WARWICK VALLEY TELEPHONE CO
Incorporated by reference to the information under the caption “Executive Compensation” in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders.
Incorporated by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders.
Incorporated by reference to the information under the caption “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders.  Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.  Incorporated by reference to the information under the caption “Audit Fees” in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders.  30       Part IV.  Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a) The following items are filed as part of this Annual Report:                        1.    Financial Statements                    Page         Report of Independent Registered Public Accounting Firm WithumSmith+Brown, P.C.-December 31, 2005      35          Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP-December 31, 2004 and 2003      39          Consolidated Statements of Income-Years Ended December 31, 2005, 2004 and 2003      40          Consolidated Balance Sheets-December 31, 2005 and 2004      41          Consolidated Statements of Cash Flows-Years Ended December 31, 2005, 2004 and 2003      42          Consolidated Statements of Shareholders’ Equity-Years Ended December 31, 2005, 2004 and 2003      43          Notes to Consolidated Financial Statements      44-60                     2.    Financial Statement Schedules                                Report of Independent Registered Public Accounting Firm — WithumSmith+Brown, P.C.      61          Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP      62          Schedule II. Valuation and Qualifying Accounts      63                     3.    Exhibits                Index to Exhibits      64       31       3. Exhibits                  Exhibit No.   Description of Exhibit   Reference       3(a)    Articles of Incorporation, as amended    Incorporated by reference to Exhibit 3(i) to the Company’s Quarterly Report on Form 10-Q for September 2003               3(b)    By-Laws    Filed herewith               4(a)    Form of Common Shares Certificate, as amended    Incorporated by reference to Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for September 2003               4(b)    CoBank Loan Agreement    Incorporated by reference to Exhibit 4(d) to the Company’s Annual Report on Form 10-K for 2002               10    Severance Agreement with Larry Drake    Filed herewith               14    Warwick Valley Telephone Company Code of Ethics    Incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for 2003               16    Letter from PricewaterhouseCoopers LLC regarding accuracy of statements concerning their dismissal    Filed herewith               21    Significant Subsidiaries of Registrant    Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for 2003                           23.1    Consent of Independent Registered Public Accountants WithumSmith + Brown, P.C.   Filed herewith                           23.2    Consent of Independent Registered Public Accountants PriceWaterhouseCoopers LLP   Filed herewith               23.3    Consent of Independent Registered Public Accountants Deloitte & Touch LLP   Filed herewith               31.1    Rule 13a -14(a)/15d-14(a) Certification signed by Herbert Gareiss, Jr. Chief Executive Officer    Filed herewith               31.2    Rule 13a -14(a)/15d-14(a) Certification signed by Michael Cutler Chief Financial Officer    Filed herewith               32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Herbert Gareiss, Jr.-Chief Executive Officer    Filed herewith     32                       Exhibit No.   Description of Exhibit   Reference       32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Michael Cutler-Chief Financial Officer    Filed herewith               99    Orange County-Poughkeepsie Limited Partnership Financial Statements as of December 31, 2005 and 2003 and for the years ended December 31, 2005, 2004 and 2003    Filed herewith     33       SIGNATURES       Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                            WARWICK VALLEY TELEPHONE COMPANY                   Dated: March 27, 2006   /s/Herbert Gareiss, Jr.                        Herbert Gareiss, Jr.           President, Chief Executive Officer          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated and on the 27th day of March, 2006.                      Signature   Title          /s/ Herbert Gareiss, Jr.    President and Chief Executive Officer                     Herbert Gareiss, Jr.    (Principal Executive Officer)                    /s/ Michael Cutler    Vice President and Treasurer                     Michael Cutler    (Principal Financial and Accounting Officer)                    /s/ Wisner H. Buckbee    Director                     Wisner H. Buckbee                        /s/ Philip S. Demarest    Director                     Philip S. Demarest                        /s/ Robert J. DeValentino    Director                     Robert J. DeValentino                        /s/ Corinna S. Lewis    Director                     Corinna S. Lewis                        /s/ Joseph J. Morrow    Director                     Joseph J. Morrow                        /s/ Kelley C. Bloss    Director                     Kelley C. Bloss                        /s/ Jeffery D. Alario    Director                     Jeffery D. Alario                        /s/ Douglas J. Mello    Director                     Douglas J. Mello         34       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Shareholders, Warwick Valley Telephone Company:   We have audited the accompanying consolidated balance sheet of Warwick Valley Telephone Company as of December 31, 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended. We have also audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that Warwick Valley Telephone Company did not maintain effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Warwick Valley Telephone Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits. We did not audit the financial statements of the Orange County-Poughkeepsie Limited Partnership (the “O-P Partnership”), an investment that was reflected in the consolidated financial statements using the equity method of accounting. The investment in the O-P Partnership represented 5% of total assets as of December 31, 2005 and 139% of income before income taxes for the year ended December 31, 2005. The financial statements of the O-P Partnership were audited by other auditors whose report thereon has been furnished to us and our opinion expressed herein, insofar as it relates to the amounts included for O-P Partnership, is based solely on the report of the other auditors.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America , and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2005 financial statements.  35          1.   The Company did not maintain an effective control environment. Specifically, the financial reporting organizational structure was not adequate to support the activities of the Company. Furthermore, the information technology infrastructure was not adequate to support the Company’s financial accounting and reporting responsibilities. This control deficiency contributed to the material weaknesses described in 2 through 9 below. This control deficiency could result in a misstatement of significant accounts and disclosures, including those described in 2 through 9 below that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.      2.   The Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of accounting principles generally accepted in the United States of America (“GAAP”) commensurate with the Company’s financial reporting requirements. Specifically, certain key finance and accounting positions were not staffed with personnel possessing the appropriate skills, training, and experience in the application of GAAP to meet their responsibilities. This control deficiency contributed to the individual material weaknesses described in 3 through 6 below. This control deficiency could result in material misstatements of significant accounts and disclosures, including those described in items 3 through 6 below that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.      3.   The Company did not maintain effective controls over the authorization, completeness and accuracy of revenue and accounts receivable. Specifically, the controls over the authorization, completeness and accuracy of (i) service activation and service order initiation; (ii) customer billing adjustments including write-offs; (iii) the development of, changes to and the maintenance of billing rates; (iv) the approval and processing of customer payments, credits and other customer applications; and (v) the switching process for tolls and carrier access billings, including the record transfer process, were not effective. This control deficiency did not result in audit adjustments to the 2005 interim or annual consolidated financial statements. This control deficiency could result in a misstatement of revenue or accounts receivable that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.      4.   As previously reported in the Company’s Form 10-K/A for 2004 in Section 9A “Controls and Procedures”, the Company had not maintained effective controls over accounting for its equity method investments, specifically controls over the completeness and accuracy of recording its investments, the recording of a gain on the disposition of an equity investment in the appropriate period, or the presentation of related cash flows. During 2005, the Company established control procedures to remediate the internal control deficiencies. However, the Company, in 2005, could not evaluate the effectiveness of its control over accounting for its equity method investments, specifically controls over the completeness and accuracy of recording its investments, the recording of a gain on the disposition of an equity investment in the appropriate period, or the presentation of related cash flows. Specifically, the Company had no dispositions in 2005 that would validate the effectiveness of its internal controls over recording the related gains and/or losses to its equity investments. This control deficiency did not result in audit adjustments to the 2005 interim or annual consolidated financial statements. However, when considering the audit adjustments to deferred gains and losses on sales in the Company’s 2004 consolidated financial statements and without assurance that remediation for this control deficiency had occurred, this control deficiency could have resulted in a material misstatement. Accordingly management has determined that this control deficiency constitutes a material weakness.    36             5.   The Company did not maintain effective controls over the accuracy of its accounting for income taxes and the determination of income taxes payable, deferred tax assets and liabilities and the related income tax provision. Specifically, the Company did not have effective controls to accurately calculate current income tax expense and related income tax payable. In addition, the Company did not have effective controls to monitor the difference between the income tax basis and the financial reporting basis of assets and liabilities and reconcile the difference to deferred income tax asset and liability balances. This control deficiency resulted in audit adjustments to the Company’s 2005 interim and annual consolidated financial statements to correct deferred taxes, tax accruals and the tax provision. Additionally, this control deficiency could result in a material misstatement of deferred taxes, tax accrual and the tax provision that would result in a material misstatement of the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.       6.   The Company did not maintain effective controls over its period-end financial reporting process. Specifically, the Company lacked policies, procedures and controls for the preparation and review of the interim and annual consolidated financial statements and supporting schedules. This control deficiency contributed to the individual material weaknesses described in A through E below.         A.   The Company did not maintain effective controls over the preparation, review and approval of significant account reconciliations and journal entries. Specifically, the Company did not maintain effective controls over the completeness and accuracy of underlying data for supporting schedules and journal entries for: (i) accounts payable and accruals; (ii) inventory and the related valuation reserve; (ii) payroll expense and the related accruals; (iv) debt; (v) revenues and accounts receivable; (vi) taxes and (vii) fixed assets and the related depreciation accounts. This control deficiency resulted in audit adjustments to the Company’s 2005 interim and annual consolidated financial statements.        B.   The Company did not maintain effective controls over the completeness and accuracy of period-end accruals. Specifically, several entries regarding accounts payable and related accrued expenses were not identified and recorded in the appropriate time period. This control deficiency resulted in audit adjustments to the Company’s 2005 interim and annual consolidated financial statements.        C.   The Company did not maintain effective controls over the completeness, accuracy and validity of the period-end consolidation process. Specifically, the Company lacked controls to ensure all required consolidation entries were identified, analyzed and approved prior to being recorded in the consolidation schedules. This control deficiency did not result in audit adjustments to the Company’s 2005 interim or annual consolidated financial statements.        D.   The Company did not maintain effective controls over the preparation and review of the consolidated interim and annual financial statements. Specifically, the Company did not have effective controls over the process related to identifying and accumulating all required supporting information to ensure the completeness and accuracy of the consolidated financial statements and the accompanying footnote disclosures to ensure the balances reported in the consolidated financial statements reconciled to the underlying supporting schedules and analyses. This control deficiency did not result in adjustments to the Company’s 2005 interim or annual consolidated financial statements.        