950110-97-000553.txt : 19970401 0000950110-97-000553.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950110-97-000553 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARWICK VALLEY TELEPHONE CO CENTRAL INDEX KEY: 0000104777 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 141160510 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11174 FILM NUMBER: 97571056 BUSINESS ADDRESS: STREET 1: 47 49 MAIN ST CITY: WARWICK STATE: NY ZIP: 10990 BUSINESS PHONE: 9149861101 MAIL ADDRESS: STREET 1: 47 49 MAIN ST STREET 2: PO BOX 592 CITY: WARWICK STATE: NY ZIP: 10990 10-K 1 FORM 10-K 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, 1996 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 X NO --- --- Aggregate market value of voting stock held by non-affiliates as of March 20, 1996 - (no organized market exists) Common shares outstanding, March 20, 1997 - 621,771 DOCUMENTS INCORPORATED BY REFERENCE Name Incorporated Into Annual Report to Shareholders for the year ended December 31, 1996 Parts II and IV Proxy statement for the 1997 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 28. 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 14,634 access lines in New York State and 8,739 in New Jersey at December 31, 1996. 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 (10,082 access lines), Florida (3,135 access lines) and Pine Island (1,417 access lines), New York and Vernon (6,178 access lines) and Upper Greenwood Lake (2,561 access lines), New Jersey. The Company's service area is primarily rural and has an estimated population of 50,000. In 1996, 22,297,227 toll calls were made on the Company's system, representing an increase of 12.5% from 19,817,462 in 1995. Business customers represent 21.8% 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 NYNEX Mobile), and the other limited partners are Highland Telephone Company, Sylvan Lake 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 1997. The partnership began offering cellular service in both counties in February 1988. The partnership's pre-tax income for the year ended December 31, 1996 was $8,885,000, and the Company's share of that pre-tax income was $666,375. 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, 1996, WVMT had a pre-tax profit of $16,417. 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 1996 of $376,585. 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 will make it unnecessary for its member companies to rely on outside companies for these services and may also offer services to companies who are not members, creating a potential source of additional revenue. The NYSINET network began partial operations during 1996 and is expected to be fully in operation in 1997. 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 loss of $380,008 in 1996. 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 NYNEX, 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. 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 are the regional toll areas in both states. Regional toll competition was implemented in New York on January 1, 1997 and is expected to be implemented in New Jersey in May 1997. The competition in these areas is expected to have the effect of reducing Warwick's revenues. The extent of such reductions cannot yet be determined, but is expected to be small in New York, where carrier access is the main revenue source. In the ongoing New Jersey proceeding, the Company has urged that it be allowed to realign its local, toll and access rates to prevent a shortfall which could result from the loss of a significant portion of the regional toll market. Currently the Company's revenues from toll and access in the intrastate New Jersey market approximate $2,100,000. The effects of competition will be felt both in market share retained by the Company and the level of its toll rates required in order to remain competitive. Although any loss of toll revenue will be partially offset by increased access revenue, the current level of access rates will also be reduced. 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 as listed in this section, to compete in various markets, 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. WVMT competes against Bell Atlantic-NYNEX Mobile Communication Retail Company, Orange County Cellular Telephone Corporation and others offering either cellular service or the sale and installation of cellular equipment. The Company currently provides access to the national and international -2- 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 NYNEX and 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 a level of growth which exceeds Management's expectations. If customer growth continues and current levels of pricing can be maintained, profitability is anticipated during 1997. Whether growth and pricing levels can be maintained depends, in part, on the actions of existing competitors and on the possible entry into the market of new competitors. Should NYSINET offer services to non-members, WVN will indirectly be competing against NYNEX and others. STATE AND FEDERAL REGULATIONS 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 69.5% 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 is obligated to make contributions to a long-term support fund of the National Exchange Carrier Association. During 1996, the Company paid approximately $61,000 to that fund. The Company's contributions to the fund are expected to be approximately $65,000 in 1997. Such fund contributions are considered as part of the Company's cost of providing access services and are recoverable from inter-exchange carriers that use the Company's network. 