TABLE OF CONTENTS
Highlights 1
President's Summary 2
Management's Discussion 4
Consolidated Balance Sheet 6
Consolidated Statement
Of Income 7
Consolidated Statement of
Stockholders' 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
1999 1998
Total Revenues $23,185,929 $21,362,100
Net Income $ 5,581,616 $ 4,042,497
Earnings per Share $ 3.06 $ 2.21
Book Value $ 12.23 $ 10.51
Cash Dividend per
Common Share $ 1.34 $ 1.12
Access Lines in Service 28,935 26,786
Cellular Subscribers 719 851
Online Subscribers 21,535 15,841
WVLD Subscribers 9,642 9,000
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
[BAR CHART]
WHERE THE DOLLAR COMES FROM WHERE THE DOLLAR GOES
LONG DISTANCE ACCESS - - WAGES & BENEFITS
- DEPRECIATION
WARWICK ONLINE -
- TAXES
LOCAL SERVICE - - DIVIDENDS
- COST OF GOODS SOLD
WV LONG DISTANCE -
CELLULAR - - OTHER OPERATING EXPENSES
OTHER REVENUES - - RETAINED EARNINGS
PRESIDENT'S SUMMARY
[PHOTO]
Warwick Valley Telephone Company closed out the 1990's with yet another record
year for growth and earnings. Nineteen ninety-nine saw continued success in all
significant lines of business. WVT began commercial operation as a Competitive
Local Exchange Carrier (CLEC) in Middletown, N. Y. Thus the 1998 plan to expand
from a traditional regulated provider of local telephone service to a serious
competitor outside its franchised local exchange area was implemented. WVT will
continue to expand the CLEC business in New York and is investigating other
areas where we can provide reliable services accompanied by superior customer
service. In addition further expansion into the provision of broadband and other
advanced network services is on the immediate horizon, with or without partners.
Efforts in 1999, the first year of operation in Middletown, resulted in the
acquisition of 222 traditional dial tone lines. WVT also provides port
connection for 3 Internet Service Providers for a combined new revenue stream of
$682,000. After expenses this new business contributed $274,000 in net income.
Planned expansion in 2000 should result in significant growth in this market.
The core regulated businesses, local telephone service and Warwick Valley Long
Distance, continued to grow in 1999. The number of local service access lines
increased from 27,000 to 29,000, an 8 percent growth. Warwick Valley Long
Distance continues to be the most popular choice of long distance providers for
our customers. The number of subscribers grew from 9,000 to 9,700. WVLD began to
offer calling plans similar to those of the large national carriers in February
2000 in an effort to sustain the growth of this business segment. The 1998
decision to "take back" all directory functions from directory vendors and
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
[BAR CHART]
ACCESS LINES INCOME PER SHARE
manage sales and production in-house was a success. Our first "1999" directory
made a positive contribution to income. WVT was the first telco in New York
State to do so.
Warwick Online added 5,700 new customers during 1999 to end the year with a
total of 21,535 a 36 percent growth rate. Seventy percent of our customers
continue to be outside the telephone serving area, providing a presence and name
recognition, which will be helpful, as we implement further expansion of our
CLEC operations.
As the business has grown, so has the need to grow our plant capacities and
employee resources. Capital and operating expenditures have increased by 68.5
and 8.4 percent respectively. WVT added 26 employees in 1999.
Financial results were as impressive as our growth. Revenues show an increase of
8.5 percent and earnings grew by 38.5 percent. Annual dividends to shareholders
increased 19.6 percent to $1.34 per share.
Another significant change at WVT in 1999 was the retirement of President and
CEO, Fred M. Knipp and my selection as his successor. Mr. Knipp led the company
through the transition from a regulated telephone company to a competitive, full
service telecommunications provider poised to make a successful entry into the
new millennium. I am pleased to be at Warwick Valley Telephone and to have the
opportunity to work with the able team of employees Mr. Knipp assembled.
Furthermore, I am excited about the challenge of leading the Company on this
most interesting journey. No doubt we will find continued growth and financial
success along the way.
/s/ M. Lynn Pike
---------------------
M. Lynn Pike
President and C.E.O.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
[BAR CHART]
DIVIDENDS PER SHARE BOOK VALUE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS - 1999 vs. 1998
The Company's net income from all sources increased $1,539,119 (or 38.1%) to
$5,581,616 for the twelve-month period ended December 31, 1999, as compared to
the same period in 1998.