E.   The Company did not maintain effective controls over the maintenance of certain spreadsheets utilized in the period-end financial reporting process. Specifically, the Company lacked effective controls related to the completeness, accuracy, validity and restricted access to spreadsheets related to: (i) shareholders’ equity, including earning per share; (ii) journal entries and reconciliations; (iii) revenue and accounts receivable; and (iv) payroll expense and the related accruals. This control deficiency did not result in audit adjustments to the Company’s 2005 interim and annual consolidated financial statements.         In summary, with respect to this deficiency, the control deficiencies described in A. through E. above could result in a misstatement of the aforementioned accounts or disclosures that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that each of the control deficiencies described above constitutes a material weakness.  37          7.   The Company did not maintain effective controls over access to programs and data. Specifically, certain of the Company’s personnel had unrestricted access to various financial application programs and data beyond the requirements of their individual job responsibilities including (i) accounts payable; (ii) financial reporting; (iii) payroll; (iv) inventory; (v) fixed assets; and (vi) revenue. Such access was beyond the requirements of their assigned responsibilities and was not appropriately monitored. This control deficiency did not result in audit adjustments to the 2005 interim or annual consolidated financial statements. However, this control deficiency could result in a misstatement of significant accounts and disclosures, including those described in (i) through (vi) above, that would result in a material misstatement to the Company’s interim or annual consolidated statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.       8.   The company did not maintain effective controls over the design of its general ledger application. Specifically, the design of the general ledger application allows users to post adjusting entries to closed periods. Furthermore, this inadequate system design within the general ledger application permitted users to post adjustments to prior periods without authorization. This control deficiency did not result in audit adjustments to the Company’s 2005 interim or annual consolidated financial statements. However, this control deficiency could result in a misstatement of significant accounts or disclosures that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.     9.   The Company did not maintain effective controls over segregation of duties. Specifically, certain key financial accounting and reporting personnel had incompatible duties that allowed the creation, review, and processing of financial data without independent review and authorization for (i) purchases and payables; (ii) debt; (iii) investments; (iv) revenues; (v) taxes and (vi) inventory. This control deficiency did not result in audit adjustments to the Company’s 2005 interim or annual consolidated financial statements. However, this control deficiency could result in a misstatement of significant accounts or disclosures, including those described in (i) through (vi) above, that would result in a material misstatement to the Company’s interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness  In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Warwick Valley Telephone Company as of December 31, 2005, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, management’s assessment that Warwick Valley Telephone Company did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effects of the material weaknesses described above on the achievements of the objectives of the control criteria, Warwick Valley Telephone Company has not maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the COSO.            /s/ WithumSmith+Brown, P.C. Princeton, New Jersey March 13, 2006   38       Report of Independent Registered Public Accounting Firm  To the Board of Directors and Shareholders of Warwick Valley Telephone Company:   In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Warwick Valley Telephone Company and its subsidiaries (the “Company”) at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Orange County-Poughkeepsie Limited Partnership (the “O-P Partnership”), an investment that was reflected in the consolidated financial statements using the equity method of accounting. The investment in O-P Partnership represented 4% of total assets as of December 31, 2004, and 81% and 79% of income before income taxes for the years ended December 31, 2004 and 2003, respectively. The financial statements of O-P Partnership were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for O-P Partnership, is based solely on the report of the other auditors. We conducted our audits of the Company’s financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.  /s/ PricewaterhouseCoopers LLP New York, New York  November 15, 2005   39       WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF INCOME ($ in thousands except share and per share amounts)                                   FOR THE YEARS ENDED DECEMBER 31,   2005     2004     2003       Operating Revenues:                           Local network service   $ 3,903     $ 4,070     $ 4,075     Network access service     9,711       9,284       9,854     Long distance services     3,586       3,785       3,766     Directory advertising     1,390       1,452       1,429     Online services     6,734       6,913       6,699     Other services and sales     2,018       2,174       2,826                                                       Total operating revenues     27,342       27,678     $ 28,649                                                       Operating Expenses:                           Plant specific     4,911       4,317     $ 4,738     Plant non-specific:                           Depreciation & amortization     5,652       5,270       4,901     Other     3,561       3,271       2,846     Customer operations     4,460       4,698       4,483     Corporate operations     8,717       5,790       4,562     Cost of services and sales     1,578       1,866       2,470     Property, revenue and payroll taxes     1,410       1,352       1,472                                                       Total operating expenses     30,289       26,564       25,472                                                       Operating (loss) income     (2,947 )     1,114       3,177                                 Other Income (Expenses):                           Interest income (expense), net of capitalized interest     (210 )     (292 )     (414 )   Income from equity method investments, net     10,638       10,208       8,846     Gain on sale of investment     889       2,490       —     Loss on write-down of investment     (705 )     —       —     Other income (expense)     291       (15 )     (6 )                                                     Total other income     10,903       12,391       8,426                                                       Income before income taxes     7,956       13,505       11,603                                 Income Taxes     2,786       4,577       3,873                                                       Net Income     5,170       8,928       7,730                                 Preferred Dividends     25       25       25                                                       Income Applicable to Common Stock   $ 5,145     $ 8,903     $ 7,705                                                       Basic & Diluted Earnings per Share of Outstanding Common Stock   $ 0.96     $ 1.65     $ 1.43                                                       Weighted Average Shares of Common Stock Outstanding     5,359,862       5,401,498       5,400,873                             Please see the accompanying notes, which are an integral part of the consolidated financial statements.  40       WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS ($ in thousands except share and per share amounts)                               December 31,     December 31,         2005     2004       Assets                     Current Assets:                   Cash and cash equivalents   $ 16,956     $ 16,809     Accounts receivable — net of reserve for uncollectibles — $171 and $148, in 2005 and 2004, respectively     3,680       3,317     Other accounts receivable     354       954     Materials and supplies     1,116       1,308     Prepaid income taxes     1,882       —     Prepaid expenses     929       599     Deferred income taxes     167       405                     Total Current Assets     25,084       23,392                                         Property, plant and equipment, net     37,854       40,971     Unamortized debt issuance costs     90       103     Intangible asset — pension     624       —     Other deferred charges     848       889     Investments     3,606       3,411     Other assets     123       —                                         Total Assets   $ 68,229     $ 68,766                                         Liabilities                   Current Liabilities:                   Accounts payable   $ 823     $ 813     Current maturities of long term debt     1,519       1,519     Advance billing and payments     253       255     Deferred gain on sale of investment     —       889     Customer deposits     141       156     Accrued taxes     34       604     Pension and post retirement benefit obligations     1,429       1,429     Accrued access billing     —       827     Other accrued expenses     2,486       1,729                     Total Current Liabilites     6,685       8,221                                         Long-term debt , net of current maturities     8,732       10,251     Deferred income taxes     6,747       4,141     Other liabilities and deferred credits     561       607     Pension and postretirement benefit obligations     5,273       4,600                                         Total Liabilities     27,998       27,820                                         Shareholders’ Equity                   Preferred Shares — $100 par value; authorized and issued shares of 5,000; $0.01 par value authorized and unissued shares of 10,000,000;     500       500     Common stock — $0.01 par value; authorized shares of 10,000,000 issued 5,985,463 shares as of December 31, 2005 and December 31, 2004     60       60     Treasury stock — at cost, 633,683 Common Shares as of December 31, 2005 and 583,683 Shares as of December 31, 2004     (4,748 )     (3,598 )   Additional paid in capital     3,487       3,487     Accumulated other comprehensive (loss)     (1,756 )     (1,328 )   Retained earnings     42,688       41,825                     Total Shareholders’ Equity     40,231       40,946                                         Total Liabilities and Shareholders’ Equity   $ 68,229     $ 68,766                       Please see accompanying notes, which are an intergral part of the consolidated financial statements.   41       WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)                                   FOR THE YEAR ENDED DECEMBER 31,   2005     2004     2003         CASH FLOW FROM OPERATING ACTIVITIES:                                                       Net income   $ 5,170     $ 8,928     $ 7,730     Adjustments to reconcile net income to net cash provided by operating activities:                           Depreciation and amortization     5,652       5,270       4,901     Deferred income taxes     2,844       112       225     Interest charged to construction     (12 )     (7 )     (42 )   Income from equity investments, net of distributions     (662 )     1,567       1,279     Gain on sale of investment     (889 )     (2,490 )     —     Loss on write-down of investment     705       —       —                                 Changes in assets and liabilities:                           (Increase) Decrease in accounts receivable     (363 )     103       (294 )   (Increase) Decrease in other accounts receivable     (289 )     133       342     (Increase) Decrease in materials and supplies     192       (155 )     315     (Increase) Decrease in prepaid income taxes     (1,882 )     —       —     (Increase) Decrease in prepaid expenses     (330 )     82       (137 )   (Increase) Decrease in deferred charges     41       (379 )     (482 )   (Increase) Decrease in other assets     (123 )     —       —     Increase (Decrease) in accounts payable     10       (746 )     (523 )   Increase (Decrease) in customers’ deposits     (14 )     21       9     Increase (Decrease) in advance billing and payment     (2 )     8       17     Increase (Decrease) in accrued taxes     (570 )     98       458     Increase (Decrease) in pension and post retirement benefit obligations     (379 )     560       1,856     Increase (Decrease) in other accrued expenses     757       477       129     Increase (Decrease) in accrued access billing     (827 )     133       228     Increase (Decrease) in other liabilities and deferred credits     (46 )     71       53                                                       Net cash provided by operating activities     8,983       13,786       16,064                                                       CASH FLOW FROM INVESTING ACTIVITIES:                           Capital expenditures     (2,523 )     (4,906 )     (6,261 )   Interest charged to construction     12       7       42     Sale of investment     889       3,603       —     Investment contributions     (238 )     (713 )     (38 )                                                     Net cash used in investing activites     (1,860 )     (2,009 )     (6,257 )                                                     CASH FLOW FROM FINANCING ACTIVITES:                           Payment of notes payable     —       —       (9,000 )   Proceeds from issuance of long-term debt     —       5,000       7,149     Repayment of long term debt     (1,519 )     (380 )     —     Unamoritzed debt discount     —       —       (126 )   Dividends (Common and Preferred )     (4,307 )     (5,319 )     (3,806 )   Sale of common stock     —       14       52     Purchase of treasury stock     (1,150 )     —       —                                                       Net cash used in financing activities     (6,976 )     (685 )     (5,731 )                                                     Increase in cash and cash equivalents     147       11,092       4,076                                 Cash and cash equivalents at beginning of year     16,809       5,717       1,641                                                       Cash and cash equivalents at end of year   $ 16,956     $ 16,809     $ 5,717                                                       Supplemental disclosure cash flow information:                           Interest   $ 560     $ 207     $ 459     Income tax   $ 1,940     $ 4,210     $ 2,690       Please see the accompanying notes, which are an integral part of the consolidated financial statements.  