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 toll carriers of which the Company will be one in May, 1997 when regional toll competition is implemented. 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 -3- 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. The Tax Reform Act of 1986, while reducing the potential liability of the Company for income taxes, also affects the rates the Company is permitted to charge to customers. The NJBPU ruled that any reduction of tax liability must be passed on to the Company's subscribers in the form of reduced rates. Rate reductions in the New Jersey exchanges commenced July 1, 1987 and approximate $180,000 on an annual basis. The NYSPSC took the position that all benefits realized from such reduction is tax liability should be deferred. The Company's deferred tax savings were applied during 1994 through 1996, and will be completed during 1997. These applications were used as an offset against amounts the NYSPSC requires the Company to contribute to a fund for the payment of post-retirement health benefits for the Company's employees. For further information concerning compensation for toll usage see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Shareholders filed as an exhibit hereto. EMPLOYEES The Company has 106 full-time and part-time employees, including 83 non-management employees. Forty-two (42) 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-eight (28) non-management employees (primarily plant employees) are represented by Local 503 of the International Brotherhood of Electrical Workers (IBEW). The current three-year contract between the Company and Local 503 expires on April 30, 1998. Twelve Online help desk technicians are not classified as being represented by either union at this time. Their status was the subject of a unit clarification hearing held before a hearing officer of the National Labor Relations Board in December, 1996. Both unions participated as did the Company. A decision in the matter is expected in the near future. EXECUTIVE OFFICERS AND REGISTRANT Name Age Position and Period Served Fred M. Knipp 66 President since 1988 Philip S. Demarest 60 Vice President since 1989; Vice President- Finance and Administration 1977-1989; Secretary since 1972; Treasurer since 1989; Assistant Treasurer 1982-1989 Herbert Gareiss, Jr. 51 Vice President since 1989; Treasurer 1982- 1989; Assistant Treasurer since 1989; Assistant Secretary since 1980 There are no arrangements between any officer and any other person pursuant to which he was selected an officer. 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 -4- Company's other exchanges. Of the Company's investment in telephone plan in service, central office equipment represents approximately 44.0%; connecting lines and related equipment, 36.7%; telephone instruments and related equipment, 3.7%; land and buildings, 6.3%; and other telephone plant, 9.3%. A substantial portion of the Company's properties is subject to the lien of the Company's Indenture or Mortgage. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (1) Item 9. DISAGREEMENTS 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, 1996, which pages have been incorporated. 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 1997 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, 1996, are incorporated herein by reference: Reference Pages Annual Report On Form 10-K Consolidated Statement of Income - Years Ended December 31, 1996, 1995 and 1994 16 Consolidated Balance Sheet - December 31, 1996 and 1995 15 Consolidated Statement of Stockholders' Equity - Years Ended December 31, 1996, 1995 and 1994 17 Consolidated Statement of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 18 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: 19-26 Report of Independent Certified Public Accountants on Financial Statement Schedules 24 Schedules: VIII. Valuation and Qualifying Accounts 8 -6- 3. Exhibits: Exhibit No. Description of Exhibit Reference 3(a) Articles of Incorporation, Incorporated by reference as amended to Exhibit 3(a) to the Company's Annual Report of Form 10-K for 1990 3(b) By-Laws Incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for 1993 4(a) Form of Common Stock Incorporated by reference to Certificate Exhibit 4(a) to the Company's Annual Report on Form 10-K for 1990 4(b) Loan Agreement, dated Incorporated by reference to June 1,1976, with Stromberg- Exhibit 4(C) to the Company's Carlson Corporation Registration Statement on Form 10 (File No. 0-11174), dated April 29, 1983 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 1990 dated November 1, 1952, including form of 9.05% First Mortgage Bond, Series I, Due May 1, 2000 4(e) Ninth Supplemental Incorporated by reference 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 1993 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, 1996. -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 26, 1997 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 26th day of March, 1997. 