PRESIDENT'S SUMMARY
1996 was another prosperous year for Warwick Valley Telephone Company.
This was the fourth straight year with significant growth in earnings; they have
more than doubled in those four years. Dividends have increased and stock value
has increased substantially. One result is that we are proposing a stock split
to reduce the per share market price and enhance stock marketability.
Earnings have increased from our newer services as expected, but also from
ordinary telephone services. Warwick Valley Long Distance was again the profit
leader of new services. In telephone operations our revenue increase far
exceeded the expense increase reflecting much higher productivity. Our overall
earnings were understandably somewhat depressed by Warwick Online's start-up
costs; however, by year's end WOL also was operating Oin the blackO and stands
ready to make a significant contribution to 1997 earnings.
Growth has had many dimensions. There has been some growth in the number
of customers, but much of our growth in telephone lines has come from additional
lines per customer. A typical new residential customer today has two or three
telephone lines, a facsimile line and a computer line. We are now routinely
installing six lines into each new dwelling. Long distance and ancillary
telephone services have grown proportionally. Online computer service growth has
been dramatic and has also added to the need for additional lines. The demand
for online service as access to the Internet has exploded as more people are
buying or upgrading computers, as more people are learning about the Internet
and as the Internet is developing more useful information. In 1996 Warwick
Online's subscriber count increased fivefold from 1,000 to over 5,000. Almost
2/3 of our Online subscribers are outside our telephone service area.
Our progress appears particularly significant in the context of our
changed business environment. All of our new services and many of the
traditional telephone services are now offered in a highly competitive market.
Long distance telephone service has been competitive for us since 1991. On
January 1, 1997 competition was introduced in our New York market for Regional
toll service (generally calls within the same area code) and we now have eleven
competitors. We expect that in New Jersey later this year. State regulators are
proceeding to implement rules for increased competition for all
telecommunications as they and the Federal Communications Commission implement
the Federal Telecommunications Act of 1996. The impact of these new regulations
is still evolving but we are adapting well so far and I expect we will continue
to do so. We generally believe that competition is good if it is not unfairly
regulated by government. Our approach to competition is to become better
competitors.
Paging is a service that is making great strides. It is moving from being
only emergency communication to becoming a popular way for the larger population
to stay in touch. We therefore introduced paging as a WVT service and are now
selling pagers and reselling pager service in our community.
By most measures the Company is progressing well. We know that changes in
regulation and advances in technology are also accompanied by changes in society
that affect customer attitudes. We know that today's customers want choice and
demand flawless service. We strive to provide both. Our services and products
give more choice to customers and we are entering those competitive markets
where we feel we have competence. Our employees are developing new skills and
customer focus. Our managers are adapting new techniques to benefit from those
employee skills and from information technology. We have maintained the level of
investment needed to keep our facilities modern and we are planning ahead. I am
quite confident in a successful future for this Company.
-12-
RESULTS OF OPERATIONS - 1996 vs. 1995
The Company's net income from all sources increased $942,109 (or 43.8%) to
$3,095,481 for the twelve-month period ended December 31, 1996, as compared to
the same period in 1995.
Telephone operating revenues increased $1,855,932 (or 13.9%) to $15,161,873 for
the year ended December 31, 1996, as compared to $13,315,940 for 1995, primarily
as a result of a $1,631,781 (or 21.9%) increase in toll and access revenue. This
increase resulted primarily from increased state and interstate access revenues
of $1,397,767, increased federal subscriber line charges to end user customers
of $79,087, and an increase in toll revenue of $88,401. Local revenues increased
$286,322 (or 10.6%), primarily as a result of an increase in the number of
access lines and increased use of newly marketed services. Miscellaneous
revenues decreased $72,171 (or 2.3%), primarily as a result of a non-recurring
revenue settlement received during 1995.
Telephone operating expenses increased $543,702 (or 5.9%) to $9,761,435 at
December 31, 1996, as compared to $9,217,733 at year-end 1995. An increase in
wages and benefits of $438,686 (or 7.5%) and an increase in depreciation expense
of $118,376(or 5.8%) accounted for most of the increase.
Non-operating income increased to $487,382 in 1996 from $305,200 in 1995. This
increase resulted largely from an increase in net income received from the
Company's 7.5% interest in the Orange-Poughkeepsie Cellular Partnership, which
increased by $248,243 after federal income tax. This was partially offset by an
increase in the operating loss of Hometown Online, Inc. which lost $165,531
during its first full year of operation as opposed to a loss of $87,121 during
1995, when it commenced doing business.
RESULTS OF OPERATIONS - 1995 vs. 1994
The Company's net income from all sources increased $403,923 (or 23.1%) for the
twelve-month period ended December 31, 1995, as compared to the same period in
1994.