Operating revenues increased $1,823,829 (or 8.5%) to $23,185,929 for the year
ended December 31, 1999, as compared to $21,362,100 for 1998, primarily as a
result of a $1,486,844 (or 47.2%) increase in online revenues. This increase was
primarily due to customers interest in and use of the internet. Local service
revenues increased $578,332 (or 19.5%), primarily as a result of an increase in
the number of access lines and increased use of newly marketed services. This
was offset by a decrease of $786,734 (or 6.9%) in network access service
revenues due to a more competitive market.
Operating expenses increased $1,212,963 (or 8.4 %) to $15,622,395 for the year
ended December 31, 1999, as compared to $14,409,432 for the previous year. An
increase in wages and benefits of $770,267 (or 10.9%), an increase in internet
facilities of $209,343 (or 25.0%) and an increase in depreciation expense of
$412,453 (or14.2%) were the main factors in the increase.
Nonoperating income increased to $1,706,637 in 1999 from $770,135 in 1998. This
increase resulted from an increase in income of Bell Atlantic Orange
County/Poughkeepsie Limited Partnership, a cellular partnership in which the
Company has a 7.5% interest, which earned $1,937,538 in 1999 compared to
$1,085,499 in 1998 and the gain on partnership assets amounting to $401,305
during 1999.
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 revenues. This increase was
primarily due to customers interest in and use of the internet. 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 (or10.0%) were the main factors in the increase.
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Nonoperating income increased to $770,135 in 1998 from $495,082 in 1997. This
increase resulted largely from an increase in income of 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended 1999 with working capital of ($932,806) as compared to
$2,497,221 at December 31, 1998. This difference was largely due to a
reclassification of $3,000,000 for the current maturity of the Company's Series
I bond due May 1, 2000. The Company's capital expenditures for 1999 were
$6,449,273 compared to $3,828,418 in 1998 and were primarily financed by
internally generated funds.
Bell Atlantic Orange County/Poughkeepsie Limited Partnership is licensed to
operate as the wire-line licensee in both Orange and Dutchess Counties, New
York. The Company received distributions from the Partnership amounting to
$1,791,305 for 1999 and $450,000 for 1998. It is expected that these
distributions from the Partnership will continue in the near future.
SEGMENTED OPERATIONS
In 1998 the Company began business segment reporting to reflect the predominance
of its two major operating segments, telephone operations and internet service
provider. The Company currently reports its operating results in two segments:
Warwick Valley Telephone and Warwick Online. Each of the Company's segment
results is reviewed below.
The telephone operations revenue increased $638,582 (or 3.5%) for the year ended
December 31, 1999 as compared to $500,928 (or 2.8%) for 1998 primarily due to an
increase in customer growth. Internet revenues increased $1,486,844 (or 47.2%)
for the year ended December 31, 1999 as compared to $1,093,634 (or 53.1%) for
1998 largely due to an increase in customer growth outside our telephone service
area.
The telephone operations expenses increased $343,770 (or 2.3%) for the year
ended December 31, 1999 as compared to $758,753 (or 5.4%) for 1998 primarily due
to normal expenditures. Internet expenses increased $1,189,571 (or 46.7%) for
the year ended December 31, 1999 as compared to $745,314 (or 41.31%) for 1998
largely due to an increase in wages and benefits.
Comparative financial information regarding the operation of the Company's two
business segments for the period from 1997 through 1999 can be found in Note 16
of the consolidated financial statements.