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 _______________________________________ Director Corinna S. Lewis _______________________________________ Director Victor J. Marotta /s/ HENRY L. NIELSEN, JR. _______________________________________ Director Henry L. Nielsen, Jr. -8- BUSH & GERMAIN, PC CERTIFIED PUBLIC ACCOUNTANTS 901 LODI STREET SYRACUSE, NEW YORK 13203 PHONE: (315) 424-1145 CONSENT OF INDEPENDENT AUDITORS February 8, 1997 We consent to the incorporation by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996 of Warwick Valley Telephone Company of our report dated February 8, 1997, included in the 1996 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 8, 1997 with respect to the consolidated financial statements of Warwick Valley Telephone Company incorporated herein by reference and our report dated February 8, 1997 with respect to schedules of Warwick Valley Telephone Company included in this Annual Report (Form 10-K) for the year ended December 31, 1996. Bush & Germain, P.C. Syracuse, New York /26 -9- WARWICK VALLEY TELEPHONE COMPANY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995 and 1994 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 1996 $65,154 $35,085 $15,695 $50,780 $65,154 Year 1995 $65,155 $59,956 $18,509 $78,466 $65,154 Year 1994 $65,155 $25,144 $10,262 $35,406 $65,155 (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- EXHIBIT INDEX Exhibit No. Description of Exhibit Page 13 Annual Report to Shareholders for the year ended December 31, 1996 together with separate manually executed Independent Auditor's Report. 23 Consent of Independent Auditor Exhibit 3(a) is incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Exhibit 3(b) is incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. Exhibit 4(a) is incorporated by reference to Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Exhibits 4(b) and 4(c) are incorporated by reference to Exhibits 4(b) and 4(c), respectively, 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 4(e) is incorporated by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. -11- EX-13 2 ANNUAL REPORT 1996 PRESIDENT'S SUMMARY 1996 was another prosperous year for Warwick Valley Telephone Company. This was the fourth straight year with significant growth in earnings; they have more than doubled in those four years. Dividends have increased and stock value has increased substantially. One result is that we are proposing a stock split to reduce the per share market price and enhance stock marketability. Earnings have increased from our newer services as expected, but also from ordinary telephone services. Warwick Valley Long Distance was again the profit leader of new services. In telephone operations our revenue increase far exceeded the expense increase reflecting much higher productivity. Our overall earnings were understandably somewhat depressed by Warwick Online's start-up costs; however, by year's end WOL also was operating Oin the blackO and stands ready to make a significant contribution to 1997 earnings. Growth has had many dimensions. There has been some growth in the number of customers, but much of our growth in telephone lines has come from additional lines per customer. A typical new residential customer today has two or three telephone lines, a facsimile line and a computer line. We are now routinely installing six lines into each new dwelling. Long distance and ancillary telephone services have grown proportionally. Online computer service growth has been dramatic and has also added to the need for additional lines. The demand for online service as access to the Internet has exploded as more people are buying or upgrading computers, as more people are learning about the Internet and as the Internet is developing more useful information. In 1996 Warwick Online's subscriber count increased fivefold from 1,000 to over 5,000. Almost 2/3 of our Online subscribers are outside our telephone service area. Our progress appears particularly significant in the context of our changed business environment. All of our new services and many of the traditional telephone services are now offered in a highly competitive market. Long distance telephone service has been competitive for us since 1991. On January 1, 1997 competition was introduced in our New York market for Regional toll service (generally calls within the same area code) and we now have eleven competitors. We expect that in New Jersey later this year. State regulators are proceeding to implement rules for increased competition for all telecommunications as they and the Federal Communications Commission implement the Federal Telecommunications Act of 1996. The impact of these new regulations is still evolving but we are adapting well so far and I expect we will continue to do so. We generally believe that competition is good if it is not unfairly regulated by government. Our approach to competition is to become better competitors. Paging is a service that is making great strides. It is moving from being only emergency communication to becoming a popular way for the larger population to stay in touch. We therefore introduced paging as a WVT service and are now selling pagers and reselling pager service in our community. By most measures the Company is progressing well. We know that changes in regulation and advances in technology are also accompanied by changes in society that affect customer attitudes. We know that today's customers want choice and demand flawless service. We strive to provide both. Our services and products give more choice to customers and we are entering those competitive markets where we feel we have competence. Our employees are developing new skills and customer focus. Our managers are adapting new techniques to benefit from those employee skills and from information technology. We have maintained the level of investment needed to keep our facilities modern and we are planning ahead. I am quite confident in a successful future for this Company. -12- RESULTS OF OPERATIONS - 1996 vs. 1995 The Company's net income from all sources increased $942,109 (or 43.8%) to $3,095,481 for the twelve-month period ended December 31, 1996, as compared to the same period in 1995. Telephone operating revenues increased $1,855,932 (or 13.9%) to $15,161,873 for the year ended December 