Telephone operating revenues increased $1,037,992 (or 8.5%) to $13,315,940 for
the year ended December 31, 1995, as compared to $12,277,948 for 1994, primarily
as a result of increases in interstate access revenues of $401,200,
miscellaneous revenues of $295,451 (including directory, rent, operator services
and non-regulated revenues), and local revenues of $249,808 (primarily from
newly-marketed services).
Telephone operating expenses increased $367,511 (or 4.2%) to $9,217,733 at
December 31, 1995, as compared to $8,850,222 at year-end 1994. Wage and benefit
increases of $327,984 (or 6.0%) accounted for most of the overall increase.
Non-operating income decreased to $305,200 in 1995 from $326,392 in 1994.
Decreases in interest charged construction, interest income and other
non-operating income (expense) were offset by increased net income from
subsidiaries and decreased non-operating federal income taxes.
-13-
LIQUIDITY AND CAPITAL RESOURCES
The Company ended 1996 with working capital of $2,053,934 as compared to
$1,255,242 at December 31, 1995. This difference was largely due to a decrease
in accounts payable of $758,397 and the fact that no current maturities of long
term debt existed, compared to $370,000 at the end of 1995.
The Company issued 4,471 shares of its common stock on April 1, 1996 to
employees participating in retirement savings plans at $42.84 per share (a 15%
discount from the appraised price of $50.40). Additional sales to employees are
anticipated during 1997 and subsequent years. A purchase of 1,000 shares for the
treasury took place during 1996 at $50.00 per share. No additional purchases are
planned at this time.
Pursuant to a NYSPSC order, the tax savings due to the general reduction in
income tax liability of the Company made possible by the Tax Reform Act of 1986
attributable to New York State operations have been deferred. These tax savings
were applied during 1996, and will continue until fully written off during 1997,
as an offset against the costs of funding retiree health benefits. Reduced rates
to reflect the tax savings were ordered in New Jersey beginning July 1, 1987.
The Company holds a 7.5% limited partnership interest in the cellular mobile
telephone partnership which is licensed to operate as the wire-line licensee in
both Orange and Dutchess Counties, New York. Since the inception of the
partnership, the Company has made capital contributions of $249,750. No further
capital contributions are currently scheduled. A wholly-owned subsidiary of the
Company, Warwick Valley Mobile Telephone Company (WVMT), resells cellular
telephone service to the Company's subscribers as well as to others. WVMT also
sells and installs cellular telephone sets. The Company has invested
approximately $326,000 in WVMT since its operations began on April 1, 1989.
A second wholly-owned subsidiary, Warwick Valley Long Distance Company, Inc.
(WVLD), began business in December 1993 in New Jersey and in May 1994 in New
York. WVLD resells toll service to customers of Warwick Valley Telephone. WVLD
achieved positive retained earnings prior to the end of 1994.
Another wholly-owned subsidiary, Warwick Valley Networks, Inc. (WVN), was
established during 1994. WVN is a partner in the New York State Independent
Network (NYSINET), which was created by the independent telephone companies of
New York to build and operate its own data connections network. NYSINET will
make it unnecessary for its member companies to rely on outside companies for
these services and may also offer services to companies who are not members,
creating a potential source of additional revenue. The NYSINET network began
partial operation during 1996 and is expected to be fully in operation during
1997.
An additional wholly-owned subsidiary, Hometown Online, Inc. (ONLINE) was
established during 1995. It is the entity through which WVTC offers connectivity
to the Internet as well as local and regional information services to personal
computer users. Service is offered within WVTC's service area as well as in
nearby areas in New York, New Jersey and Pennsylvania. The Company has invested
approximately $1,200,000 in Online since its operations began in July 1995.
Online was approaching break-even on a cash flow basis during 1996 and is
expected to show positive cash flow during 1997.
-14-
ASSETS December 31, 1996 1995
CURRENT ASSETS:
Cash $ 728,520 $ 482,049
Accounts receivable - net of
reserve for uncollectibles 3,290,714 3,659,990
Materials and supplies 1,451,858 1,516,358
Prepaid expenses 306,532 317,085
5,777,625 5,975,482
NONCURRENT ASSETS:
Unamortized debt issuance expense 61,378 75,170
Other deferred charges 227,699 140,327
Investments 1,354,390 1,076,915
1,643,467 1,292,412
PROPERTY, PLANT AND EQUIPMENT:(Notes 1, 2 and 5)
Plant in service 34,578,033 32,352,371
Plant under construction 1,444,982 1,032,206
36,023,015 33,384,577
Less: Depreciation reserve (Notes 1
and 3) 13,200,526 11,234,448
22,822,489 22,150,129
TOTAL ASSETS $30,243,580 $29,418,023
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities-long-term debt 0 $ 370,000
Notes payable (Note 6) 850,000 950,000
Accounts payable 1,600,944 2,359,341
Advance billing and payments 188,865 206,986
Customer deposits 153,143 173,717
Accrued taxes 275,241 108,409
Accrued interest 75,829 84,573
Other accrued expenses 579,669 467,215
3,723,691 4,720,241
LONG TERM DEBT (Note 5) 7,000,000 7,000,000
DEFERRED CREDITS: (Notes 1 and 7)
Accumulated deferred federal income taxes 2,313,224 2,250,073
Unamortized investment tax credits 252,427 312,517
Other deferred credits 243,690 390,980
2,809,341 2,953,570
STOCKHOLDERS EQUITY: (Notes 5, 12, 13 and 14)
Preferred stock - 5% cumulative;
$100 par value;
Authorized 7,500 shares;
Issued and outstanding 5,000 shares 500,000 500,000
Common stock - no par value;
Authorized shares: 720,000
Issued 648,571(1996) and
644,757 (1995) 2,439,663 2,281,238
Retained earnings 14,596,085 12,738,174
17,535,748 15,519,412
Less: Treasury stock at cost,
26,800 (1996) and 25,800 (1995)
shares 825,200 775,200
16,710,548 14,744,212
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,243,580 $ 29,418,023
The accompanying notes are an integral part of the financial statements.