CONSOLIDATED BALANCE SHEET
ASSETS 1999 1998
----------- -----------
CURRENT ASSETS:
Cash $ 865,521 $ 593,867
Accounts receivable -net of reserve for
uncollectibles 4,015,673 3,709,447
Materials and supplies 983,222 1,598,443
Prepaid expenses 401,090 353,598
----------- -----------
6,265,507 6,255,355
----------- -----------
NONCURRENT ASSETS:
Unamortized debt issuance expense 23,374 36,042
Other deferred charges 224,845 180,606
Investments 2,858,301 2,302,747
----------- -----------
3,106,520 2,519,395
----------- -----------
PROPERTY, PLANT & EQUIPMENT: (Notes 1, 2 and 5)
Plant in service 45,049,355 40,188,147
Plant under construction 1,718,296 1,205,922
----------- -----------
46,767,651 41,394,069
Less: Depreciation reserve (Notes 1 and 3) 19,163,148 16,927,427
----------- -----------
27,604,503 24,466,642
----------- -----------
TOTAL ASSETS $36,976,530 $33,241,392
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturity of long term debt $ 3,000,000 $ --
Notes payable (Note 6) 900,000 400,000
Accounts payable 2,716,429 2,620,859
Advance billing and payments -- 100,146
Customer deposits 129,660 133,433
Accrued taxes 22,168 87,183
Accrued interest 73,067 74,085
Other accrued liabilities 356,990 342,428
----------- -----------
7,198,313 3,758,134
----------- -----------
LONG-TERM LIABILITIES & DEFERRED CREDITS: (Notes 1 and 7)
Long-term debt 4,000,000 7,000,000
Accumulated deferred federal income taxes 2,079,064 2,283,976
Unamortized investment tax credits 118,247 158,447
Other deferred credits 65,040 84,279
Post retirement benefit obligations 786,159 384,637
----------- -----------
7,048,509 9,911,339
----------- -----------
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
Issued 1,991,462 (1999) and 1,990,626 (1998) 3,367,607 3,330,861
Retained earnings 21,642,391 18,521,348
----------- -----------
25,509,998 22,352,209
Less: Treasury stock at cost, 173,352 shares for 1999 and 1998 2,780,290 2,780,290
----------- -----------
22,729,708 19,571,919
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,976,530 $33,241,392
=========== ===========
The accompanying notes are an integral part of the financial statements
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
OPERATING REVENUES:
Local network service $ 3,545,976 $ 2,967,644 $ 2,686,637
Network access and long distance
network service 8,624,489 9,458,776 9,539,942
Other services and sales (Note 1) 11,015,464 8,935,680 7,570,117
------------ ------------ ------------
23,185,929 21,362,100 19,796,696
Less: Provision for uncollectibles (35,712) (44,309) (46,289)
------------ ------------ ------------
Total operating revenues 23,150,217 21,317,791 19,750,407
------------ ------------ ------------
OPERATING EXPENSES:
Plant specific 2,670,835 2,347,814 2,282,463
Plant non-specific:
Depreciation 3,311,411 2,898,958 2,635,371
Other 1,330,865 1,237,270 1,113,615
Customer operations 4,122,826 3,759,920 3,440,376
Corporate operations 2,414,961 2,181,653 1,750,713
Cost of services and sales 1,771,497 1,983,817 2,173,162
------------ ------------ ------------
Total operating expenses 15,622,395 14,409,432 13,395,700
------------ ------------ ------------
OPERATING TAXES:
Federal income taxes (Note 7) 1,572,021 1,588,333 1,269,542
Property, revenue and payroll 1,456,530 1,412,839 1,268,471
------------ ------------ ------------
Total operating taxes 3,028,551 3,001,172 2,538,013
------------ ------------ ------------
Operating income 4,499,271 3,907,187 3,816,694
NONOPERATING INCOME (EXPENSES)-NET: (Note 10) 1,706,637 770,135 495,082
------------ ------------ ------------
Income available for fixed charges 6,205,909 4,677,322 4,311,776
------------ ------------ ------------
FIXED CHARGES:
Interest on funded debt 553,500 553,500 553,500
Other interest charges 58,125 68,657 61,899
Amortization 12,668 12,668 12,668
------------ ------------ ------------
Total fixed charges 624,293 634,825 628,067
------------ ------------ ------------
NET INCOME 5,581,616 4,042,497 3,683,709
PREFERRED DIVIDENDS 25,000 25,000 25,000
------------ ------------ ------------
INCOME APPLICABLE TO COMMON STOCK $ 5,556,616 $ 4,017,497 $ 3,658,709
============ ============ ============
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK (NOTE 11) $ 3.06 $ 2.21 $ 1.97
============ ============ ============
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Note 11) 1,817,531 1,813,792 1,853,298
============ ============ ============