31, 1996, as compared to $13,315,940 for 1995, primarily as a result of a $1,631,781 (or 21.9%) increase in toll and access revenue. This increase resulted primarily from increased state and interstate access revenues of $1,397,767, increased federal subscriber line charges to end user customers of $79,087, and an increase in toll revenue of $88,401. Local revenues increased $286,322 (or 10.6%), primarily as a result of an increase in the number of access lines and increased use of newly marketed services. Miscellaneous revenues decreased $72,171 (or 2.3%), primarily as a result of a non-recurring revenue settlement received during 1995. Telephone operating expenses increased $543,702 (or 5.9%) to $9,761,435 at December 31, 1996, as compared to $9,217,733 at year-end 1995. An increase in wages and benefits of $438,686 (or 7.5%) and an increase in depreciation expense of $118,376(or 5.8%) accounted for most of the increase. Non-operating income increased to $487,382 in 1996 from $305,200 in 1995. This increase resulted largely from an increase in net income received from the Company's 7.5% interest in the Orange-Poughkeepsie Cellular Partnership, which increased by $248,243 after federal income tax. This was partially offset by an increase in the operating loss of Hometown Online, Inc. which lost $165,531 during its first full year of operation as opposed to a loss of $87,121 during 1995, when it commenced doing business. RESULTS OF OPERATIONS - 1995 vs. 1994 The Company's net income from all sources increased $403,923 (or 23.1%) for the twelve-month period ended December 31, 1995, as compared to the same period in 1994. Telephone operating revenues increased $1,037,992 (or 8.5%) to $13,315,940 for the year ended December 31, 1995, as compared to $12,277,948 for 1994, primarily as a result of increases in interstate access revenues of $401,200, miscellaneous revenues of $295,451 (including directory, rent, operator services and non-regulated revenues), and local revenues of $249,808 (primarily from newly-marketed services). Telephone operating expenses increased $367,511 (or 4.2%) to $9,217,733 at December 31, 1995, as compared to $8,850,222 at year-end 1994. Wage and benefit increases of $327,984 (or 6.0%) accounted for most of the overall increase. Non-operating income decreased to $305,200 in 1995 from $326,392 in 1994. Decreases in interest charged construction, interest income and other non-operating income (expense) were offset by increased net income from subsidiaries and decreased non-operating federal income taxes. -13- LIQUIDITY AND CAPITAL RESOURCES The Company ended 1996 with working capital of $2,053,934 as compared to $1,255,242 at December 31, 1995. This difference was largely due to a decrease in accounts payable of $758,397 and the fact that no current maturities of long term debt existed, compared to $370,000 at the end of 1995. The Company issued 4,471 shares of its common stock on April 1, 1996 to employees participating in retirement savings plans at $42.84 per share (a 15% discount from the appraised price of $50.40). Additional sales to employees are anticipated during 1997 and subsequent years. A purchase of 1,000 shares for the treasury took place during 1996 at $50.00 per share. No additional purchases are planned at this time. Pursuant to a NYSPSC order, the tax savings due to the general reduction in income tax liability of the Company made possible by the Tax Reform Act of 1986 attributable to New York State operations have been deferred. These tax savings were applied during 1996, and will continue until fully written off during 1997, as an offset against the costs of funding retiree health benefits. Reduced rates to reflect the tax savings were ordered in New Jersey beginning July 1, 1987. The Company holds a 7.5% limited partnership interest in the cellular mobile telephone partnership which is licensed to operate as the wire-line licensee in both Orange and Dutchess Counties, New York. Since the inception of the partnership, the Company has made capital contributions of $249,750. No further capital contributions are currently scheduled. A wholly-owned subsidiary of the Company, Warwick Valley Mobile Telephone Company (WVMT), resells cellular telephone service to the Company's subscribers as well as to others. WVMT also sells and installs cellular telephone sets. The Company has invested approximately $326,000 in WVMT since its operations began on April 1, 1989. A second wholly-owned subsidiary, Warwick Valley Long Distance Company, Inc. (WVLD), began business in December 1993 in New Jersey and in May 1994 in New York. WVLD resells toll service to customers of Warwick Valley Telephone. WVLD achieved positive retained earnings prior to the end of 1994. 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 will make it unnecessary for its member companies to rely on outside companies for these services and may also offer services to companies who are not members, creating a potential source of additional revenue. The NYSINET network began partial operation during 1996 and is expected to be fully in operation during 1997. 