-15-
Years ended December 31, 1996 1995 1994
OPERATING REVENUES:
Local network service $ 2,984,805 $ 2,698,483 $ 2,448,677
Network access and long distance
network service 9,080,619 7,448,838 6,956,102
Miscellaneous (Note 1) 3,096,449 3,168,620 2,873,169
15,161,873 13,315,941 12,277,948
Less: Provision for uncollectibles (35,085) (59,956) (25,144)
Total operating revenues 15,126,788 13,255,985 12,252,804
OPERATING EXPENSES:
Plant specific 2,339,213 2,128,966 1,926,005
Plant non-specific:
Depreciation 2,150,240 2,031,864 1,801,722
Other 590,210 580,838 742,732
Customer operations 2,970,626 2,780,319 2,651,856
Corporate operations 1,711,146 1,695,746 1,727,907
Total operating expenses 9,761,435 9,217,733 8,850,222
OPERATING TAXES:
Federal income taxes (Note 7) 1,152,084 584,466 312,507
Property, revenue and payroll 947,105 960,718 1,023,023
Total operating taxes 2,099,189 1,545,184 1,335,530
Operating income 3,266,164 2,493,068 2,067,052
NONOPERATING INCOME (EXPENSES) -
NET: (Note 11) 487,382 305,200 326,392
Income available for fixed charges 3,753,546 2,798,268 2,393,444
FIXED CHARGES:
Interest on funded debt 575,581 593,756 619,064
Other interest charges 68,692 31,790 16,367
Amortization 13,792 19,350 8,563
Total fixed charges 658,065 644,896 643,994
Net Income 3,095,481 2,153,372 1,749,450
PREFERRED STOCK 25,000 25,000 25,000
INCOME APPLICABLE TO
COMMON STOCK $ 3,070,481 $ 2,128,372 $ 1,724,450
NET INCOME PER AVERAGE SHARE
OF OUTSTANDING COMMON
STOCK (Note 12) $ 4.94 $ 3.45 $ 2.82
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Note 12) 621,697 617,584 612,248
The accompanying notes are an integral part of the financial statements.
-16-
Years ended December 31, 1996, 1995 and 1994
Treasury Preferred Common Retained
Stock Stock Stock Earnings Total
Balance,
December 31, 1993 ($775,200) $500,000 $1,922,347 $10,989,170 $12,636,317
Net income
for the year ----- ----- ----- 1,749,450 1,749,450
Dividends:
Common
($1.68 per share) ----- ----- ----- (1,028,820) (1,028,820)
Preferred
($5.00 per share) ----- ----- ----- (25,000) (25,000)
Sale of Common Stock ----- ----- 167,295 ----- 167,295
Balance,
December 31, 1994 ($775,200) $500,000 $2,089,642 $11,684,800 $13,499,242
Net income
for the year ----- ----- ----- 2,153,372 2,153,372
Dividends:
Common
($1.74 per share) ----- ----- ----- (1,074,998) (1,074,998)
Preferred
($5.00 per share) ----- ----- ----- (25,000) (25,000)
Sale of Common Stock ----- ----- 191,596 ----- 191,596
Balance,
December 31, 1995 ($775,200) $500,000 $2,281,238 $12,738,174 $14,744,212
Net income
for the year ----- ----- ----- 3,095,481 3,095,481
Dividends:
Common
($1.95 per share) ----- ----- ----- (1,212,570) (1,212,570)
Preferred
($5.00 per share) ----- ----- ----- (25,000) (25,000)
Sale of Common Stock ----- ----- 158,425 ----- 158,425
Purchase of Treasury
Stock (50,000) ----- ----- ----- (50,000)
Balance,
December 31, 1996 ($825,200) $ 500,000 $2,439,663 $14,596,085 $16,710,548
The accompanying notes are an integral part of the financial statements.