42       WARWICK VALLEY TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ($ in thousands except share amounts)                                                                                                                                                              Accumulated                       Treasury     Preferred     Preferred             Common     Additional             Other               Treasury     Stock     Stock     Stock     Common Stock     Stock     Paid In     Retained     Comprehensive               Stock Shares     Amount     Shares     Amount     Shares     Amount     Capital     Earnings     Loss     Total         Balance, December 31, 2002     583,683     $ (3,598 )     5,000     $ 500       5,982,810     $ 60     $ 3,421     $ 34,292     $ (269 )   $ 34,406                                                                                         Net income for the year                                                             7,730               7,730     Minimum Pension Liability                                                                     (496 )     (496 )                                                                                     Total Comprehensive Income (Loss)                                                                             7,234     Dividends:                                                                                   Common ($0.70 per share)                                                             (3,781 )             (3,781 )   Preferred ($5.00 per share)                                                             (25 )             (25 )   Sale of Common Stock                                     2,073               52                       52             Balance, December 31, 2003     583,683     $ (3,598 )     5,000     $ 500       5,984,883     $ 60     $ 3,473     $ 38,216     $ (765 )   $ 37,886                                                                                                                             Net income for the year                                                             8,928               8,928     Minimum Pension Liability                                                                     (563 )     (563 )                                                                                     Total Comprehensive Income (Loss)                                                                             8,365     Dividends:                                                                                   Common ($.98 per share)                                                             (5,294 )             (5,294 )   Preferred ($5.00 per share)                                                             (25 )             (25 )   Sale of Common Stock                                     580               14                       14                                               Balance, December 31, 2004     583,683     $ (3,598 )     5,000     $ 500       5,985,463     $ 60     $ 3,487     $ 41,825     $ (1,328 )   $ 40,946                                                                                                                                   Net income for the year                                                             5,170               5,170     Minimum Pension Liability                                                                     (428 )     (428 )                                                                                     Total Comprehensive Income (Loss)                                                                             4,742     Dividends:                                                                                   Common ($.80 per share)                                                             (4,282 )             (4,282 )   Preferred ($5.00 per share)                                                             (25 )             (25 )   Purchase of Tresury Stock     50,000       (1,150 )                                                             (1,150 )                                             Balance, December 31, 2005     633,683     $ (4,748 )     5,000     $ 500       5,985,463     $ 60     $ 3,487     $ 42,688     $ (1,756 )   $ 40,231                                                 Please see the accompanying notes, which are an intergral part of the consolidated financial statements.  43       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  Note 1: Summary of Significant Accounting Policies  Nature of Operations       Warwick Valley Telephone Company (the “Company”) provides communications 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 telephone service to residential and business customers, access and billing and collection services to interexchange carriers, Internet access and Video service.  Basis of Presentation       The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in the consolidated financial statements. 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 the financial statements, and the reported amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, depreciation expense, pension and postretirement expenses, income taxes and revenues from Universal Service Fund. Actual results could differ from those estimates.       Our investments in the Orange County-Poughkeepsie Limited Partnership (“O-P”), Zefcom and the Empire State Network (“EsiNet”) are accounted for under the equity method of accounting (See Note 9). Our other investment, Data Communications Group, Inc., (“DataNet”) which was sold in October 2004, was accounted for under the cost method of accounting.  Regulated Accounting       The Company’s rates are regulated by the Federal Communications Commission (the “FCC”), the New York State Public Service Commission (the “NYPSC”) and the New Jersey Board of Public Utilities (the “NJBPU”) and therefore the Company reflects the effects of the ratemaking actions of these regulatory bodies in its financial statements. Accordingly, the Company follows the accounting prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 71 “Accounting for the Effects of Certain Types of Regulation.” The Company periodically reviews the continued applicability of SFAS No. 71 based on the current regulatory and competitive environment.       The rates that the Company charges to its customers for regulated services in New York were established in its 1993 rate case with the NYPSC. The rates the Company charges for its regulated services in New Jersey were established in its 1972 rate case with the NJBPU. The Company has not filed a rate case in New York or New Jersey since those times. If the Company should submit a rate case with the NYPSC or NJBPU in the future, it is uncertain as to what the outcome of the rate case would be and how it would affect the Company’s results of operations and financial position.  Revenue Recognition       The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) 104 “Revenue Recognition in Financial Statements”. The Company recognizes revenue when (i) persuasive evidence of an arrangement between the Company and the customer exists, (ii) the delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price to the customer is fixed or determinable and (iv) collectibility of the sales price is assured.       Telephone and Network access revenues are primarily derived from usage of the Company’s network and facilities. Telephone and Network access revenues are recognized as the corresponding services are rendered to customers. Long distance revenue is recognized monthly as services are provided. Directory advertising revenue is recorded ratably over the life of the directory.  - 44 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       Revenues from Online services, which include DSL and Video, are recorded when the services are rendered. Other service and sales revenue is recognized when services are provided or the sales transactions are completed.  Allowance for Doubtful Accounts       The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. Such an allowance is based upon historical trends of accounts receivable write offs, net of subsequent cash recoveries of previously written-off balances. Uncollectible accounts are charged against the allowance for doubtful accounts and subsequent cash recoveries of previously written off bad debts are credited to the account. For the years ended December 31, 2005, 2004 and 2003 net write-offs over recoveries of uncollectible accounts receivable were $156, $480 and $66, respectively.  Advertising and Promotional Costs       Advertising and promotional costs are expensed as incurred. Advertising and promotional expenses were $487, $389 and $261 for 2005, 2004 and 2003 respectively.  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. The Company’s deferred taxes result principally from differences in depreciation, Universal Service Fund revenues and in the accounting for pensions and other postretirement benefits. Investment tax credits are amortized as a reduction to the provision for income taxes over the useful lives of the assets that produced the credits.  Property, Plant and Equipment       The Company records property, plant and equipment at cost. Construction costs, labor and related costs related to installations and interest during construction are capitalized. Costs of maintenance and repairs of property, plant and equipment are charged to operating expense. The estimated useful life of support equipment (vehicles, computers, etc.) ranges from approximately 3 to 19 years. The estimated useful life of communication and network equipment ranges from approximately 10 to 15 years. The estimated useful life of Internet and Video equipment ranges from 3 to 15 years. The estimated useful life of buildings and other equipment ranges from approximately 14 to 50 years. Depreciation expense is computed using the straight line method. In accordance with regulatory accounting guidelines when units of property are retired, sold or otherwise disposed of in the ordinary course of business, the gross book value is charged to accumulated depreciation with no gain or loss recognized.  Cash and Cash Equivalents       The Company considers all highly liquid instruments with an initial maturity from the date of purchase of three months or less to be cash equivalents. Cash equivalents consist primarily of money market mutual funds. The Company places its cash with high credit quality financial institutions which at times may exceed amounts insured by the Federal Deposit Insurance Corporation.  - 45 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  Fair Value of Financial Instruments       As of December 31, 2005, the Company’s financial instruments consisted of cash, cash equivalents, accounts receivable and long-term debt. The Company believes that the carrying values of cash equivalents and accounts receivable at December 31, 2005 approximated fair value. Based on the borrowing rates currently available to the Company for loans of similar terms, the Company has determined that the carrying value of the long-term debt (including current maturities) approximates fair value.  Impairment of Long-Lived Assets       The Company reviews business conditions to determine the recoverability of the carrying value of its long-lived assets on a periodic basis in order to identify business conditions which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If total expected future undiscounted cash flows are less than the carrying value amount of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected market value or future discounted cash flows) and the carrying value of the assets.       In March 2006, the Company identified an investment as permanently impaired (See Note: 9 for further discussion).  Derivative Financial Instrument and Hedging Activities       As of December 31, 2005 and 2004, the Company had no derivative financial instrument and hedging activities.  Note 2: Impact of Recently Adopted Accounting Pronouncements       In June 2004, the FASB issued EITF Issue No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue 03-1 establishes a common approach to evaluating other-than-temporary impairment to investments in an effort to reduce the ambiguity in impairment methodology found in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” and FASB No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, which has resulted in inconsistent application. In September 2004, the FASB issued FASB Staff Position EITF Issue 03-1-1, which deferred the effective date for the measurement and recognition guidance clarified in EITF   Issue 03-1 indefinitely; however, the disclosure requirements remain effective for fiscal years ending after June 15, 2004. While the effective date for certain elements of EITF Issue 03-1 has been deferred, the adoption of EITF Issue 03-1 when finalized in its current form is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.       In December 2004, the FASB issued SFAS 153 “Exchanges of Nonmonetary Assets (as amended)”. SFAS 153 amends APB No. 29 “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of SFAS No. 153 has not had a material impact on the Company’s financial position, results of operations or cash flows.       