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. The Company has invested approximately $1,200,000 in Online since its operations began in July 1995. Online was approaching break-even on a cash flow basis during 1996 and is expected to show positive cash flow during 1997. -14- ASSETS December 31, 1996 1995 CURRENT ASSETS: Cash $ 728,520 $ 482,049 Accounts receivable - net of reserve for uncollectibles 3,290,714 3,659,990 Materials and supplies 1,451,858 1,516,358 Prepaid expenses 306,532 317,085 5,777,625 5,975,482 NONCURRENT ASSETS: Unamortized debt issuance expense 61,378 75,170 Other deferred charges 227,699 140,327 Investments 1,354,390 1,076,915 1,643,467 1,292,412 PROPERTY, PLANT AND EQUIPMENT:(Notes 1, 2 and 5) Plant in service 34,578,033 32,352,371 Plant under construction 1,444,982 1,032,206 36,023,015 33,384,577 Less: Depreciation reserve (Notes 1 and 3) 13,200,526 11,234,448 22,822,489 22,150,129 TOTAL ASSETS $30,243,580 $29,418,023 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities-long-term debt 0 $ 370,000 Notes payable (Note 6) 850,000 950,000 Accounts payable 1,600,944 2,359,341 Advance billing and payments 188,865 206,986 Customer deposits 153,143 173,717 Accrued taxes 275,241 108,409 Accrued interest 75,829 84,573 Other accrued expenses 579,669 467,215 3,723,691 4,720,241 LONG TERM DEBT (Note 5) 7,000,000 7,000,000 DEFERRED CREDITS: (Notes 1 and 7) Accumulated deferred federal income taxes 2,313,224 2,250,073 Unamortized investment tax credits 252,427 312,517 Other deferred credits 243,690 390,980 2,809,341 2,953,570 STOCKHOLDERS EQUITY: (Notes 5, 12, 13 and 14) 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: 720,000 Issued 648,571(1996) and 644,757 (1995) 2,439,663 2,281,238 Retained earnings 14,596,085 12,738,174 17,535,748 15,519,412 Less: Treasury stock at cost, 26,800 (1996) and 25,800 (1995) shares 825,200 775,200 16,710,548 14,744,212 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,243,580 $ 29,418,023 The accompanying notes are an integral part of the financial statements. -15- Years ended December 31, 1996 1995 1994 OPERATING REVENUES: Local network service $ 2,984,805 $ 2,698,483 $ 2,448,677 Network access and long distance network service 9,080,619 7,448,838 6,956,102 Miscellaneous (Note 1) 3,096,449 3,168,620 2,873,169 15,161,873 13,315,941 12,277,948 Less: Provision for uncollectibles (35,085) (59,956) (25,144) Total operating revenues 15,126,788 13,255,985 12,252,804 OPERATING EXPENSES: Plant specific 2,339,213 2,128,966 1,926,005 Plant non-specific: Depreciation 2,150,240 2,031,864 1,801,722 Other 590,210 580,838 742,732 Customer operations 2,970,626 2,780,319 2,651,856 Corporate operations 1,711,146 1,695,746 1,727,907 Total operating expenses 9,761,435 9,217,733 8,850,222 OPERATING TAXES: Federal income taxes (Note 7) 1,152,084 584,466 312,507 Property, revenue and payroll 947,105 960,718 1,023,023 Total operating taxes 2,099,189 1,545,184 1,335,530 Operating income 3,266,164 2,493,068 2,067,052 NONOPERATING INCOME (EXPENSES) - NET: (Note 11) 487,382 305,200 326,392 Income available for fixed charges 3,753,546 2,798,268 2,393,444 FIXED CHARGES: Interest on funded debt 575,581 593,756 619,064 Other interest charges 68,692 31,790 16,367 Amortization 13,792 19,350 8,563 Total fixed charges 658,065 644,896 643,994 Net Income 3,095,481 2,153,372 1,749,450 PREFERRED STOCK 25,000 25,000 25,000 INCOME APPLICABLE TO COMMON STOCK $ 3,070,481 $ 2,128,372 $ 1,724,450 NET INCOME PER AVERAGE SHARE OF OUTSTANDING COMMON STOCK (Note 12) $ 4.94 $ 3.45 $ 2.82 AVERAGE SHARES OF COMMON STOCK OUTSTANDING (Note 12) 621,697 617,584 612,248 The accompanying notes are an integral part of the financial statements. -16- Years ended December 31, 1996, 1995 and 1994 Treasury Preferred Common Retained Stock Stock Stock Earnings Total Balance, December 31, 1993 ($775,200) $500,000 $1,922,347 $10,989,170 $12,636,317 Net income for the year ----- ----- ----- 1,749,450 1,749,450 Dividends: Common ($1.68 per share) ----- ----- ----- (1,028,820) (1,028,820) Preferred ($5.00 per share) ----- ----- ----- (25,000) (25,000) Sale of Common Stock ----- ----- 167,295 ----- 167,295 Balance, December 31, 1994 ($775,200) $500,000 $2,089,642 $11,684,800 $13,499,242 Net income for the year ----- ----- ----- 2,153,372 2,153,372 Dividends: Common ($1.74 per share) ----- ----- ----- (1,074,998) (1,074,998) Preferred ($5.00 per share) ----- ----- ----- (25,000) (25,000) Sale of Common Stock ----- ----- 191,596 ----- 191,596 Balance, December 31, 1995 ($775,200) $500,000 $2,281,238 $12,738,174 $14,744,212 Net income for the year ----- ----- ----- 3,095,481 3,095,481 Dividends: Common ($1.95 per share) ----- ----- ----- (1,212,570) (1,212,570) Preferred ($5.00 per share) ----- ----- ----- (25,000) (25,000) Sale of Common Stock ----- ----- 158,425 ----- 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 The accompanying notes are an integral part of the financial statements. -17- Years ended December 31, 1996 1995 1994 CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 3,095,481 $ 2,153,372 $ 1,749,450 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,164,032 2,051,214 1,811,191 Deferred income tax and investment tax credit (144,229) (33,114) (16,238) Interest charged to construction (25,272) (32,372) (123,482) Income from partnership (666,375) (290,250) (293,500) Change in assets and liabilities: (Increase) Decrease in accounts receivable 369,276 (970,903) (243,517) (Increase) Decrease in materials and supplies 64,500 (223,267) (252,651) (Increase) Decrease in prepaid expenses 10,553 (31,266) 23,312 (Increase) Decrease in deferred charges (87,372) 22,289 (74,011) Increase (Decrease) in accounts payable (758,397) 592,564 93,104 Increase (Decrease) in customers' deposits (20,574) (83,509) 57,665 Increase (Decrease) in advance billing and payment (18,121) 4,628 15,497 Increase (Decrease) in accrued expenses 158,088 77,271 (211,188) Increase (Decrease) in other liabilities 112,454 27,632 283,133 Net cash provided by operating activities 4,254,044 3,264,289 2,818,765 CASH FLOW FROM INVESTING ACTIVITY: Purchase of property, plant and equipment (2,822,600) (1,988,826) (4,143,323) Interest