-17-
Years ended December 31, 1996 1995 1994
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,095,481 $ 2,153,372 $ 1,749,450
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 2,164,032 2,051,214 1,811,191
Deferred income tax and
investment tax credit (144,229) (33,114) (16,238)
Interest charged to construction (25,272) (32,372) (123,482)
Income from partnership (666,375) (290,250) (293,500)
Change in assets and liabilities:
(Increase) Decrease in accounts
receivable 369,276 (970,903) (243,517)
(Increase) Decrease in materials
and supplies 64,500 (223,267) (252,651)
(Increase) Decrease in prepaid
expenses 10,553 (31,266) 23,312
(Increase) Decrease in deferred
charges (87,372) 22,289 (74,011)
Increase (Decrease) in accounts
payable (758,397) 592,564 93,104
Increase (Decrease) in customers'
deposits (20,574) (83,509) 57,665
Increase (Decrease) in advance
billing and payment (18,121) 4,628 15,497
Increase (Decrease) in accrued
expenses 158,088 77,271 (211,188)
Increase (Decrease) in other
liabilities 112,454 27,632 283,133
Net cash provided by operating
activities 4,254,044 3,264,289 2,818,765
CASH FLOW FROM INVESTING ACTIVITY:
Purchase of property, plant
and equipment (2,822,600) (1,988,826) (4,143,323)
Interest charged to construction 25,272 32,372 123,482
Distribution from partnership 393,750 ---- 202,500
Changes in other investments (4,850) (216,589) (2,345)
Net cash used in investing
activities (2,408,428) (2,173,043) (3,819,686)
CASH FLOW FROM INVESTING ACTIVITIES:
Increase (Decrease) in Notes Payable (100,000) 50,000 900,000
Repayment of long-term debt (370,000) (120,000) (120,000)
Dividends (1,237,569) (1,099,998) (1,053,820)
Sale of Common Stock 158,425 191,596 167,295
Purchase of Treasury Stock (50,000) ---- ----
Increase in unamortized debt issue
expense ---- (52,832) ----
Net cash provided by (used in)
financing activities (1,599,144) (1,031,234) (106,525)
Increase (Decrease) in cash and
cash equivalents 246,471 60,012 (1,107,446)
Cash and cash equivalents at
beginning of year 482,049 422,037 1,529,483
Cash and cash equivalents at
end of year $ 728,520 $ 482,049 $ 422,037
The accompanying notes are an integral part of the financial statements.
-18-
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is an independent telephone company providing telephone service
to customers in the Towns of Warwick and Goshen, New York and the Townships
of Vernon and West Milford, New Jersey. Its services include providing local
toll and cellular telephone service to residential and business customers,
access and billing and collection services to interexchange carriers, the
sale and leasing of telecommunications equipment, paging and Internet
access.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in the consolidated financial statements
except for the billing of certain intercompany expenses, which have not been
eliminated in order to accurately state the income from the telephone
company and subsidiary operations.
DEPRECIATION
Depreciation is based on the cost of depreciable plant in service and is
calculated on the straight-line method using estimated service lives of the
various classes of telephone plant. Depreciation as a percent of average
depreciable telephone plant was 6.53%, 6.47%, and 6.25%, for the years 1996,
1995 and 1994, respectively.
CAPITALIZATION OF CERTAIN COSTS AND EXPENSES
The Company has consistently followed the practice of capitalizing certain
costs related to construction, including payroll and payroll related costs
and significant costs of capital incurred during construction. The income
which results from capitalizing interest during construction is not
currently realized but, under the regulatory rate-making process, is
recovered by revenues generated from higher depreciation expense over the
life of the related plant.
FEDERAL INCOME TAXES
The Company records deferred taxes according to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109").
Under SFAS 109 deferred income taxes arise from temporary differences
resulting from differences between the financial statement and tax basis of
assets and liabilities. Deferred taxes are classified as current or
non-current, depending on the classification of the assets and liabilities
to which they relate. Deferred taxes arising from temporary differences that
are not related to an asset or liability are classified as current or
non-current depending on the periods in which the temporary differences are
expected to reverse. The Company's deferred taxes result principally from
differences in depreciation methods for financial reporting and tax
reporting.
Investment tax credits have been normalized and are being amortized to
income over the average life of the related telephone plant and other
equipment.
INVESTMENTS
Investments consisted of the following at December 31:
1996 1995
Investment in cellular partnership $ 1,327,110 $ 1,054,485
Other investments 27,280 22,430
$ 1,354,390 $ 1,076,915
The partnership investment represents the Company's 7.5% interest as a
limited partner in a cellular telephone operation. Other investments are
recorded at cost.