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Treasury Preferred Common Retained
Stock Stock Stock Earnings Total
-------------- ------------ ------------ ------------ -------------
Balance, December 31, 1996 $ (825,200) $ 500,000 $ 2,439,663 $ 14,596,085 $ 16,710,548
Net income for the year -- -- -- 3,683,709 3,683,709
Dividends:
Common ($.93 per share) -- -- -- (1,719,803) (1,719,803)
Preferred ($5.00 per share) -- -- -- (25,000) (25,000)
Sale of Common Stock -- -- 508,775 -- 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 -- -- -- 4,042,497 4,042,497
Dividends:
Common ($.1.12 per share) -- -- -- (2,031,140) (2,031,140)
Preferred ($5.00 per share) -- -- -- (25,000) (25,000)
Sale of Common Stock -- -- 382,423 -- 382,423
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 $ (2,780,290) $ 500,000 $ 3,330,861 $ 18,521,348 $ 19,571,919
Net income for the year -- -- -- 5,581,616 5,581,616
Dividends:
Common ($1.34 per share) -- -- -- (2,435,573) (2,435,573)
Preferred ($5.00 per share) -- -- -- (25,000) (25,000)
Sale of Common Stock -- -- 36,746 -- 36,746
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 $ (2,780,290) $ 500,000 $ 3,367,607 $ 21,642,391 $ 22,729,708
============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
1999 1998 1997
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 5,581,616 $ 4,042,497 $ 3,683,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,324,078 2,911,626 2,648,039
Deferred income tax and investment tax credit (264,352) (80,967) (127,266)
Interest charged to construction (143,480) (44,292) (57,562)
Income from partnership (2,337,843) (1,085,499) (632,244)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable (306,226) 255,913 (674,646)
(Increase) Decrease in materials and supplies 615,221 (464,806) 318,221
(Increase) Decrease in prepaid expenses (47,492) (15,181) (31,885)
(Increase) Decrease in deferred charges (44,239) 36,969 10,124
Increase (Decrease) in accounts payable 95,571 869,119 150,795
Increase (Decrease) in customers' deposits (3,773) (35,032) 15,322
Increase (Decrease) in advance billing and payment (100,146) (63,736) (24,983)
Increase (Decrease) in accrued expenses (66,033) (41,424) (138,179)
Increase (Decrease) in post retirement benefit
obligations 401,522 30,737 (10,198)
Increase (Decrease) in other liabilities 14,561 5,919 36,334
----------- ----------- -----------
Net cash provided by operating activities 6,717,985 6,321,843 5,165,581
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,449,273) (3,828,418) (3,350,063)
Interest charged to construction 143,480 44,292 57,562
Distribution from partnership 1,791,305 450,000 337,500
Changes in other investments (8,016) (2,668) (15,448)
----------- ----------- -----------
Net cash used in investing activities (4,522,504) (3,336,794) (2,970,449)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in Notes Payable 500,000 (1,200,000) 750,000
Dividends (2,460,573) (2,056,140) (1,744,803)
Sale of Common Stock 36,746 382,423 508,775
Purchase of Treasury Stock -- -- (1,955,090)
----------- ----------- -----------
Net cash provided by (used in) financing activities (1,923,827) (2,873,717) (2,441,118)
----------- ----------- -----------
Increase (Decrease) in cash and cash equivalents 271,654 111,332 (245,986)
Cash and cash equivalents at beginning of year 593,867 482,534 728,520
----------- ----------- -----------
Cash and cash equivalents at end of year $ 865,521 $ 593,867 $ 482,534
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
The Company is an independent telephone company providing services to
customers in the Towns of Warwick, Goshen, and Wallkill, 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 information includes the accounts of Warwick
Valley Telephone Company and its wholly-owned subsidiaries (the "Company")
after elimination of all significant intercompany transactions. Certain
prior year amounts have been reclassified to conform with the 1999
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 7.80%, 7.51%, and 6.66%, for the years
1999, 1998 and 1997, 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 related plant.
Federal Income Taxes
The Company records deferred taxes that 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.
Reserve for Uncollectibles
The Company uses the reserve method to record uncollectible accounts. The
reserve for uncollectibles was $65,155 as of December 31, 1999 and 1998
respectively.