In April 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” requiring companies to recognize a liability for the fair value of an asset retirement obligation that may be conditional on a future event if the fair value of the liability can be reasonably estimated. The Company’s the adoption of FIN 47 has not had a material impact on the Company’s financial position, results of operations or cash flows.  - 46 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       In June 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections”, which establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS 154 completely replaces APB No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Periods”, although it carries forward the guidance in those pronouncements with respect to accounting for changes in estimates, changes in the reporting entity, and correction of errors. Under APB 20, most voluntary changes in accounting principle, including a change in the method of applying a principle were reported in the period in which the change occurred through a cumulative effect of the change. Under SFAS No. 154, all such changes must be accounted for by retrospective restatement of financial statements of prior periods unless it is impracticable to determine either (1) period specific events, or (2) the cumulative effect of the change. The Company’s adoption of SFAS 154 will not have a material impact on the Company’s financial position, results of operations or cash flows.  Note 3: Change in Estimate       In August 2005, the Company changed the estimated useful life of certain video equipment from 7 to 3 years in order to better reflect the equipment’s projected economic life under current market conditions. This change in the assets useful life was treated as a change in estimate and applied on a prospective basis. The effect on net income and earnings per share for the year ended of December 31, 2005 was a decrease of $149 or $.03 per share.  Note 4: Earnings Per Share       Basic and diluted earnings per share are based on the weighted average number of actual weighted shares outstanding of 5,359,862, 5,401,498 and 5,400,873 (as adjusted for the 3-for-1 stock split that occurred in October 2003 as discussed in Note 13) for the years ended December 31, 2005, 2004 and 2003, respectively.       The Company did not have any Common Share equivalents as of December 31, 2005, 2004 and 2003, respectively.  Note 5: Comprehensive Loss       The Company’s only component of accumulated other comprehensive income (loss) consisted of a minimum pension liability for the years ended December 31:                                      2005   2004   2003               Minimum pension liability   $ (658 )   $ (871 )   $ (767 )   Related deferred income tax     230       308       271                                         Total comprehensive loss   $ (428 )   $ (563 )   $ (496 )             Note 6: Segment Information       Warwick Valley Telephone Company’s segments are strategic business units that offer different products and services and are managed as telephone and online services. We evaluate the performance of the segments based upon factors such as revenue growth, expense containment, market share and operating income.       The telephone segment provides landline telecommunications services, including local, network access and long distance services and messaging, and yellow and white pages advertising and electronic publishing.  - 47 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  The Online segment provides high speed and dial-up Internet services, help desk operations, and Video over VDSL.       Segment income statement information for the years ended December 31:                                         2005       2004       2003      Revenues                           Telephone   $ 22,483     $ 22,728     $ 23,892     Online     6,734       6,913       6,699     Eliminations     (1,875 )     (1,963 )     (1,942 )           Total revenues   $ 27,342     $ 27,678     $ 28,649                                         Depreciation and amortization                           Telephone   $ 3,757     $ 3,788     $ 3,744     Online     1,895       1,482       1,157             Total depreciation and amortization   $ 5,652     $ 5,270     $ 4,901                                         Operating (loss) income                           Telephone   $ (1,149 )   $ 1,687     $ 3,845     Online     (1,798 )     (573 )     (668 )           Total operating (loss) income     (2,947 )     1,114       3,177                                         Interest expense and income     (210 )     (292 )   $ (414 )   Income from equity investments, net     10,638       10,208       8,846     Gain on sale of investment     889       2,490       —     Loss on write-down of investment     (705 )     —       —     Other income (expenses)     291       (15 )     (6 )           Income before taxes   $ 7,956     $ 13,505     $ 11,603                    Segment balance sheet information as of December 31:                              2005   2004             Assets                   Telephone   $ 73,820     $ 74,338     Online     10,508       9,652     Eliminations     (16,099 )     (15,224 )           Total assets   $ 68,229     $ 68,766               Capital expenditures                   Telephone   $ 1,912     $ 4,097     Online     611       809             Total capital expenditures   $ 2,523     $ 4,906               No single customer accounts for 10% or more of the Company’s revenues or accounts receivable. - 48 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  Note 7: Material and Supplies       Material and supplies are carried at average cost. As of December 31, 2005 and 2004, material and supplies consisted of the following:                              2005   2004             Inventory for outside plant   $ 274     $ 257     Inventory for inside plant     550       672     Inventory for online equipment     19       80     Inventory for video equipment     105       130     Inventory of equipment held for sale or lease     168       169                 $ 1,116     $ 1,308               Note 8: Property, Plant and Equipment       Property, plant and equipment, at cost, consisted of the following for the years ended December 31:                              2005   2004             Land, buildings and other support equipment   $ 8,219     $ 7,925     Network communications equipment     31,074       30,699     Telephone plant     25,800       24,985     Online plant     10,860       10,252             Plant in service   $ 75,953     $ 73,861     Plant under construction     157       391                   76,110       74,252     Less: Accumulated depreciation     38,256       33,281             Property, plant and equipment, net   $ 37,854     $ 40,971               Note 9: Investments       Investments consisted of the following as of December 31:                              2005   2004             Investment in O-P Partnership   $ 3,517     $ 2,429     Investment in Zefcom     89       326     Investment in EsiNet     —       656                 $ 3,606     $ 3,411               Investment in Orange County-Poughkeepsie Limited Partnership       The Company is a limited partner in Orange County-Poughkeepsie Limited Partnership (O-P) and has a 7.5% limited partnership interest which is accounted for under the equity method of accounting. The majority owner and general partner is Verizon Wireless of the East L.P.  - 49 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       The following summarizes O-P’s income statement for the years ended December 31:                                      2005   2004   2003             Net Sales   $ 180,508     $ 163,367     $ 144,643     Cellular service cost     25,292       16,854       17,248     Operating expenses     8,490       7,823       7,299             Operating income     146,726       138,690       120,096     Other income     782       980       1,472             Net income   $ 147,508     $ 139,670     $ 121,568             Company share of 7.5%   $ 11,063     $ 10,475     $ 9,117                    The following summarizes O-P’s balance sheet for the years ended December 31:                              2005   2004             Current assets   $ 9,812     $ 1,545     Property, plant and equipment, net     37,516       34,525             Total assets   $ 47,328     $ 36,070                                 Current liabilities   $ 432     $ 3,682     Partners’ capital     46,896       32,388             Total liabilities and partners’ capital   $ 47,328     $ 36,070               Investment in Data Communications Group       The Company owned until October 2004 an 8.9% interest in DataNet. DataNet was formed in 2000 to build, market, and provide affordable, high speed, broadband fiber optic data communication services throughout New York State. In October 2004, the Company sold 100% of its interest in DataNet for $4,492. The Company received $3,603 in cash on the transaction date. The remainder of the sales price, $889, was held in an escrow account to provide funds available to satisfy any indemnification claim notices to DataNet subsequent to the transaction date until May 2005, at which time that amount, plus interest, was remitted in full to the Company.  Investment in Zefcom       As of December 31, 2005, the Company owned a 17% of Zefcom, LLC, d.b.a. Telispire, a consortium of small telephone companies that resells Sprint PCS under private label, which was accounted for under the equity method of accounting. The Company’s share of Zefcom’s losses have been reflected in “Income from equity method investments, net” in the Income Statement for the years ended December 31, 2005, 2004, and 2003, respectively. In January 2006, the Company sold its interest in Zefcom to an outside investor for $700 in cash.  Investment in EsiNet       In 2004, the Company made capital contributions of $713 in cash to Empire State Independent Fiber Network, LLC (“EsiNet”). As of April 1, 2005, the Company had satisfied the entire commitment of $950. On November 9, 2005, EsiNet closed a commitment with the Rural Telephone Finance Cooperative (“RTFC”) with respect to a $6,750 10 year secured term credit facility at a variable rate of interest. The loan is collateralized by all personal, tangible and intangible property of EsiNet, along with all rents, income, revenue, profits and other benefits derived or received from these properties. The proceeds are to be used mainly to finance a portion of the construction of its fiber optic network throughout upstate New York.  - 50 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       In March 2006, the Company’s management completed a review of EsiNet’s 2006 operating cash flow budget. Based upon this review, and subsequent discussions with EsiNet’s management, it became evident to the Company that EsiNet, while continuing its infrastructure build out in 2006, was also projecting a significant short-term operating cash flow deficit of a magnitude that it could both jeopardize the construction timetable and potentially force EsiNet into insolvency and loan default. EsiNet’s management has indicated to the Company that it intends to address this situation by enacting cost cutting measures, redirecting a portion of the RFTC loan proceeds away from the infrastructure build out towards operating expenses, and approaching certain vendors, particularly those from whom it currently leases fiber routes, in order to restructure existing agreements to defer costs to a future date and thus conserve cash. In addition, EsiNet is actively seeking additional sources of equity financing from its existing partners and from outside sources. However, EsiNet, at present, has no restructured agreements in place with vendors and has not secured any commitments for additional equity financing, thus failing to provide the Company with any reasonable assurance that it will generate sufficient cash flow to remain a viable going concern in the near future. Accordingly, the Company has determined that there existed as of December 31, 2005, a permanent impairment of the entire amount of this investment ($705, representing the original capital contribution of $950, less cumulative equity in losses of $245 as of December 31, 2005). Consequently, the entire amount of this investment has been written off and is reflected in the “Loss on write-down of investment” in the Consolidated Statement of Income for the year ended December 31, 2005. The effects on net income and earnings per share for the year ended December 31, 2005 were $457 and $0.08 per share, respectively.  Note 10: Debt Obligations       Debt obligations consisted of the following at December 31:                              2005     2004               Current maturing long-term debt -CoBank   $ 1,519     $ 1,519     Cobank, ACB unsecured credit facility     8,732       10,251                                 Total debt obligation   $ 10,251     $ 11,770                    The Company has an unsecured line of credit in the amount of $4,000 with Provident Bank. Any borrowings under this line of credit are on a demand basis without restrictions, and at a variable lending rate. The Company had no outstanding balance on this facility at December 31, 2005 or 2004.       On February 18, 2003, the Company closed a commitment with CoBank, ACB with respect to an $18,475 unsecured term credit facility at a variable rate of interest. The ability of the Company to draw against the commitment commenced on February 18, 2003 and continued until September 30, 2004. The loan remains outstanding until all indebtedness and obligations of the Company, under the facility, have been paid or satisfied, but no later than July 2012 (the “Maturity Date”). The unpaid principal balance accrues interest at an interest rate determined or selected by the Company. The Company may select a variable rate option, a long-term fixed rate option or a LIBOR option. The Company selected the variable rate option, and the average interest rate on borrowings for the period January 1 through December 31, 2005 was approximately 5.4%. Interest is paid quarterly each January, April, June and October. The outstanding principal is being repaid in 32 consecutive quarterly installments which started in October 2004, with the last such installment due on the Maturity Date. On the Maturity Date, the amount of then unpaid principal plus accrued interest and fees is due in full.  - 51 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       Under conditions set by the NYPSC, the Company was allowed to use a portion of the proceeds from this loan to refinance $4,000 of existing long-term debt and repay $3,000 under an existing line of credit. The Company was permitted to use the remaining amount available under the facility amounting to $11,475 to finance capital expenditures and pay expenses and fees associated with borrowings made under the facility. The Company was also permitted to re-borrow amounts repaid under the facility until the expiration of the ability to draw upon the facility on September 30, 2004. In February 2003, the Company used $3,149 of the credit facility funds to pay off an existing $3,000 line of credit, plus accrued interest, and closing costs associated with the facility. The Company made a second draw to repay $4,000 in long-term debt that matured in December 2003. On September 30, 2004 prior to expiration, the Company borrowed an additional $5,000 to finance future capital expenditures. In the interim, the proceeds were deposited by CoBank on the Company’s behalf in an interest bearing money market account.  Future aggregate principal payments under this loan agreement are as follows:                    2006   $ 1,519     2007     1,519     2008     1,519     2009     1,519     2010     1,519     Thereafter     2,656               Total   $ 10,251                      Under the terms of the CoBank facility, the Company is required to comply with certain loan covenants, which include but are not limited to the achievement of certain financial ratios, as set forth in the agreement, as well as certain financial reporting requirements. As of December 31, 2005 the Company was not in default on any of these loan covenants.  Note 11: Income Taxes       The federal and state components of the provision for income taxes are presented in the following table:  - 52 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)                                      For the years Ended December 31,       2005   2004   2003             Provision (benefit) for income tax                           Current:                           Federal   $ (309 )   $ 4,162     $ 3,342     State and local     57       2       156                   (252 )     4,164       3,498                                 Deferred:                           Federal     3,014       397       358     State and local     24       16       17                   3,038       413       375                                         Provision for income taxes   $ 2,786     $ 4,577     $ 3,873                    Deferred income tax liabilities are taxes the Company expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax basis of certain assets and liabilities.       Deferred income tax liabilities and assets consist of the following:                              At December 31,       2005   2004             Deferred income tax assets:                   Employee pensions and other benefits   $ 1,968     $ 1,877     Other     223       392             Total deferred income tax assets     2,191       2,269                         Deferred income tax liabilities:                   Property, plant and equipment   $ 7,048     $ 5,854     Deferred Universal Service Fund revenues     1,677       —     Other     46       151             Total deferred income tax liabilities     8,771       6,005                                 Net deferred income tax liability   $ 6,580     $ 3,736                    The difference between the United States Federal statutory tax rate and the effective tax rate is primarily due to state taxes (net of the Federal benefit) and other nondeductible expenses. During December 2005, the Company adjusted its estimated corporate income tax provision at December 31, 2004 to that of the actual tax returns filed. The adjustment resulted in approximately a $1,620 reclassification, which reduced the 2005 current income tax expense and increased the 2005 deferred income tax expense. The adjustment had no impact on 2005 net income but did result in a reclassification to reduce income taxes payable and increase deferred taxes payable for the same amount. The adjustment resulted primarily from tax timing differences and estimated versus actual amounts reported in the Company’s previous year’s tax returns.       The Company had a net operating loss carry forward as of December 31, 2005 of $7,388 for state income tax purposes. This net operating loss carry forward is available to offset future taxable income subject to expiration in 2012.       The deferred tax asset related to employee pension includes amounts recorded for the years ended December 31, 2005 and 2004 of $230 and $308, respectively, to reflect the tax impact of the minimum pension liability recorded in other comprehensive income.  Note 12: 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, have completed one year of service and have been hired before May 1, 2003 for the non-management plan and March 1, 2005 for the management plan. 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. Per regulatory requirements, the Company recognized additional expense of $41 in 2005 and deferred $379 and $483 for 2004 and 2003, respectively. The amounts expensed were $240, $875 and $1,154 for the years ended December 31, 2005, 2004, and 2003, respectively. In 2004, the Company instituted a benefit freeze for all eligible employees covered by the Management Plan, resulting in a charge to pension expense of $657. In 2003, the Company instituted a benefit freeze for all eligible employees covered under the Non-Management Plan, resulting in a charge to pension expense of $675.  - 53 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       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. Assets of the plan are principally invested in the stock market and a money market fund. The Company uses an annual measurement date of December 31 for all of its benefit plans.       The components of the pension and postretirement expense (credit) were as follows for the years ended December 31:                                                              Pension Benefits   Postretirement Benefits       2005   2004   2003   2005   2004   2003                 Components of Net                                                   Period Costs                                                   Service cost   $ 4     $ 297     $ 420     $ 214     $ 189     $ 161     Interest cost     795       785       862       387       308       278     Expected return on plan assets     (783 )     (647 )     (612 )     (135 )     (120 )     (85 )   Amortization of transition asset     —       —       —       51       51       51     Amortization of prior service cost     183       87       127       (20 )     (20 )     (20 )   Recognized actuarial (gain) loss     —       75       142       273       209       179     Special termination benefits     —       657       675       —       —       —     Net curtailment loss (gain)     —       —       23       —       —       —                   Net periodic (income) loss   $ 199     $ 1,254     $ 1,637     $ 770     $ 617     $ 564                        The following table presents a summary of the projected benefit obligation and plan assets of the plans at December 31:                                              Pension Benefits   Postretirement Benefits   Change in Benefit Obligation   2005   2004   2005   2004                 Benefit obligation, beginning of year   $ 13,950     $ 13,257     $ 5,738     $ 5,011     Benefits earned     —       297       214       189     Interest cost     795       785       387       308     Plan amendments     624       —       —       —     Actuarial losses     658       495       1,335       349     Benefit payments     (475 )     (487 )     (150 )     (119 )   Curtailment losses     —       (397 )     —       —                                                     Benefit obligation, end of year   $ 15,552     $ 13,950     $ 7,524     $ 5,738                   - 54 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)                                              Pension Benefits   Postretirement Benefits       2005   2004   2005   2004                 Changes in Fair Value of Plan Assets                                   Fair value of Plan Assets , beginning of year   $ 9,474     $ 7,838     $ 1,649     $ 1,478     Actual return on plan     600       747       77       69     Employer contributions     1,344       1,376       221       221     Benefit payments     (479 )     (487 )     (150 )     (119 )                                                   Fair value of plan assets, end of year   $ 10,939     $ 9,474     $ 1,797     $ 1,649                                                               Pension Benefits   Postretirement Benefits       2005   2004   2005   2004                 At December 31,                                   Funded (unfunded) benefit obligation   $ (4,613 )   $ (4,476 )   $ (5,726 )   $ (4,089 )   Unrecognized loss (gain)     2,704       2,046       3,885       2,765     Unrecognized transition asset     —       —       361       412     Unrecognized prior service cost (credits)     624       —       (265 )     (285 )                                                   Accrued benefit cost   $ (1,285 )   $ (2,430 )   $ (1,745 )   $ (1,197 )                      The following table provides the amounts recorded in our Consolidated Balance Sheets                                              Pension Benefits   Postretirement Benefits       2005   2004   2005   2004                 At December 31,                                   Accrued benefit cost   $ (4,613 )   $ (4,476 )   $ (1,745 )   $ (1,197 )   Intangible asset     624       —       —       —     Accumulated other comprehensive loss     2,704       2,046       —       —                                                     Net amount recognized   $ (1,285 )   $ (2,430 )   $ (1,745 )   $ (1,197 )                      Actuarial assumptions used to calculate the projected benefit obligation were as follows for the years ended December 31:                                              Pension Benefits   Postretirement Benefits       2005   2004   2005   2004                 Discount rate     5.50 %     5.75 %     5.50 %     5.75 %   Expected return on plans     8.00 %     8.00 %     8.00 %     8.00 %   Rate of compensation increase     5.50 %     5.50 %     —       —     Healthcare cost trend     —       —       10.00 — 11.00 %     8.00 — 10.00 %     - 55 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  Actuarial assumptions used to calculate net periodic benefit cost were as follows for the years ended December 31:                                              Pension Benefits   Postretirement Benefits       2005   2004   2005   2004             Discount rate     5.75 %     6.25 %     5.75 %     6.25 %   Expected return on assets     8.00 %     8.00 %     8.00 %     8.00 %   Rate of compensation increase     5.50 %     5.50 %     —       —            The rate of return assumption, currently 8%, estimates the portion of plan benefits that will be derived from investment return and the portion that will come directly from Company contributions. Accordingly, the Company, utilizing the investment policy described below, strives to maintain an investment portfolio that generates annual returns from funds invested consistent with achieving the projected long-term rate of return required for plan assets. The investment policy followed by the Pension Plan Manager can be described as an “Adaptive” approach that is essentially structured towards achieving a compromise between the static long-term approach and the short-term opportunism of the dynamic or tactical approaches. The objective is to modify asset allocations based on changing economic and financial market conditions so as to capture the major position of excess returns and then shifts the priority to risk containment after valuations become stretched.       The Company’s pension plans had an unfunded projected benefit obligation of $4,613 as of December 31, 2005. The projected benefit obligation of $15,552 at December 31, 2005 was in excess of Plan assets of $10,939. The Company’s postretirement plans had an unfunded projected benefit obligation of $5,726 as of December 31, 2005. The projected benefit obligation of $7,524 at December 31, 2005 was in excess of plan assets of $1,797.       The accumulated benefit obligation exceeded the fair value of plan assets and the Company was required to record a minimum pension liability in the statement of financial position as of December 31, 2005. The effect of this adjustment was an increase in intangible assets of $624, an increase in the pension liability of $1,282 and a charge to comprehensive loss of $658. The amount of the intangible asset represents the prior service costs that had not yet been recognized in net periodic pension expense. These are non-cash items and consequently have been excluded from the consolidated statement of cash flows. 2004 pension expense was also impacted by special termination benefits totaling $657 associated with the freezing of the management pension plan. The increase in expense in 2005 for the postretirement health benefits was due to the continued incremental rise in the health care trend rate and decline in the discount rate which resulted in upward pressure on medical claim costs. These changes reflect current market conditions regarding current market interest rates. The health care cost trend rates (representing the assumed annual percentage increase in claim costs by year) was 9.5 % for the pre-65 trend rate and 11.5% for the post-65 trend rate, which each of these grading down to 5%, by 0.5% per year. The Company’s most recent actuarial calculation anticipates that this trend will continue on into 2006. An increase in the assumed health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligation as of December 31, 2005 to approximately $1,426 and the aggregate of the service and interest cost components of postretirement expense for the year then ended by approximately $131. A 1.0% decrease in the health care cost trend rate would decrease these components by approximately $1,127 and by approximately $101, respectively.  