CASH FLOW STATEMENT
Cash and cash equivalents consist principally of demand deposits and are in
accounts which are insured by the Federal Deposit Insurance Corporation
(F.D.I.C.) up to $100,000 at each financial institution. As of December 31,
1996 the amount of cash in excess of these F.D.I.C. insured limits was
approximately $535,000. The following is a list of interest and federal
income tax payments for each of the three years in the period ending
December 31, 1996:
1996 1995 1994
Interest $ 635,528 $ 625,259 $ 613,969
Federal Income Taxes $1,343,151 $ 615,000 $ 717,037
-19-
MATERIAL AND SUPPLIES
New material and reusable materials are carried at average original cost,
except that specific costs are used in the case of large individual items.
As of December 31, 1996 and 1995 the Material and Supplies inventory
consisted of the following:
1996 1995
Inventory for outside plant construction $ 322,440 $ 301,022
Inventory for central office equipment 431,946 544,109
Inventory of deregulated equipment held
for sale or lease (principally PBX and
station equipment) 697,472 671,227
$1,451,858 $1,516,358
RETIRMENT AND/OR DISPOSITION OF PROPERTY
When depreciable property is retired, the amount at which it is carried plus
the cost of removal is charged to the depreciation reserve and any salvage
is credited thereto. Expenditures for maintenance and repairs are charged
against income; renewals and betterments are capitalized.
MISCELLANEOUS REVENUES
Miscellaneous revenues consisted of the following for each of the three
years in the period ended December 31:
1996 1995 1994
Directory advertising
revenue $ 854,940 $ 784,365 $ 738,231
Rent revenue 199,021 193,310 178,585
Billing and collection
revenue 1,153,032 1,105,198 1,109,344
Deregulated revenues 467,669 441,352 428,693
Other operating revenues 421,787 644,395 418,316
$ 3,096,449 $3,168,620 $2,873,169
2. PROPERTY, PLANT AND EQUIPMENT
Plant in service, at cost, consisted of the following at December 31:
1996 1995
Land, buildings, furniture and
office equipment $ 4,172,633 $ 3,959,825
Vehicles and work equipment 1,104,873 1,089,133
Central office equipment 14,824,564 14,170,386
Customer premise equipment 1,260,294 1,238,875
Outside plant equipment 12,402,005 11,672,967
Other equipment 813,664 221,185
$34,578,033 $32,352,371
3. DEPRECIATION RESERVE
Depreciation reserve consisted of the following at December 31:
1996 1995
Buildings, furniture and
office equipment $ 1,644,932 $ 1,340,689
Vehicles and work equipment 653,551 619,792
Central office equipment 6,348,878 5,215,246
Customer premise equipment 1,171,241 1,154,728
Outside plant equipment 3,249,002 2,892,539
Other equipment 132,922 11,454
$13,200,526 $11,234,448
4. ACCOUNTS RECEIVABLE
The Company uses the reserve method to record uncollectible accounts. The
reserve for uncollectibles was $65,155 as of December 31, 1996 and 1995
respectively.
-20-
5. LONG TERM DEBT
Long-term debt consisted of the following at December 31:
1996 1995
Redemption Redemption
Price Plus Price Plus
First Mortgage Bonds Amount Premium Amount Premium
9.50 % Series "F"
(due 09/01/1996) $ 0 0.00% $ 260,000 100.00%
8.75 % Series "G"
(due 12/15/1996) 0 0.00% 110,000 100.00%
9.05 % Series "I"
(due 05/01/2000) 3,000,000 N/A 3,000,000 N/A
7.05 % Series "J"
(due 12/01/2003) 4,000,000 N/A 4,000,000 N/A
7,000,000 7,370,000
Less: Current
maturities
of Long-Term Debt 0 370,000
Total Long-Term Debt $7,000,000 $7,000,000
Telephone properties have been pledged as collateral on the first mortgage
bonds. Under provisions of the bond indentures, as amended, the payment of
dividends or a distribution of assets to stockholders to the extent of 75%
of the Company's net income earned during the calendar year will be allowed,
providing "net operating income" exceeds interest expense 1.5 times.
Maturities and sinking fund requirements for the five years subsequent to
1996 for long-term debt outstanding as of December 31, 1996 are as follows:
1997 ----- 2000 $ 3,000,000
1998 ----- 2001 -----
1999 -----
The first mortgage bonds, Series "I" and "J" bonds, may not be redeemed
prior to their maturity date.
6. NOTES PAYABLE
The Company has an unsecured line of credit with the Warwick Savings Bank,
which expires in April, 1997. Any borrowings under this line of credit are
on a demand basis and are without restrictions, at a variable lending rate.
The total credit available at December 31, 1996 was $1,650,000. The balances
outstanding as of December 31, 1996 and 1995 were $850,000 and $950,000
respectively, bearing interest rates of 7.75% and 8%.
7. FEDERAL INCOME TAXES
The following tabulation is a reconciliation of the federal income tax
expense as reported in these financial statements with the tax expense
computed by applying the statutory federal income tax rates to pre-tax
income. The statutory tax rate of 34% applies to all three years.