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,
1999 the amount of cash in excess of these F.D.I.C. insured limits was
approximately $468,000 . The following is a list of interest and federal
income tax payments for each of the three years in the period ending
December 31:
1999 1998 1997
---------- ---------- ----------
Interest $ 612,643 $ 623,902 $ 615,124
Federal income taxes 2,787,991 2,064,867 1,776,178
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, 1999 and 1998 the Material and Supplies inventory
consisted of the following:
1999 1998
---------- ----------
Inventory for outside plant $ 215,710 $ 461,616
Inventory for inside plant 567,325 869,890
Inventory of equipment held for sale or lease 200,187 266,937
---------- ----------
$ 983,222 $1,598,443
========== ==========
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:
1999 1998 1997
----------- ----------- -----------
Directory advertising revenue $ 972,738 $ 941,714 $ 936,787
Rent revenue 296,498 208,179 201,575
Billing and collection revenue 1,096,779 1,154,150 1,138,323
Long distance services and sales 1,884,557 1,932,111 1,691,823
Internet services and sales 4,639,864 3,153,020 2,059,386
Other services and sales 2,125,028 1,546,506 1,542,223
----------- ----------- -----------
$11,015,464 $ 8,935,680 $ 7,570,117
=========== =========== ===========
2. Property, Plant and Equipment
Plant in service, at cost, consisted of the following at December 31:
1999 1998
----------- -----------
Land, buildings, furniture and office equipment $ 4,249,179 $ 4,469,180
Vehicles and work equipment 1,265,185 1,150,083
Central office equipment 19,391,013 16,920,270
Customer premise equipment 1,318,299 1,209,591
Outside plant equipment 15,909,015 14,380,676
Other equipment 2,916,664 2,058,347
----------- -----------
$45,049,355 $40,188,147
=========== ===========
3. Depreciation Reserve
Depreciation reserve consisted of the following at December 31:
1999 1998
----------- -----------
Buildings, furniture and office equipment $ 2,267,264 $ 2,337,127
Vehicles and work equipment 798,865 727,095
Central office equipment 9,386,103 8,098,368
Customer premise equipment 728,467 715,385
Outside plant equipment 4,525,404 4,038,785
Other equipment 1,457,045 1,010,667
----------- -----------
$19,163,148 $16,927,427
=========== ===========
4. Investments
Investments consisted of the following at December 31:
1999 1998
----------- -----------
Investment in cellular partnership $ 2,829,923 $ 2,282,385
Other investments $ 28,378 $ 20,362
----------- -----------
$ 2,858,301 $ 2,302,747
=========== ===========
The partnership investment represents the Company's 7.5% interest as a
limited partner in the Orange-Poughkeepsie Limited Partnership, a cellular
telephone operation, which is recorded on the equity method. Other
investments are recorded at cost.
The following is a summary of financial position and results of operations
of the Orange-Poughkeepsie Limited Partnership as of and for the years
ending December 31, 1999 and 1998:
1999 1998
----------- -----------
Current assets $17,055,000 $11,056,000
Property, plant and equipment, net 23,406,000 20,904,000
Total assets 40,469,000 31,971,000
Current liabilities 1,810,000 1,193,000
Partners capital 38,659,000 30,778,000
Revenues 35,512,000 21,048,000
Net income 26,417,000 14,935,000
5. Long-term Debt
Long-term debt consisted of the following at December 31:
1999 1998
----------- -----------
First Mortgage Bonds Amount Amount
----------- -----------
9.05% Series "I"
(due 05/01/2000) $ 3,000,000 $ 3,000,000
7.05% Series "J"
(due 12/01/2003) 4,000,000 4,000,000
----------- -----------
7,000,000 7,000,000
Less: Current maturities
Of long-term debt 3,000,000 --
----------- -----------
Total Long-term debt $ 4,000,000 $ 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 for the five years subsequent to 1999 for long-term debt
outstanding as of December 31, 1999, are as follows:
2000 $3,000,000 2003 $4,000,000
2001 -- 2004 --
2002 --
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 in the amount of $2,500,000
with the Warwick Savings Bank, which expires in June, 2000. 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, 1999 was $1,600,000. The balances outstanding as
of December 31, 1999 and 1998 were $900,000 and $400,000, respectively,
bearing interest at rates of 8.0% and 6.75%, respectively.
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.
1999 1998 1997
----------- ----------- -----------
Operating federal income taxes:
Current portion $ 1,837,842 $ 1,670,896 $ 1,404,115
----------- ----------- -----------
Deferrals, net of reversals:
Depreciation 25,367 (17,736) (22,352)
Cost of removal (5,946) (2,813) 2,037
Tax savings due to TRA of 1986 -- -- (45,494)
Other (245,042) (19,034) (17,764)
Investment tax credit, net of amortization (40,200) (42,980) (51,000)
----------- ----------- -----------
(265,821) (82,563) (134,573)
----------- ----------- -----------
Operating F.I.T. expense $ 1,572,021 $ 1,588,333 $ 1,269,542
----------- ----------- -----------
Nonoperating federal income taxes $ 796,354 $ 368,316 $ 217,386
----------- ----------- -----------
Total F.I.T. expense, as reported 2,368,375 1,956,649 1,486,928
Reversals of deferred taxes 167,374 67,485 74,029
Tax savings of TRA of 1986, net -- -- 45,494
Other 167,248 15,576 151,567
----------- ----------- -----------
FEDERAL INCOME TAX AT
STATUTORY RATE $ 2,702,997 $ 2,039,710 $ 1,758,018
=========== =========== ===========
The following components comprise the net deferred tax liability reported
as of December 31:
1999 1998 1997
---------- ---------- ----------
Deferred tax liabilities $2,418,263 $2,366,194 $2,405,183
Deferred tax assets 339,199 82,218 103,765
---------- ---------- ----------
Net deferred tax liability $2,079,064 $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 consists principally of temporary
differences due to the reporting of pension and deferred compensation
obligations.