charged to construction 25,272 32,372 123,482 Distribution from partnership 393,750 ---- 202,500 Changes in other investments (4,850) (216,589) (2,345) Net cash used in investing activities (2,408,428) (2,173,043) (3,819,686) CASH FLOW FROM INVESTING ACTIVITIES: Increase (Decrease) in Notes Payable (100,000) 50,000 900,000 Repayment of long-term debt (370,000) (120,000) (120,000) Dividends (1,237,569) (1,099,998) (1,053,820) Sale of Common Stock 158,425 191,596 167,295 Purchase of Treasury Stock (50,000) ---- ---- Increase in unamortized debt issue expense ---- (52,832) ---- Net cash provided by (used in) financing activities (1,599,144) (1,031,234) (106,525) Increase (Decrease) in cash and cash equivalents 246,471 60,012 (1,107,446) Cash and cash equivalents at beginning of year 482,049 422,037 1,529,483 Cash and cash equivalents at end of year $ 728,520 $ 482,049 $ 422,037 The accompanying notes are an integral part of the financial statements. -18- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. 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 intercompany transactions and balances have been eliminated in the consolidated financial statements except for the billing of certain intercompany expenses, which have not been eliminated in order to accurately state the income from the telephone company and subsidiary operations. 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 6.53%, 6.47%, and 6.25%, for the years 1996, 1995 and 1994, 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: 1996 1995 Investment in cellular partnership $ 1,327,110 $ 1,054,485 Other investments 27,280 22,430 $ 1,354,390 $ 1,076,915 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. CASH FLOW STATEMENT Cash and cash equivalents consist 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, 1996 the amount of cash in excess of these F.D.I.C. insured limits was approximately $535,000. The following is a list of interest and federal income tax payments for each of the three years in the period ending December 31, 1996: 1996 1995 1994 Interest $ 635,528 $ 625,259 $ 613,969 Federal Income Taxes $1,343,151 $ 615,000 $ 717,037 -19- 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, 1996 and 1995 the Material and Supplies inventory consisted of the following: 1996 1995 Inventory for outside plant construction $ 322,440 $ 301,022 Inventory for central office equipment 431,946 544,109 Inventory of deregulated equipment held for sale or lease (principally PBX and station equipment) 697,472 671,227 $1,451,858 $1,516,358 RETIRMENT 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: 1996 1995 1994 Directory advertising revenue $ 854,940 $ 784,365 $ 738,231 Rent revenue 199,021 193,310 178,585 Billing and collection revenue 1,153,032 1,105,198 1,109,344 Deregulated revenues 467,669 441,352 428,693 Other operating revenues 421,787 644,395 418,316 $ 3,096,449 $3,168,620 $2,873,169 2. PROPERTY, PLANT AND EQUIPMENT Plant in service, at cost, consisted of the following at December 31: 1996 1995 Land, buildings, furniture and office equipment $ 4,172,633 $ 3,959,825 Vehicles and work equipment 1,104,873 1,089,133 Central office equipment 14,824,564 14,170,386 Customer premise equipment 1,260,294 1,238,875 Outside plant equipment 12,402,005 11,672,967 Other equipment 813,664 221,185 $34,578,033 $32,352,371 3. DEPRECIATION RESERVE Depreciation reserve consisted of the following at December 31: 1996 1995 Buildings, furniture and office equipment $ 1,644,932 $ 1,340,689 Vehicles and work equipment 653,551 619,792 Central office equipment 6,348,878 5,215,246 Customer premise equipment 1,171,241 1,154,728 Outside plant equipment 3,249,002 2,892,539 Other equipment 132,922 11,454 $13,200,526 $11,234,448 4. ACCOUNTS RECEIVABLE The Company uses the reserve method to record uncollectible accounts. The reserve for uncollectibles was $65,155 as of December 31, 1996 and 1995 respectively. -20- 5. LONG TERM DEBT Long-term debt consisted of the following at December 31: 1996 1995 Redemption Redemption Price Plus Price Plus First Mortgage Bonds Amount Premium Amount Premium 9.50 % Series "F" (due 09/01/1996) $ 0 0.00% $ 260,000 100.00% 8.75 % Series "G" (due 12/15/1996) 0 0.00% 110,000 100.00% 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 7,370,000 Less: Current maturities of Long-Term Debt 0 370,000 Total Long-Term Debt $7,000,000 $7,000,000 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 1996 for long-term debt outstanding as of December 31, 1996 are as follows: 1997 ----- 2000 $ 3,000,000 1998 ----- 2001 ----- 1999 ----- 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 April, 1997. Any borrowings under this line of credit are on a demand basis and are without restrictions, at a variable lending rate. The total credit available at December 31, 1996 was $1,650,000. The balances outstanding as of December 31, 1996 and 1995 were $850,000 and $950,000 respectively, bearing interest rates of 7.75% and 8%. 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 rates to pre-tax income. The statutory tax rate of 34% applies to all three years. 