1996 1995 1994
Operating federal income taxes:
Current portion $1,301,825 $ 601,448 $ 345,433
Deferrals, net of reversals:
Depreciation (18,393) 100,984 153,538
Cost of removal 1,275 2,928 (11,768)
Tax savings due to TRA of 1986 (89,760) (89,760) (89,760)
Other 8,137 19,866 (33,936)
Investment tax credit, net
of amortization (51,000) (51,000) (51,000)
(149,741) (16,982) (32,926)
Operating F.I.T. expense $1,152,084 $ 584,466 $ 312,507
-21-
1996 1995 1994
Nonoperating federal income taxes:
Current portion $ 228,956 $ 89,917 $ 102,417
Deferrals, net of reversals: (9,090) (9,089) (3,875)
Nonoperating F.I.T. expense 219,866 80,828 98,542
F.I.T. included in income of
subsidiary 4,418 45,947 115
Total F.I.T. expense,
as reported 1,376,368 711,241 411,164
Reversals of deferred taxes 122,917 177,968 202,255
Tax savings of TRA of 1986, net 89,760 89,760 89,760
Other (68,617) (5,001) 31,430
FEDERAL INCOME TAX AT
STATUTORY RATE $1,520,428 $ 973,968 $ 734,609
The following components comprise the net deferred tax liability reported as
of December 31:
1996 1995
Deferred tax liabilities $2,443,262 $ 2,406,384
Deferred tax assets 130,038 156,311
Net deferred tax liability $2,313,224 $ 2,250,073
The deferred tax liability consists principally of temporary differences due
to differences in depreciation methods for financial reporting and tax
reporting. The deferred tax asset is due to the unamortized investment tax
credit being deemed a temporary difference in the basis of the related
assets.
The adoption of SFAS 109, Accounting for Income Taxes, has required certain
reclassifications of deferred tax balances and the establishment of
regulatory assets and liabilities. This is due to the ratemaking treatment
of deferred taxes and unamortized investment tax credits, whereby future
reversals can be expected to be recovered or returned to customers through
future rates. Any existing excess deferrals, generated from a change in tax
rates, which will be passed on to customers of the Company's regulated
operations in the future, have been reclassed as regulatory liabilities. The
balance of unamortized investment tax credits is a temporary difference and
a deferred tax asset has been established for this. The offsetting
regulatory liability associated with this reflects the future amounts due to
customers as reversals of these balances occur. These regulatory liabilities
are included in other deferred credits and amounted to $176,404 and $202,170
as of December 31, 1996 and 1995, respectively. As reversals of the deferred
tax balances occur in the future, these regulatory liabilities will also
decrease.
8. PENSION PLANS
Defined Benefit Pension Plan - The Company has two defined benefit pension
plans covering all management and non-management employees who are at least
21 years of age and have completed one year of service. Benefits are based
on years of service and the average of the employee's three highest
consecutive years' base compensation. The Company's policy is to fund the
minimum required contribution disregarding any credit balance arising from
excess amounts contributed in the past. Contributions to the plan for 1996,
1995 and 1994 were $328,598, $329,807, and $80,309, respectively.
The following table sets forth the combined plan's funded status and amounts
recognized in the Company's statement of financial position as of December
31, 1996 and 1995:
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
vested benefit $ 6,006,210 $ 6,019,582
non-vested benefit 9,650 4,528
$ 6,015,860 $ 6,024,110
Projected benefit obligation for service
rendered to date $(7,505,941) $(7,602,508)
Plan assets at fair value (bonds, real
estate, mortgages and stocks) 7,460,136 6,429,016
Projected benefit obligation in excess of
plan assets (45,805) (1,173,492)
Unrecognized net loss (gain) from past
experience different from that assumed
and effects of changes in assumptions (807,762) 265,103
Prior service cost not yet recognized in
net periodic pension cost 297,556 348,167
Unrecognized net transition obligation 266,319 319,582
Prepaid (accrued) pension cost $ (289,692) $ (240,640)
Net pension cost for the years
1996, 1995 and 1994
include the following components:
1996 1995 1994
Service cost-benefits
earned during the period $ 210,213 $ 168,557 $161,479
Interest cost on projected
benefit obligation 524,866 506,037 474,519
Actual return on plan assets (962,583) (1,100,756) (30,662)
Net amortization and deferral 605,154 752,328 (226,140)
Net periodic pension cost $ 377,650 $ 326,166 $ 379,196
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A discount rate of 7.0% and 8.5% and a rate of increase in future
compensation levels of 5.5% and 6.5% were used in determining the actuarial
present value of the projected benefit obligations for 1996 and 1995,
respectively. The expected long-term rate of return on assets was 7.75% and
9.0% for 1996 and 1995, respectively.
There may be differences in the amount of pension expense as stated above
and that recorded in these financial statements due to regulatory
requirements. This difference would be recorded as a regulatory asset or
liability and will be disposed of by the regulators at a future date.