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
1999 1998 1997 1999 1998 1997
------------------------------------- -------------------------------------
Service cost $ 267,535 $ 238,977 $ 200,862 $ 71,446 $ 42,117 $ 43,425
Interest cost on
benefit obligation 642,092 601,153 558,396 129,247 58,618 55,367
Amortization of transition
Obligation 53,263 53,263 53,263 51,496 51,496 51,496
Amortization of prior
service (credit) cost 48,282 50,611 50,611 (19,964) (21,494) (21,494)
Recognized net actuarial
(gain) loss (35,719) (98,490) (62,274) 39,817 (40,835) (83,743)
Expected return on
plan assets (705,469) (692,142) (594,971) (78,071) (61,313) (47,605)
--------- --------- --------- --------- --------- ---------
Net periodic (credit)
Expense $ 269,984 $ 153,372 $ 205,887 $ 193,971 $ 28,589 $ (2,554)
========= ========= ========= ========= ========= =========
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
1999 1998 1999 1998
------------ ------------ ------------ ------------
Fair value of plan assets $ 8,966,950 $ 8,739,040 $ 962,257 $ 875,892
at beginning of year
Employer contributions 87,934 122,634 89,372 --
Actual return on plan assets 1,640,940 356,917 155,986 86,365
Benefits paid (319,566) (251,641) (34,052) --
------------ ------------ ------------ ------------
Fair value of plan assets
at end of year $ 10,376,258 $ 8,966,950 $ 1,173,563 $ 962,257
------------ ------------ ------------ ------------
Projected benefit obligation
at beginning of year 9,320,457 8,385,536 831,259 795,291
Benefits earned 267,535 238,977 71,446 32,891
Interest cost on projected
benefit obligation 642,092 601,153 129,247 60,490
Actuarial (gain) loss (1,457,048) 346,432 739,485 (57,413)
Benefits paid (319,566) (251,641) (34,052) --
------------ ------------ ------------ ------------
Projected benefit obligation
at year end 8,453,470 9,320,457 1,737,385 831,259
------------ ------------ ------------ ------------
Plan assets in excess of (less than)
projected benefit obligation 1,922,788 (353,507) (563,822) 130,998
Unrecognized actuarial (gain) loss (2,669,652) (312,852) 366,784 (254,968)
Unrecognized prior service
(credit) cost 148,052 196,334 (384,819) (404,783)
Unrecognized net transition
obligation 106,530 159,793 669,444 720,940
------------ ------------ ------------ ------------
Prepaid (accrued) benefit cost ($ 492,282) ($ 310,232) $ 87,587 $ 192,187
------------ ------------ ------------ ------------
Actuarial assumptions used to calculate the projected benefit obligation
were as follows for the years ended December 31:
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
----------------------- ------------------------
Discount rate 8.00% 7.25% 8.00% 7.00%
Expected return on plans 8.00% 8.00% 8.00% 7.00%
Rate of compensation increase 5.50% 5.50% -- --
Healthcare cost trend -- -- 9.00% 10.00%
The health care cost trend rate was expected to decrease gradually (.5% per
year) to an ultimate rate of 5% in 2007. 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, 1999 by approximately
$268,000 and the aggregate of the service and interest cost components of
postretirement expense for the year then ended by approximately $38,000.
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 1999 the Company made a matching contribution up to 7.0% of an eligible
participant's compensation for management, clerical and traffic employees
and up to 6.0% for plant employees. The Company contributed and expensed
$320,795, $236,597, and $180,255 for the years ended December 31, 1999,
1998 and 1997 respectively.
The Company has deferred compensation agreements in place for certain
officers which become effective upon retirement. The non-qualified plans
are not currently funded and a liability representing the present value of
future payments has been established, with a balance of $189,950 as of
December 31, 1999.