The Company also has a Defined Contribution 401(k) Profit Sharing Plan covering substantially all employees. Under the plan, employees may contribute up to 100% of compensation not to exceed the Company match subject to certain legal limitations. In 2005 the Company made a matching contribution up to 9.0% of an eligible participant’s compensation for management, clerical and plant employees. The Company contributed and expensed $626, $563 and $466 for the years ended December 31, 2005, 2004, and 2003, respectively.  - 56 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       The Company has deferred compensation agreements in place for certain former officers which became effective upon retirement. These non-qualified plans are not currently funded and a liability representing the present value of future payments has been established, with balances of $343 and $355 as of December 31, 2005 and 2004, respectively.  Plan Assets       The pension plan weighted average asset allocations at December 31, 2005 and 2004 by assets category are as follows:                              Plan Assets       at December 31,       2005   2004             Equity securities     63 %     63 %   Debt securities     27 %     23 %   Short term investments     10 %     14 %                               Total     100 %     100 %                  The postretirement benefit plan weighted average asset allocations at December 31, 2005 and 2004, by assets category are as follows:                              Plan Assets       at December 31,       2005   2004             Equity securities     70 %     72 %   Short term investments     30 %     28 %                               Total     100 %     100 %                  In accordance with its contribution policy, the Company expects to contribute $1,051 to its pension plan and $378 to its postretirement plan for the year 2006.       Benefit payments, which reflect expected future service as appropriate, are expected to be paid as follows:                              Pension     Postretirement         Benefits     Benefits               2006   $ 664     $ 217     2007     776       245     2008     839       280     2009     846       298     2010     863       314     2011-2015     4,543       1,912            In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company is impacted by the Act since it sponsors a postretirement health care plan that provides prescription drug benefits.  - 57 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)       In May 2004, the Financial Accounting Standards Board released FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FSP 106-2”). FSP 106-2 states that if a company concludes that its single-employer defined benefit postretirement health care plan provides a drug benefit that is actuarially equivalent to the Medicare Part D benefit, the employer should recognize the subsidy in the measurement of the accumulated postretirement benefit obligation (APBO) under FAS 106, and should account for this reduction in the APBO as an actuarial gain. If an employer amends its plan to achieve actuarially equivalent drug benefits, therefore making the employer eligible for the subsidy, the employer is required to consider the combined effect that the amendment and the subsidy have on the APBO. If the combined effect is a decrease in the APBO, the net reduction is accounted for as an actuarial gain. If the combined effect is an increase in the APBO, the net increase is accounted for as a plan amendment.       The provisions of FSP 106-2 were effective for the first interim or annual period beginning after June 15, 2004 for all public companies. If the effects of FSP 106-2, including the subsidy, changes in participation rates, and changes in per capita claims costs, lead the employer to conclude that the enactment of FSP 106-2 was not a “significant event” for its plan, the effects should be incorporated in the valuation performed at the next measurement date required by FAS 106. Because clarifying regulations providing a firm definition of actuarial equivalence had not yet been issued, the Company was unable to determine whether the prescription drug benefits provided under its plans are actuarially equivalent to Medicare Part D benefits until the first quarter of 2005. Accordingly, the estimated annualized net periodic cost for Company post retirement benefits, as projected for the twelve months ended December 31, 2005 prior to adoption of the Act is $892, incorporating the provisions of the Act reduces this annualized cost to $770, resulting in a projected saving to the Company of $122 in 2005. This effect as it relates to the year ended December 31, 2005 is reflected in the valuation of net periodic cost present above.  Note 13. Shareholders’ Equity       The Company has 10,000,000 authorized Common Shares at par value of $0.01 per share; 5,000 authorized Preferred Shares at par value $100 per share and 10,000,000 authorized Preferred shares at par value $0.01 per share.       On April 25, 2003, the Company announced a three-for-one stock split of the Company’s Common Shares. Approval for the stock split was received from both the NYPSC and the NJBPU on October 6, 2003, and the Shares were made available on October 13, 2003. Also, the Common Shares were changed from no par value to a par value, of $0.01 per share. As a result, the Common Share amounts in Shareholders’ Equity for all periods prior to the split were restated to reflect the stock split. Also, additional paid-in capital in the amount of $3,473 for the year ended December 31, 2003 was recorded as a result of these events and is reflected in the Consolidated Statement of Shareholders’ Equity above. In addition, the earnings per share amount for the year ended December 31, 2003 was restated for the stock split.       In March 2005, the Company purchased 50,000 Common Shares from a shareholder at $23 per share or $1,150. These shares are recorded as Treasury Stock in the Company’s financial statements as of December 31, 2005.  - 58 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  Note 14: Commitments and Contingencies       The Company currently has an operating lease to rent space on a tower to transmit video content from its head end facility. The Company also leases vehicles for operations as well as office space in Warwick, New York and Vernon, New Jersey. In addition, the Company has entered into certain long-term agreements to access trunk lines from other carriers to transmit voice, video and data. Total expense associated with these agreements was $932, $881 and $733 in 2005, 2004 and 2003, respectively.       The future aggregate commitment for minimum rentals as of December 31, 2005 is as follows:                    2006   $ 496     2007     171     2008     155     2009     118     2010     118     Thereafter     182               Total   $ 1,240                      From time to time, the Company is involved in various litigation relating to legal claims arising in of the normal course of business. These claims are generally covered by insurance. The Company is not currently subject to any litigation which singularly or in the aggregate could reasonably be expected to have a material adverse effect on the Company’s financial position or results of operations.  Note 15: Related Party Transactions       The Company paid approximately $97, $247 and $294 during 2005, 2004, and 2003 to John W. Sanford & Son, Inc. and $253 in 2005 to Warwick Resource Group, LLC, both whose President and Chief Operating Officer is the brother of Corinna S. Lewis, a Director of the Company. The stated amounts were paid as premiums on various insurance policies maintained by the Company. The portion of these amounts that represent commissions to John Sanford & Son, Inc. and the Warwick Resource Group LLC was less than $200,000. The Company believes that the transactions with John W. Sanford & Son, Inc. and the Warwick Resource Group, LLC are on as favorable terms as those available from unaffiliated third parties.       The Company paid approximately $70 in 2005 to Morrow & Co., Inc. a proxy solicitation, corporate governance and strategic consulting firm whose founder and President is Joseph J. Morrow, a Director of the Company. The Company believes that the transactions with Morrow & Co., Inc. are on as favorable terms as those available from unaffiliated third parties.       During 2004, Warwick Savings Bank was purchased and merged with Provident Bank. As a result, Board of Director member until February 27, 2006, Fred M. Knipp, is no longer a trustee of the Warwick Savings Bank. The Company now has its principal bank accounts and temporary investments with Provident Bank.  - 59 -       WARWICK VALLEY TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands except share and per share amounts)  Note 16: Quarterly Information (unaudited)                                                      Fiscal Year Quarters       ($ in thousands)       First   Second   Third   Fourth   Total               Year ended, December 31, 2005                                           Revenue   $ 6,690     $ 6,385     $ 6,350     $ 7,917 (a)   $ 27,342     Operating income (loss)     (547 )     (728 )     (1,313 )     (359 )     (2,947 )   Net income     1,222       1,663       967       1,318 (b)     5,170     Earning per share     0.23       0.31       0.18       0.24       0.96                                                 Year ended, December 31, 2004                                           Revenue   $ 6,998     $ 6,928     $ 7,023     $ 6,729     $ 27,678     Operating income (loss)     534       458       475       (353 )     1,114     Net income     1,858       2,010       2,152       2,908       8,928     Earning per share     0.34       0.37       0.40       0.54       1.65              (a)   In December 2005, the Company recorded an additional $1,542 of revenues associated with funding from USF based upon the submission by the Company of updated information to USF for the year ended 2005 which resulted in a higher allocation of funds in 2005 apportioned to the Company from USF than had originally been estimated.       (b)   In December 2005, the Company wrote off its net investment in EsiNet in the amount of $705 (see Note: 9).    Note 17: Subsequent Event       In January 2006, the Company sold its 17% interest in Zefcom to an outside investor group for $700 in cash.  - 60 -       Report of Independent Registered Public Accounting Firm on  Consolidated Financial Statement Schedule  To the Board of Directors     of Warwick Valley Telephone Company:   Our audits of the consolidated financial statements, of management’s assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated March 13, 2006 appearing in the 2005 Annual Report to Shareholders of Warwick Valley Telephone Company also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  /s/ WithumSmith+Brown, P.C.  Princeton, New Jersey March 13, 2006   61       Report of Independent Registered Public Accounting Firm on  Consolidated Financial Statement Schedule  To the Board of Directors      of Warwick Valley Telephone Company:  Our audits of the consolidated financial statements referred to in our report dated November 15, 2005 appearing in the 2005 Annual Report to Shareholders of Warwick Valley Telephone Company also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  /s/ PriceWaterhouseCoopers LLP New York, New York November 15, 2005   62       WARWICK VALLEY TELEPHONE COMPANY  SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS  Years Ended December 31, 2005, 2004 and 2003 ($ in thousands)                                                  Column A   Column B   Column C   Column D   Column E       Additions             Balance at   Charged to   Charged to           Balance at       Beginning   Costs and   Other           End   Description   of Period   Expenses   Accounts   Deductions   of Period               (Note a)   (Note b)   (Note c)             Allowance for                                           Uncollectible:                                             Year 2005    $ 148     $ 179     $ 105     $ 261     $ 171       Year 2004    $ 508     $ 120     $ 87     $ 567     $ 148       Year 2003    $ 428     $ 146     $ 102     $ 168     $ 508                  (a)   Provision for uncollectible as stated in statements of income.     (b)   Amounts previously written off which were credited directly to this account when recovered.     (c)   Amounts written off as uncollectible.   63       WARWICK VALLEY TELEPHONE COMPANY  EXHIBIT INDEX                      Exhibit No.   Description of Exhibit   Page       3(b)    By-Laws      65                     10    Severance Agreement with Larry Drake      80                     16    Letter from PricewaterhouseCoopers LLP regarding accuracy of statements concerning their dismissal      85                     23.1    Consent of Independent Registered Public Accounting Firm WithumSmith+Brown, P.C.      86                     23.2    Consent of Independent Registered Public Accounting Firm PriceWaterhouseCoopers LLP      87                     23.3    Consent of Independent Registered Public Accounting Firm Deloitte & Touche LLP      88                     31.1    Rule 13a-14a/15d-14(a) Certification signed by Herbert Gareiss, Jr. Chief Executive Officer      89                     31.2    Rule 13a-14a/15d-14(a) Certification signed by Michael Cutler Chief Financial Officer      90                     32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Herbert Gareiss, Jr.-Chief Executive Officer.      91                     32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Michael Cutler -Chief Financial Officer.      92                     99    Orange County-Poughkeepsie Limited Partnership Financial Statements as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003.      