Defined Contribution Plan - The Company also has a Defined Contribution
401(K) Profit Sharing Plan covering substantially all employees. Under the
plan, employees may contribute up to 15% of compensation, subject to certain
legal limitations. The Company contributes a matching contribution up to
5.0% of an eligible participant's compensation for management, clerical,
traffic, and plant employees.
9. POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
The Company has adopted SFAS 106, "Employers' Accounting for Postretirement
Benefits other than Pensions," which requires the cost of these benefits to
be recognized over the service life of employees. The Company sponsors a
non-contributory, defined benefit postretirement medical benefit plan that
covers all employees that retire directly from active service on or after
age 55 with at least 10 years of service or after age 65 with at least 5
years of service. The projected unit credit actuarial method was used in
determining the cost of future benefits. During 1996 the plan was
redesigned which caused a significant decrease in future benefit
obligations. The Company's funding policy is to contribute the maximum
allowed under current Internal Revenue Service regulations. Due to
regulatory requirements the Company is allowed to expense the amount
actually funded, with any difference between the funding amount and the
SFAS 106 expense amount being deferred as a regulatory asset or liability.
Assets of the plan are invested in common stocks and a money market fund.
The following table sets forth the plan's funded status reconciled with the
amounts shown in the Company's balance sheet at December 31, 1996 and 1995.
Accumulated postretirement benefit obligation: 1996 1995
Retirees $ (140,947) $ (364,378)
Eligible active plan participants (558,425) (1,112,223)
$ (699,372) $(1,476,601)
Plan assets at fair value 680,072 456,361
Accumulated postretirement benefit
obligation in excess of plan assets (19,300) (1,020,240)
Unrecognized net loss (gain) 246,758 103,494
Unrecognized prior service costs 472,859 0
Unrecognized transition obligation 823,932 875,428
Prepaid (Accrued) postretirement benefit cost $1,524,249 $ (41,318)
Net periodic postretirement benefit costs for 1996, 1995 and 1994 includes
the following components:
1996 1995 1994
Service cost $ 65,873 $ 44,963 $ 42,975
Interest cost on accumulated
postretirement benefit
obligation 138,186 102,387 95,370
Actual return on plan assets (85,331) (52,234) (11,513)
Amortization of transition
obligation over 20 years 51,496 51,496 51,496
Net amortization and deferral 4,557 32,211 2,078
Net periodic postretirement
benefit cost $ 174,781 $ 178,823 $ 180,406
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996. The health care
cost trend rate assumption has a significant effect on the amounts reported.
Increasing the assumed health care cost trend rates by one percentage point
in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1996 by approximately $300,000 and the
aggregate of the service and interest cost components of postretirement
expense for the year then ended by approximately $35,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 7.0% and the expected
long-term rate of return on plan assets was 8.5% and 7.5% for 1996 and 1995,
respectively.
10. RELATED PARTY TRANSACTIONS
The Company expended approximately $193,976, $204,565 and $187,036 during
1996, 1995and 1994, respectively, in insurance premiums for required
insurance coverage. These expenditures were made to an insurance agency in
which a member of the Board of Directors has a financial interest. Two Board
of Director members are also trustees of the Warwick Savings Bank, at which
the Company has its principal bank accounts and temporary investments.
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11. NONOPERATING INCOME AND EXPENSES
Nonoperating income (expense) for the years ended December 31, are as
follows:
1996 1995 1994
Interest charged to construction $ 25,272 $ 32,372 $ 123,482
Interest income 462 513 17,082
Income from cellular partnership 666,375 290,250 293,500
Net income (loss) from subsidiaries 44,660 89,193 225
Other nonoperating income (expense) (29,521) (26,300) (9,355)
Nonoperating federal income taxes (219,866) (80,828) (98,542)
$ 487,382 $ 305,200 $ 326,392
12. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding of 621,697, 617,584 and 612,248 for the years ended December 31,
1996, 1995 and 1994, respectively.
13. TREASURY STOCK
The Company accounts for treasury stock using the cost method of accounting.
14. PREFERRED STOCK
The preferred stock may be redeemed by the Company on any dividend payment
date at par plus accumulated dividends. Preferred stock ranks prior to the
common stock both as to dividends and on liquidation, but has no general
voting rights. However, if preferred stock dividends are in default in an
amount equal to six quarterly dividends, the holder of preferred stock shall
have the right to elect a majority of the Board of Directors and such voting
rights would continue until all dividends in arrears have been paid.
