-----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, HH88tri8ulXhF/kDL8fwPCU4qMnAw0ivZ4Yh9bbKd8xwvlIZs/FEcs7YIDPZX+8M a9NOHj1gVz2x60idT8Tgww== 0000950110-99-000458.txt : 19990403 0000950110-99-000458.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950110-99-000458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 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: SEC FILE NUMBER: 000-11174 FILM NUMBER: 99583898 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, 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. -- 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 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 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 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 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 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 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 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 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
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: 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
- ---------- (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, 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 EX-13 2 ANNUAL REPORT 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 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 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 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 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 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
CONSOLIDATED BALANCE SHEET ASSETS 1998 1997 CURRENT ASSETS ----------- ----------- 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
The accompanying notes are an integral part of the financial statements. 6 CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31:
1998 1997 1996 ----------- ----------- ----------- 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
The accompanying notes are an integral part of the financial statements. 7 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Treasury Preferred Common Retained Stock Stock Stock Earnings Total ----------- ----------- ----------- ----------- ----------- 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
The accompanying notes are an integral part of the financial statements. 8 CONSOLIDATED STATEMENT OF CASH FLOWS
1998 1997 1996 ----------- ----------- ----------- 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
The accompanying notes are an integral part of the financial statements. 9 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 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:
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: 1998 1997 ----------- ----------- 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
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:
1998 1997 1996 ----------- ----------- ----------- 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
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 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:
1998 1997 ------------------------ ------------------------ Redemption Redemption Price Plus Price Plus First Mortgage Bonds Amount Premium Amount Premium -------------------- ----------- ---------- ----------- ---------- 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
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 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.
1998 1997 1996 ----------- ----------- ----------- 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
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 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:
Pension Benefits Postretirement Benefits ----------------------------------------- ----------------------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- --------- --------- --------- 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 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 ----------- ----------- ----------- ----------- 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
14
Postretirement Pension Benefits Benefits ------------------------ ------------------ 1998 1997 1998 1997 --------- --------- ------- ------- 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
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 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 Nonoperating income (expense) for the years ended December 31, are as follows:
1998 1997 1996 ---- ---- ---- 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
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 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
---------------------------------------------------------------- 1998 ---------------------------------------------------------------- Intercompany Consolidated Telephone Internet Elimination Total ----------- ----------- ------------ ------------ Revenues from: 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
---------------------------------------------------------------- 1997 ---------------------------------------------------------------- Intercompany Consolidated Telephone Internet Elimination Total ----------- ----------- ------------ ------------ Revenues from: 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
18
---------------------------------------------------------------- 1996 ---------------------------------------------------------------- Intercompany Consolidated Telephone Internet Elimination Total ----------- ---------- ------------ ------------ Revenues from: 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
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
BOARD OF DIRECTORS AND OFFICERS [page of photos] 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
20 PERFORMANCE HIGHLIGHTS
- ---------------------------------- ------------------------------------------------------------------------------------ For years ended or at December 31, 1998 1997 1996 1995 1994 - ---------------------------------- ------------ ------------ ------------ ------------ ------------ 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.
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 EX-23 3 CONSENT OF INDEPENDENT AUDITORS 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 EX-27 4 FINANCIAL DATA SCHEDULE
UT 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 24,466,642 2,302,747 6,255,355 216,648 0 33,241,392 3,330,861 0 22,352,209 25,683,070 0 500,000 7,000,000 400,000 0 0 0 0 0 0 0 3,489,183 21,317,791 1,588,333 1,412,839 14,409,432 3,907,187 770,135 4,677,322 634,825 4,042,497 25,000 4,017,497 2,031,140 0 6,321,843 2.23 0
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