1996 1995 1994 Operating federal income taxes: Current portion $1,301,825 $ 601,448 $ 345,433 Deferrals, net of reversals: Depreciation (18,393) 100,984 153,538 Cost of removal 1,275 2,928 (11,768) Tax savings due to TRA of 1986 (89,760) (89,760) (89,760) Other 8,137 19,866 (33,936) Investment tax credit, net of amortization (51,000) (51,000) (51,000) (149,741) (16,982) (32,926) Operating F.I.T. expense $1,152,084 $ 584,466 $ 312,507 -21- 1996 1995 1994 Nonoperating federal income taxes: Current portion $ 228,956 $ 89,917 $ 102,417 Deferrals, net of reversals: (9,090) (9,089) (3,875) Nonoperating F.I.T. expense 219,866 80,828 98,542 F.I.T. included in income of subsidiary 4,418 45,947 115 Total F.I.T. expense, as reported 1,376,368 711,241 411,164 Reversals of deferred taxes 122,917 177,968 202,255 Tax savings of TRA of 1986, net 89,760 89,760 89,760 Other (68,617) (5,001) 31,430 FEDERAL INCOME TAX AT STATUTORY RATE $1,520,428 $ 973,968 $ 734,609 The following components comprise the net deferred tax liability reported as of December 31: 1996 1995 Deferred tax liabilities $2,443,262 $ 2,406,384 Deferred tax assets 130,038 156,311 Net deferred tax liability $2,313,224 $ 2,250,073 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 ratemaking 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. Any existing excess deferrals, generated from a change in tax rates, which will be passed on to customers of the Company's regulated operations in the future, have been reclassed as regulatory liabilities. 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 $176,404 and $202,170 as of December 31, 1996 and 1995, respectively. As reversals of the deferred tax balances occur in the future, these regulatory liabilities will also decrease. 8. PENSION PLANS Defined Benefit Pension Plan - 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. Contributions to the plan for 1996, 1995 and 1994 were $328,598, $329,807, and $80,309, respectively. The following table sets forth the combined plan's funded status and amounts recognized in the Company's statement of financial position as of December 31, 1996 and 1995: 1996 1995 Actuarial present value of benefit obligations: Accumulated benefit obligation: vested benefit $ 6,006,210 $ 6,019,582 non-vested benefit 9,650 4,528 $ 6,015,860 $ 6,024,110 Projected benefit obligation for service rendered to date $(7,505,941) $(7,602,508) Plan assets at fair value (bonds, real estate, mortgages and stocks) 7,460,136 6,429,016 Projected benefit obligation in excess of plan assets (45,805) (1,173,492) Unrecognized net loss (gain) from past experience different from that assumed and effects of changes in assumptions (807,762) 265,103 Prior service cost not yet recognized in net periodic pension cost 297,556 348,167 Unrecognized net transition obligation 266,319 319,582 Prepaid (accrued) pension cost $ (289,692) $ (240,640) Net pension cost for the years 1996, 1995 and 1994 include the following components: 1996 1995 1994 Service cost-benefits earned during the period $ 210,213 $ 168,557 $161,479 Interest cost on projected benefit obligation 524,866 506,037 474,519 Actual return on plan assets (962,583) (1,100,756) (30,662) Net amortization and deferral 605,154 752,328 (226,140) Net periodic pension cost $ 377,650 $ 326,166 $ 379,196 -22- A discount rate of 7.0% and 8.5% and a rate of increase in future compensation levels of 5.5% and 6.5% were used in determining the actuarial present value of the projected benefit obligations for 1996 and 1995, respectively. The expected long-term rate of return on assets was 7.75% and 9.0% for 1996 and 1995, respectively. There may be differences in the amount of pension expense as stated above and that recorded in these financial statements due to regulatory requirements. This difference would be recorded as a regulatory asset or liability and will be disposed of by the regulators at a future date. Defined Contribution Plan - 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. The Company contributes a matching contribution up to 5.0% of an eligible participant's compensation for management, clerical, traffic, and plant employees. 9. POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS The Company has adopted SFAS 106, "Employers' Accounting for Postretirement Benefits other than Pensions," which requires the cost of these benefits to be recognized over the service life of employees. 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. During 1996 the plan was redesigned which caused a significant decrease in future benefit obligations. 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 following table sets forth the plan's funded status reconciled with the amounts shown in the Company's balance sheet at December 31, 1996 and 1995. Accumulated postretirement benefit obligation: 1996 1995 Retirees $ (140,947) $ (364,378) Eligible active plan participants (558,425) (1,112,223) $ (699,372) $(1,476,601) Plan assets at fair value 680,072 456,361 Accumulated postretirement benefit obligation in excess of plan assets (19,300) (1,020,240) Unrecognized net loss (gain) 246,758 103,494 Unrecognized prior service costs 472,859 0 Unrecognized transition obligation 823,932 875,428 Prepaid (Accrued) postretirement benefit cost $1,524,249 $ (41,318) Net periodic postretirement benefit costs for 1996, 1995 and 1994 includes the following components: 1996 1995 1994 Service cost $ 65,873 $ 44,963 $ 42,975 Interest cost on accumulated postretirement benefit obligation 138,186 102,387 95,370 Actual return on plan assets (85,331) (52,234) (11,513) Amortization of transition obligation over 20 years 51,496 51,496 51,496 Net amortization and deferral 4,557 32,211 2,078 Net periodic postretirement benefit cost $ 174,781 $ 178,823 $ 180,406 For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by approximately $300,000 and the aggregate of the service and interest cost components of postretirement expense for the year then ended by approximately $35,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 7.0% and the expected long-term rate of return on plan assets was 8.5% and 7.5% for 1996 and 1995, respectively. 