15. COMMITMENTS
The Company is required to make certain contributions to national and state
associations as part of the industry practice of pooling revenues and
redistributing to members based on cost to provide services or some other
method. Due to recent changes in the structure of these pools, the Company's
responsibility is to contribute certain fixed amounts during a transition
period, after which time the amounts may change. Payments to the National
Exchange Carrier Association during 1996 were $61,000 and the contribution
for 1997 is expected to be $67,000. Effective October 1, 1996, the Company's
contribution to the New York State Access Settlement Pool was frozen at
$23,805 per month until the New York Public Service Commission determines a
new method of providing support for universal service in rural, high cost
areas of the state. A decision is anticipated during 1997. The amounts paid
to these pools are considered part of the cost of providing access service
to inter-exchange carriers and are included in the rates charged to them.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of the instruments. The fair value of the Company's
long-term debt, after deducting current maturities, is estimated to be
$7,460,000 at December 31, 1996, compared to a carrying value of $7,000,000.
The fair value estimates were based on rates currently available from debt
instruments with similar terms and maturities. The fair value of all other
financial instruments is estimated by management to approximate the carrying
value.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors February 6, 1997
Warwick Valley Telephone Company
P.O. Box 592
Warwick, New York 10990
Independent auditor's report
We have audited the accompanying consolidated balance sheets of Warwick Valley
Telephone Company as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warwick Valley
Telephone Company as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Bush & Germain, P.C.
Syracuse, New York
February 6, 1997
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BOARD OF DIRECTORS AND OFFICERS
(page of photos)
Philip S. Demarest Howard Conklin, Jr. Earl V. Barry
Board Director, Chairman of the Board of Board Director,
Vice President, the Company, Chairman of Retired, Former Vice
Secretary & Treasurer of the Board, Conklin & President of the
the Company Strong, Inc., Warwick, N.Y. Company
Henry L. Nielsen, Jr. Fred M. Knipp Victor J. Marotta
Vice Chairman of the Board Director, Board Director,
Board of the Company, President & C.E.O. of Director of Tri-States
President, Nielsen the Company Tankers of New
Construction Co., Inc., of New York, Inc.
Warwick, N.Y. Andover, N.J.
Wisner H. Buckbee Joseph E. DeLuca, M.D. Corinna S. Lewis
Board Director, Board Director, Board Director,
President, Wisner Physician, Vernon Urgent Retired Public
Farms, Inc., Care Center, Vernon, N.J. Relations Consultant
Warwick, N.Y.
Herbert Gareiss, Jr.
Vice President of
the Company
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PERFORMANCE HIGHLIGHTS
For years ended or at
December 31, 1996 1995 1994 1993 1992
SELECTED FINANCIAL DATA
Total revenues * $17,946,698 $14,969,872 $13,570,409 $11,817,981 $10,949,082
Telephone operating revenues 15,161,873 13,315,940 12,277,948 11,162,239 10,377,034
Total expenses * 12,406,565 11,022,037 10,165,019 8,351,512 7,692,276
Telephone operating expenses 9,761,435 9,217,733 8,850,222 7,931,025 7,290,612
Net income 3,095,481 2,153,372 1,749,450 1,642,639 1,401,753
Total assets 30,243,580 29,418,023 27,657,579 25,792,681 23,010,828
Current assets 5,777,625 5,975,482 4,690,034 5,324,625 4,330,829
Current liabilities 3,723,691 4,720,240 3,801,653 2,663,442 4,373,441
Long-term obligations 7,000,000 7,000,000 7,370,000 7,490,000 3,610,000
Percentage of debt to
total capital 31.96 36.07 38.3 37.6 31.2
Shareholders' equity 16,710,548 14,744,212 13,499,242 12,636,317 11,859,847
COMMON STOCK DATA
Income applicable to
common stock 3,070,481 2,128,372 1,724,450 1,617,639 1,376,753
Income per share 4.94 3.45 2.82 2.66 2.27
Book value 26.07 23.06 21.23 19.96 18.70
Cash dividends per
common share 1.95 1.74 1.68 1.64 1.60
Shareholders of record 612 607 591 590 584
Shares outstanding 621,697 617,584 612,248 607,301 607,491
GENERAL
Access lines in service 23,719 22,132 21,126 20,312 19,514
Carrier access minutes 150,708,737 134,534,480 125,081,670 115,645,770 88,039,170
* Including cellular shown as part of nonoperating income (expenses) on
statement of income.
CONCERNING THE COMPANY'S COMMON STOCK
Although private sales are made by holders of the Company's common stock
from time to time, there is no established public trading market for the
Company's common stock, and the Company is unable to say whether one will
develop. At March 1, 1997, there were 612 holders of the Company's common stock.
The Company has paid consecutive cash dividends on its common stock
quarterly since April 1, 1931 and semi-annually from July 1, 1907 until December
31, 1930. The practice of the Company has been to reinvest a substantial portion
of its earnings in its capital plant. While the present intention of the Board
of Directors is to continue declaring cash dividends, future dividends will
necessarily depend on the Company's earnings, capital requirements, developments
in the telephone industry and general economic conditions, among other factors.
In 1995, the Company paid a dividend on its common stock of $1.74 per share. In
1996, the common stock dividend paid was $1.95 per share.
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