9. Related Party Transactions
The Company expended approximately $225,031, $221,880 and $170,731 during
1999, 1998 and 1997, 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:
1999 1998 1997
----------- ----------- -----------
Interest charged to construction $ 143,480 $ 44,292 $ 57,562
Interest income 17,330 22,401 16,009
Income from cellular partnership 1,937,538 1,085,499 632,245
Non recurring gain on sale of partnership assets 401,305 -- --
Other nonoperating income (expense) 3,338 (13,741) 6,652
Nonoperating federal income taxes (796,354) (368,316) (217,386)
----------- ----------- -----------
$ 1,706,637 $ 770,135 $ 495,082
=========== =========== ===========
11. Common Stock
Earnings per share are based on the weighted average number of shares
outstanding of 1,817,531, 1,813,792, and 1,853,298 for the years ended
December 31, 1999, 1998 and 1997, respectively. In November 1997, the Board
of Directors approved a 3-for-1 stock split, increasing the number of
shares authorized to 2,160,000 and the number issued to 1,974,168. The
split was approved by the New York State Public Service Commission
("NYSPSC") and the New Jersey Board of Public Utilities ("NJBPU"). 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, 1999:
Treasury Preferred Common
Stock Stock Stock
-------- ---------- ---------
Balance, January 1, 1999 173,352 5,000 1,990,626
Additional shares issued -- -- 836
Shares redeemed -- -- --
------- ----- ---------
Balance, December 31, 1999 173,352 5,000 1,991,462
======= ===== =========
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. The Company's
contribution to the New York State Access Settlement Pool was $222,052 for
1999 and is expected to be $191,000 for 2000. 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 1999 was $16,287 and the expected contribution for 2000 is
approximately $27,000. The Company also contributes to the Universal
Service Administration Co. (USAC). For 1999 the Company's contribution to
USAC was $78,343 and for 2000 it will be approximately $87,100. 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
The Company reports segmented information according to 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. 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 the Towns of
Warwick, Goshen, and Wallkill, New York and the Townships of Vernon and
West Milford, 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 the Company'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 1999, 1998 and 1997:
1999
Intercompany Consolidated
Revenues from: Telephone Internet Elimination Total
----------- ----------- -------------- -----------
Unaffiliated customers $18,510,353 $ 4,639,864 $ -- $23,150,217
Intersegment revenues 371,356 -- (371,356) --
----------- ----------- -------------- -----------
Total revenues 18,881,709 4,639,864 (371,356) 23,150,217
----------- ----------- -------------- -----------
Operating expenses 11,486,615 2,652,255 (371,356) 13,767,514
Depreciation 2,695,124 616,286 -- 3,311,410
Federal income taxes 1,103,037 468,984 -- 1,572,021
Other income (expenses) 1,074,302 8,042 -- 1,082,344
----------- ----------- -------------- -----------
Net income $ 4,671,235 $ 910,381 $ -- $ 5,581,616
=========== =========== ============== ===========
Assets $34,638,100 $ 2,338,430 $ -- $36,976,530
Capital expenditures $ 5,412,642 $ 1,036,631 $ -- $ 6,449,273
1998
Intercompany Consolidated
Revenues from: Telephone Internet Elimination Total
----------- ----------- -------------- -----------
Unaffiliated customers $18,164,771 $ 3,153,020 $ -- $21,317,791
Intersegment revenues 78,356 -- (78,356) --
----------- ----------- -------------- -----------
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 -- 2,898,959
Federal income taxes 1,274,431 313,902 -- 1,588,333
Other income (expenses) 131,037 4,273 -- 135,310
----------- ----------- -------------- -----------
Net income $ 3,433,158 $ 609,339 $ -- $ 4,042,497
=========== =========== ============== ===========
Assets $32,499,044 $ 1,650,052 $ (907,704) $33,241,392
Capital expenditures $ 3,059,117 $ 769,301 $ -- $ 3,828,418
1997
Intercompany Consolidated
Telephone Internet Elimination Total
-------------- ------------ ------------- -----------
Revenues from:
Unaffiliated customers $ 17,691,021 $ 2,059,386 $ -- $ 19,750,407
Intersegment revenues 51,178 -- (51,178) --
------------ ------------ ------------ ------------
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 -- 2,635,371
Federal income taxes 1,137,279 132,263 -- 1,269,542
Other income (expenses) (132,985) -- -- (132,985)
------------ ------------ ------------ ------------
Net income $ 3,426,961 $ 256,746 $ -- $ 3,683,707
============ ============ ============ ============
Assets $ 31,440,173 $ 1,256,467 $ (1,308,644) $ 31,387,996
Capital expenditures $ 2,874,681 $ 475,382 -- $ 3,350,063
Report of Independent Certified Public Accounts
February 3, 2000
To the Board of Directors
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, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Bush & Germain, P.C.