10. RELATED PARTY TRANSACTIONS The Company expended approximately $193,976, $204,565 and $187,036 during 1996, 1995and 1994, 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. -23- 11. NONOPERATING INCOME AND EXPENSES Nonoperating income (expense) for the years ended December 31, are as follows: 1996 1995 1994 Interest charged to construction $ 25,272 $ 32,372 $ 123,482 Interest income 462 513 17,082 Income from cellular partnership 666,375 290,250 293,500 Net income (loss) from subsidiaries 44,660 89,193 225 Other nonoperating income (expense) (29,521) (26,300) (9,355) Nonoperating federal income taxes (219,866) (80,828) (98,542) $ 487,382 $ 305,200 $ 326,392 12. EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding of 621,697, 617,584 and 612,248 for the years ended December 31, 1996, 1995 and 1994, respectively. 13. TREASURY STOCK The Company accounts for treasury stock using the cost method of accounting. 14. 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. 15. 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. Payments to the National Exchange Carrier Association during 1996 were $61,000 and the contribution for 1997 is expected to be $67,000. Effective October 1, 1996, the Company's contribution to the New York State Access Settlement Pool was frozen at $23,805 per month until the New York Public Service Commission determines a new method of providing support for universal service in rural, high cost areas of the state. A decision is anticipated during 1997. The amounts paid to these pools are considered part of the cost of providing access service to inter-exchange carriers and are included in the rates charged to them. 16. 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, after deducting current maturities, is estimated to be $7,460,000 at December 31, 1996, compared to a carrying value of $7,000,000. The fair value estimates were based on rates currently available from debt instruments with similar terms and maturities. The fair value of all other financial instruments is estimated by management to approximate the carrying value. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors February 6, 1997 Warwick Valley Telephone Company P.O. Box 592 Warwick, New York 10990 Independent auditor's report We have audited the accompanying consolidated balance sheets of Warwick Valley Telephone Company as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Bush & Germain, P.C. Syracuse, New York February 6, 1997 -24- BOARD OF DIRECTORS AND OFFICERS (page of photos) Philip S. Demarest Howard Conklin, Jr. Earl V. Barry Board Director, Chairman of the Board of Board Director, Vice President, the Company, Chairman of Retired, Former Vice Secretary & Treasurer of the Board, Conklin & President of the the Company Strong, Inc., Warwick, N.Y. Company Henry L. Nielsen, Jr. Fred M. Knipp Victor J. Marotta Vice Chairman of the Board Director, Board Director, Board of the Company, President & C.E.O. of Director of Tri-States President, Nielsen the Company Tankers of New Construction Co., Inc., of New York, Inc. Warwick, N.Y. Andover, N.J. Wisner H. Buckbee Joseph E. DeLuca, M.D. Corinna S. Lewis Board Director, Board Director, Board Director, President, Wisner Physician, Vernon Urgent Retired Public Farms, Inc., Care Center, Vernon, N.J. Relations Consultant Warwick, N.Y. Herbert Gareiss, Jr. Vice President of the Company -25- PERFORMANCE HIGHLIGHTS
For years ended or at December 31, 1996 1995 1994 1993 1992 SELECTED FINANCIAL DATA Total revenues * $17,946,698 $14,969,872 $13,570,409 $11,817,981 $10,949,082 Telephone operating revenues 15,161,873 13,315,940 12,277,948 11,162,239 10,377,034 Total expenses * 12,406,565 11,022,037 10,165,019 8,351,512 7,692,276 Telephone operating expenses 9,761,435 9,217,733 8,850,222 7,931,025 7,290,612 Net income 3,095,481 2,153,372 1,749,450 1,642,639 1,401,753 Total assets 30,243,580 29,418,023 27,657,579 25,792,681 23,010,828 Current assets 5,777,625 5,975,482 4,690,034 5,324,625 4,330,829 Current liabilities 3,723,691 4,720,240 3,801,653 2,663,442 4,373,441 Long-term obligations 7,000,000 7,000,000 7,370,000 7,490,000 3,610,000 Percentage of debt to total capital 31.96 36.07 38.3 37.6 31.2 Shareholders' equity 16,710,548 14,744,212 13,499,242 12,636,317 11,859,847 COMMON STOCK DATA Income applicable to common stock 3,070,481 2,128,372 1,724,450 1,617,639 1,376,753 Income per share 4.94 3.45 2.82 2.66 2.27 Book value 26.07 23.06 21.23 19.96 18.70 Cash dividends per common share 1.95 1.74 1.68 1.64 1.60 Shareholders of record 612 607 591 590 584 Shares outstanding 621,697 617,584 612,248 607,301 607,491 GENERAL Access lines in service 23,719 22,132 21,126 20,312 19,514 Carrier access minutes 150,708,737 134,534,480 125,081,670 115,645,770 88,039,170 * Including cellular shown as part of nonoperating income (expenses) on statement of income.
CONCERNING THE COMPANY'S COMMON STOCK Although private sales are made by holders of the Company's common stock from time to time, there is no established public trading market for the Company's common stock, and the Company is unable to say whether one will develop. At March 1, 1997, there were 612 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 1995, the Company paid a dividend on its common stock of $1.74 per share. In 1996, the common stock dividend paid was $1.95 per share. -26- EX-27 3 FDS --
UT YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 30,243,580 1,354,390 5,777,625 289,077 0 30,243,580 2,439,663 0 14,596,085 17,035,748 0 500,000 7,000,000 850,000 0 0 0 0 0 0 0 4,857,832 15,126,788 1,152,084 0 9,761,435 3,266,164 487,382 3,753,546 658,065 3,095,481 25,000 3,070,481 1,212,570 0 4,254,044 4.94 0
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