- ------------------------
Bush & Germain, P.C.
Syracuse, New York
BOARD OF DIRECTORS AND OFFICERS
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Howard Conklin, Jr. Henry L. Nielsen, Jr. Fred M. Knipp Philip S. Demarest
Chairman of the Board Vice Chairman of the Board of Board Director, Board Director,
of the Company the Company, President, Nielsen Retired, Former Retired, Former
Construction Co., Inc., President & C.E.O. Vice President,
Warwick, N.Y. of the Company Secretary & Treasurer of
the Company
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Wisner H. Buckbee Joesph E. DeLuca, M.D. Corinna S. Lewis Robert J. DeValentino
Board Director, Board Director, Board Director, Board Director,
President, Wisner Farms, Inc. Physician, Vernon Urgent Care Retired Public Executive Director Horton
Warwick, N.Y. Center, Vernon, N.J. Relations Healthcare Foundation,
Consultant Middletown, N.Y.
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Herbert Gareiss, Jr. M. Lynn Pike Larry Drake Brenda A. Schadt
Board Director, President and C.E.O. Vice President of Vice President of
Vice President of of the Company the Company the Company
the Company
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Barbara Barber Colleen Shannon Bonnie Jackowitz Robert A. Sieczek
Secretary of Assistant Secretary Assistant Secretary Treasurer of
the Company of the Company of the Company the Company
[PHOTO]
Dorinda M. Masker
Assistant Treasurer
of the Company
PERFORMANCE HIGHLIGHTS
For years ended or at December 31, 1999 1998 1997 1996 1995
Selected Financial Data
Total revenues $ 23,185,929 $ 21,362,100 $ 19,796,696 $ 17,874,115 $ 14,969,872
Telephone operating revenues 17,240,321 16,189,377 15,590,455 15,161,873 13,315,940
Total expenses 15,622,395 14,409,432 13,395,700 12,406,564 11,022,037
Telephone operating expenses 12,098,691 11,079,344 10,081,196 9,761,435 8,217,733
Net income 5,581,616 4,042,497 3,683,709 3,095,481 2,153,372
Total assets 36,976,530 33,241,392 31,387,996 30,243,580 29,418,023
Current assets 6,265,507 6,255,355 5,919,948 5,777,625 5,975,482
Current liabilities 7,198,313 3,758,134 4,502,782 3,723,691 4,720,240
Long-term obligations 4,000,000 7,000,000 7,000,000 7,000,000 7,000,000
Percentage of debt to
total capital 25.8 27.4 33.3 31.96 36.07
Shareholders' equity 22,729,708 19,571,919 17,203,139 16,710,548 14,744,212
Common Stock Data
Income applicable to
common stock 5,556,616 4,017,497 3,658,709 3,070,481 2,128,372
Income per share*
3.06 2.21 1.97 1.65 1.15
Book value*
12.23 10.51 9.01 8.69 7.69
Cash dividends per
common share*
1.34 1.12 0.93 0.65 0.58
Shareholders of record
655 648 616 612 607
Shares outstanding* 1,817,531 1,813,792 1,853,298 1,865,091 1,852,752
General
Access lines in service
28,935 26,786 25,154 23,719 22,132
Carrier access minutes 174,174,099 151,797,771 138,984,054 150,708,737 134,534,480
* Adjusted for 3-for-1 common stock split in 1997.
CONCERNNG 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 March1,
2000 there were 655 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 1998, the Company paid a dividend on its common stock of $1.12 per share. In
1999, the common stock dividend was $1.34 per share.
The NASDAQ high and low bid prices for the Company's common stock for the
second, third and fourth quarters of 1998 and the first, second, third and
fourth quarters of 1999 were as follows:
PRICE OF THE COMPANY'S COMMON STOCK PRICE OF THE COMPANY'S COMMON STOCK
QUARTER ENDED QUARTER ENDED
March 31, June 30, September 30, December 31, June 30, September 30, December 31,
1999 1999 1999 1999 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------------
High $ 46.75 $ 45.00 $ 45.00 $ 47.00 High $ 43.50 $ 40.00 $ 42.25
- -----------------------------------------------------------------------------------------------------------------------
Low $ 36.50 $ 38.75 $ 39.75 $ 42.00 Low $ 37.25 $36.125 $ 36.50
- -----------------------------------------------------------------------------------------------------------------------