93        64       EX-3.B 2 l18366aexv3wb.htm EX-3.B BY-LAWS    EX-3.B       EXHIBIT 3(b)  BY-LAWS  WARWICK VALLEY TELEPHONE COMPANY  ARTICLE I.  OFFICES  Section 1. Principal Office. The principal office of the Company shall be located in the Village of Warwick, County of Orange, State of New York.  Section 2. Additional offices. The Company may also have offices and places of business at such other places, within or without the State of New York, as the Board of Directors may from time to time determine.  ARTICLE II.  MEETINGS OF SHAREHOLDERS  Section 1. Time and Place. The annual meeting of the shareholders and all special meetings of the shareholders may be held at such time and place within or without the State of New York as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof.  Section 2. Annual Meetings. The annual meeting of shareholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held each year on the last Friday in April (if not a legal holiday, and if a legal holiday then on the next succeeding, business day), or on such other business day as the Board of Directors shall determine prior to the date for serving notice of such meeting.  Section 3. Special Meetings. Except as otherwise provided by law or by the certificate of incorporation, special meetings of the shareholders, for any purpose or purposes set forth in the notice of meeting, may be called by the President or the Board of Directors, and shall be called by the President at the request in writing of the holders of record of at least twenty-five percent (25%) of the outstanding shares of a class of stock of the Company entitled to vote on the proposals to come before the meeting. Such request shall state the purpose or purposes of the proposed meeting.  Section 4. Notice of Meeting of Shareholders. Written notice of a meeting of shareholders, stating the place, date and hour of the meeting, and for meetings other than annual meetings, stating by or at whose direction and for what purpose or purposes the meeting is called, shall be given personally or by mail to each shareholder entitled to vote thereat, not less than ten (10) nor more than fifty (50) days prior to the meeting. If mailed, such notice shall be directed to each shareholder at his address, as it appears on the records of the shareholders of the Company, or if he shall have previously filed with the Secretary of the Company a written request that notices to  65       him be mailed to some other address, then directed to him at such other address. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the requirements of Section 623 of the New York Business Corporation Law to receive payment for their shares, the notice of such meeting shall also include a statement to that effect and shall be accompanied by a copy of Section 623 or an outline of its material terms.  Section 5. No Notice Required. Notice of any meeting need not be given to any person who may become a shareholder of record after the mailing of such notice and prior to the meeting, or to any shareholder who attends such meeting, in person or by proxy, or to any shareholder who, in person or by proxy, submits a signed waiver of notice either before or after such meeting. Except as otherwise provided by statute, notice of any adjourned meeting of shareholders need not be given if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken.  Section 6. Quorum. Except as otherwise provided by the certificate of incorporation, the holders of record of a majority of the shares of the Company issued and outstanding and entitled to vote thereat upon a specified item of business, present in person or represented by proxy, shall be necessary to and shall constitute a quorum for the transaction of such specified item of business at any meeting of the shareholders.       If, however, as to any item or items of business noticed to come before any meeting of shareholders such quorum shall not be present or represented at such meeting, the shareholders entitled to vote thereon present in person or represented by proxy shall have power to adjourn the meeting as to such item or items of business for which a quorum is not present from time to time, until a quorum for the transaction of such item or items of business shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally noticed.       The chairman of any meeting of shareholders shall, at the beginning of such meeting, determine whether a quorum is present for the transaction of each item of business noticed to come before such meeting. A quorum for the transaction of any item of business, once present, shall not be broken by the subsequent withdrawal of any shareholders or their representatives.  66       Section 7. Voting. At any meeting of the shareholders every shareholder having the right to vote shall be entitled to vote in person, or by proxy. Except as otherwise provided by law or the certificate of incorporation, each shareholder of record shall be entitled to one vote for each share of stock standing in the shareholder’s name on the books of the Company. All elections shall be determined by a plurality vote, and, except as otherwise provided by law or the certificate of incorporation, all other matters shall be determined by vote of a majority of the shares present or represented at such meeting and voting on such questions.  Section 8. Proxies. Every proxy must be executed in writing by the shareholder or by his attorney-in-fact. No proxy shall be valid, after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is permitted by law.  Section 9. Notice of Shareholder Business. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting or by the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder.            For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, the shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the Company, not less than 120 days prior to the first anniversary of the date on which the Company first mailed its proxy materials for the prior year’s annual meeting; provided, however, that in the event the annual meeting is called for a date that is not within 30 days before or after the anniversary date of the prior year’s annual meeting, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which notice of the date of the meeting was mailed or public disclosure of such date was made by the Company. The shareholder’s notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting:            (a) a brief description of the business desired to be brought to the annual meeting and the reasons for conducting business at the annual meeting,            (b) the name and address, as they appear on the Company’s books, of the shareholder proposing such business,            (c) the class and number of shares of the Company which are beneficially owned by the shareholder, and            (d) any material interest of the shareholder in such business.            Notwithstanding anything in the By-laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 9.  67                 The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and, in accordance with the provisions of this Section 9, and if he should so determine, the Chairman shall so declare to the meeting and such business not properly brought before the meeting shall not be transacted.  ARTICLE III.  DIRECTORS  Section 1. Duties; Powers. The Board of Directors is responsible for directing, guiding and overseeing the conduct of WVT’s business. It ensures that the interests of the shareholders, customers and employees are served.  Section 2. Number; Qualification. The number of directors which shall constitute the entire Board of Directors shall not be less than three (3) nor more than ten (10), the actual number to be established at the annual meeting of shareholders. Each director shall be at least eighteen years of age.  Section 3. Election; Term. Directors shall be divided into three classes, and no class shall include fewer than three directors. The terms of office of the directors initially classified shall be as follows: that of the first class shall expire at the next annual meeting of shareholders, the second class at the second succeeding annual meeting and the third class at the third succeeding annual meeting. Except as provided in Section 5 of this Article III, directors shall be elected at each annual meeting after such initial classification to replace those whose terms expire at such annual meeting to hold office until the third succeeding annual meeting. Each director shall hold office until the expiration of the term for which he is elected, and until his successor has been elected and qualified.  Section 4. Resignation; Removal. Any director may resign at any time by giving written notice to the President or the Secretary. Such resignation shall take effect at the time stated therein. The Board of Directors may, by majority vote of all directors then in office, remove a director for cause. A notice of intention to take action to remove a director stating the date, time and place action is to be taken shall be mailed to the director at the director’s address of record on the books of the Company at least twenty (20) days prior to the time such action is to be taken. The shareholders entitled to vote for the election of directors may remove a director for cause.  Section 5. Vacancies. If any vacancy should occur in the Board of Directors by reason of the death, resignation, retirement or disqualification of any director, or the removal from office of any director, all of the directors then in office, although less than a quorum, may, by majority vote, choose a successor or successors to fill the vacated directorship, and any director so chosen to fill an existing vacancy shall hold office until the next annual meeting of the shareholders and until his successor shall be duly elected and qualified.  Section 6. Notice of Shareholder Nominees. Only persons who are nominated in accordance with the procedures set forth in this Section 6 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Company may be made at  68       the annual meeting of shareholders by or at the direction of the Board of Directors, or by any shareholder of the Company entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 6. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company.            To be timely, a shareholder’s notice shall be delivered or mailed and received at the principal executive offices of the Company not less than 120 days prior to the first anniversary of the date on which the Company first mailed its proxy materials for the prior year’s annual meeting; provided, however, that in the event the annual meeting is called for a date that is not within 30 days before or after the anniversary date of the prior year’s annual meeting, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which notice of the date of the meeting was mailed or public disclosure of such date was made by the Company. The shareholder’s notice shall set forth:            (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director,  (i) the name, age, business address and residence address of such person,  (ii) the principal occupation or employment of such person,  (iii) the class and number of shares of the Company which are beneficially owned by such person, and  (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and            (b) as to the shareholder giving the notice,  (i) the name and address, as they appear on the Company’s books, of such shareholder, and  (ii) the class and number of shares of the Company which are beneficially owned by such shareholder.            At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Company that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth in this Section 6.            The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the  69       By-laws, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded.  70       ARTICLE IV.  MEETINGS OF THE BOARD  Section 1. Place. The Board of Directors of the Company may hold meetings, both regular and special, either within or without the State of New York.  Section 2. First Meeting. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be announced at the annual meeting of the shareholders, and no further notice of such meeting to the newly elected directors shall be necessary in order to constitute the meeting, provided a quorum shall be present. In the event of the failure to so announce the time and place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so announced, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a duly executed waiver of notice thereof. The first order of business shall be to elect a Chairman of the Board and a Vice Chairman of the Board and the officers of the Company for the ensuing year. The Chairman and Vice Chairman shall be Directors of the Company who are not employees of the Company. The Chairman shall preside at all meetings of the Board of Directors and shareholders and shall consult with the officers as needed. The Vice Chairman shall assume the responsibilities of the Chairman in his absence.  Section 3. Regular Meetings. Regular meetings of the Board of Directors may be held at such time and at such place as shall from time to time be determined by the Board.  Section 4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board on two days’ notice to each director. Special meetings shall be called by the President or Secretary on like notice at the written request of two directors.  Section 5. Quorum. At all meetings of the Board of Directors a majority of the entire Board shall constitute a quorum for the transaction of business, and the vote of a majority of the directors present at the time of the vote if a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by law or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, until a quorum shall be present. Notice of any such adjournment shall be given to any directors who were not present and, unless announced at the meeting, to the other directors.  Section 6. Meetings by Telephone; Action Without Meeting. Any one or more members of the Board of Directors may participate in a meeting of such Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Prior notice of such meeting shall be furnished to each director.       Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board shall be filed with the minutes of the proceedings of the Board.  71       Section 7. Compensation. Directors, as such, shall not receive any stated salary for their services, but by resolution of the Board of Directors a fixed fee and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board or of any committee of the Board, provided that nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefore.  ARTICLE V.  COMMITTEES OF THE BOARD  Section 1. Designation. The Board of Directors, by resolution adopted by a majority of the entire Board, shall elect from among its members an Audit Committee, a Compensation Committee and such other committees, each consisting of three or more directors, as it shall deem appropriate. No such committee shall have authority as to any of the following matters:  (a) the submission to shareholders of any action as to which shareholders’ authorization is required by law;  (b) the filling of vacancies in the Board of Directors or on any committee;  (c) the fixing of compensation of any director for serving on the Board or on any committee;  (d) the amendment or repeal of these By-Laws or the adoption of new By-Laws; or  (e) the amendment or repeal of any resolution of the Board which by its terms shall not be so amendable or repealable.       The Board may designate one or more directors as alternate members of any such committee who may replace any absent member or members at any meeting of such committee.  Section 2. Audit Committee. The Board of Directors shall designate an Audit Committee to consist of not fewer than three members, the actual number to be determined and elected by the affirmative vote of a majority of the whole Board or if the majority of the Board is unable to elect such directors, the Chairman of the Board shall appoint them. Members of the Audit Committee, in the judgment of the Board of Directors, shall be independent in accordance with NASDAQ listing standards or any other standards that law or regulation may require or that the Board of Directors shall determine to apply. At least annually, the Audit Committee shall nominate the independent and internal auditors of the Company to be appointed by the shareholders at the annual meeting or any special meeting. In addition, the Audit Committee shall from time to time discuss the audit work with the auditors appointed to perform the audit.  Section 3. Compensation Committee. The Board of Directors shall designate a Compensation Committee to consist of not fewer than three members, elected by the affirmative vote of a majority of the whole Board or if the majority of the Board is unable to elect such directors, the Chairman of the Board shall appoint them. Members of the Compensation  72       Committee, in the judgment of the Board of Directors, shall be independent in accordance with NASDAQ listing standards or any other standards that law or regulation may require or that the Board of Directors shall determine to apply. The Compensation Committee shall meet annually or at such other times as may be required by the Board to review the current compensation of the officers of the Company and to establish the annual compensation of the officers for the coming twelve-month period or such other time period as may be appropriate.  Section 4. Meetings by Telephone; Action Without Meeting. Any one or more members of any committee of the Board of Directors may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.       Any action required or permitted to be taken by any committee of the Board of Directors may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the committee shall be filed with the minutes of the committee.  Section 5. Tenure: Reports. Each committee shall serve at the pleasure of the Board of Directors. It shall keep minutes of its meetings and report the same to the Board of Directors.  73       ARTICLE VI.  NOTICES  Section 1. Form; Delivery. Notices to directors and shareholders shall be in writing and may be delivered personally or by mail or e-mail. Notice by mail shall be deemed to be given at the time when deposited in the United States mail, with postage thereon prepaid, and addressed to directors or shareholders at their addresses appearing on the records of the Company.  Section 2. Waiver. Whenever a notice is required to be given by any statute, the certificate of incorporation or these By-Laws, a waiver thereof in writing, signed by the person, or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. In addition, any shareholder attending a meeting of shareholders in person or by proxy without protesting prior to the conclusion of the meeting the lack of notice thereof to him, and any director attending a meeting of the Board of Directors without protesting prior to the meeting or at its commencement such lack of notice shall be conclusively deemed to have waived notice of such meeting.  ARTICLE VII.  OFFICERS  Section 1. Officers. The officers of the Company shall be a President, one or more Vice-Presidents, a Secretary, an Assistant Secretary, a Treasurer and an Assistant Treasurer. Any two or more of the foregoing offices, except those of President and Secretary, may be held by the same person.  Section 2. Authority and Duties. All officers, as between themselves and the Company, shall have such authority and perform such duties in the management of the Company as may be provided in these By-Laws, or, to the extent not so provided, by the Board of Directors.  Section 3. Election; Term of Office; Removal. All officers shall be elected by the Board of Directors and shall hold office at the pleasure of the Board or for such term as may be prescribed by the Board. Any officer elected or appointed by the Board may be removed with or without cause at any time by the Board.  Section 4. Compensation. The compensation of all officers of the Company shall be fixed by the Board of Directors, and the compensation of agents shall either be so fixed or shall be fixed by officers thereunto duly authorized.  Section 5. Vacancies. If an office becomes vacant for any reason, the Board of Directors shall fill such vacancy. Any officer so appointed or elected by the Board shall serve only until such time as the unexposed term of his predecessor shall have expired unless reappointed or reelected by the Board.  Section 6. The President. The President shall be the Chief Executive Officer of the Company; he shall be ex officio a member of all standing committees except the Audit Committee and Compensation Committee; shall have general and active management and  74       control of the business and affairs of the Company subject to the control of the Board of Directors, and shall see that all orders and resolutions of the Board are carried into effect.  Section 7. Vice-Presidents. The Vice-Presidents (who may have such designations, if any, as the Board of Directors may determine) in the order of their seniority or in any other order determined by the Board, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President, and shall generally assist the President and perform such other duties as the Board of Directors or the President shall prescribe.  Section 8. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall act. He shall keep in safe custody the seal of the Company and, when authorized by the Board, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary or Assistant Treasurer. He shall keep in safe custody the certificate books and shareholder records and such other books and records as the Board may direct and shall perform all other duties incident to the office of the Secretary.  Section 9. Assistant Secretaries. The Assistant Secretaries, if any, in order of their seniority or in any other order determined by the Board of Directors shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors or the Secretary shall prescribe.  Section 10. The Treasurer. The Treasurer shall have the care and custody of the corporate funds, and other valuable effects, including securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the Financial conditions of the Company. If required by the Board of Directors, the Treasurer shall give the Company a bond for such term, in such sum and with such surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Company, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Company, the charge for such bond to be at the Company’s expense.  Section 11. Assistant Treasurers. The Assistant Treasurers, if any, in the order of their seniority or in any other order determined by the Board, shall in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Board of Directors or the Treasurer shall prescribe.  75       Section 12. Additional Officers. In addition to the officers provided by these By-Laws, the Board of Directors may, from time to time, designate and appoint such other officers as may be necessary or convenient for the transaction of the business and affairs of the Company. Such other officers shall have the powers and duties which may be assigned to them by resolution of the Board of Directors.  ARTICLE VIII.  SHARE CERTIFICATES  Section 1. Form; Signature. The certificates for shares of the Company shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Company as they are issued. Each certificate shall exhibit the registered holder’s name and the number and class of shares, and shall be signed by the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall bear the seal of the Company or a facsimile thereof. Where any such certificate is countersigned by a transfer agent, or registered by a registrar, the signature of any such officer may be the facsimile signature. In case any officer who signed, or whose facsimile signature or signatures were placed on any such certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Company with the same effect as if he were such officer at the date of issue.  Section 2. Lost Certificates. The Board of Directors or an officer or officers duly authorized thereunto by the Board may direct a new share certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, destroyed or wrongfully taken upon the making of a sworn affidavit of that fact by the person claiming the certificate to have been lost, destroyed or wrongfully taken. When authorizing such issue of a new certificate or certificates, the Board of Directors or any authorized officer or officers may, in its, his or their discretion and as a condition precedent to the issuance thereof, require the owner of such lost, destroyed or wrongfully taken certificate or certificates, or his legal representative, to give the Company a bond in such sum as may be directed as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, destroyed or wrongfully taken.  Section 3. Registration of Transfer. Subject to the provisions of the Federal securities laws and to any contractual restriction which may be evidenced by a legend upon the face of such certificate, upon surrender to the Company or any transfer agent of the Company of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Company or such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.  Section 4. Registered Shareholders. Except as otherwise provided by law, the Company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be  76       bound to recognize any equitable or legal claim to or interest in such share or shares on the part of any other person.  Section 5. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action affecting the interests of shareholders, the Board of Directors may fix, in advance, a record date. Such date shall not be more than fifty (50) nor less than ten (10) days before the date of any such meeting, nor more than fifty (50) days prior to any other action.       In each such case, except as otherwise provided by law, only such persons as shall be shareholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend, or such allotment of rights, or otherwise to be recognized as shareholders for the related purpose, notwithstanding any registration of transfer of shares on the books of the Company after any such record date so fixed.  77       ARTICLE IX.  GENERAL PROVISIONS  Section 1. Dividends. Subject to the applicable provisions of the certificate of incorporation, if any, dividends upon the outstanding shares of the Company may be declared by the Board of Directors at any regular or special meeting, pursuant to law, and may be paid in cash, in property, or in shares of the Company.  Section 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Company available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purpose as the Board shall think conducive to the interest of the Company, and the Board may modify or abolish any such reserve in the manner in which it was created.  Section 3. Instruments Under Seal. All deeds, bonds, mortgages, contracts, and other instruments requiring a seal may be signed in the name of the Company by the President or by any other officer authorized to sign such instrument by the President or the Board of Directors.  Section 4. Checks, etc. All checks or demands for money and notes or other instruments evidencing indebtedness or obligations of the Company shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.  Section 5. Fiscal Year. The fiscal year of the Company shall, unless otherwise fixed by the Board of Directors, begin on the 1st day of January and end on the 31st day of December in each calendar year.  Section 6. Seal. The corporate seal shall have inscribed thereon the words “The Warwick Valley Telephone Company, Corporate Seal, Warwick, N.Y.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.  ARTICLE X.  INDEMNIFICATION AND INSURANCE  Section 1. Indemnification. Any person made a party to an action by or in the right of the Company to procure a judgment in its favor, or made, or threatened to be made, a party to an action or proceeding other than one by or in the right of the Company to procure a judgment ill in its favor, by reason of the fact that he, his testator or intestate is or was a director or officer of the Company, or while serving as a director or officer of the Company, is or was serving, at the request of the Company, as a director, officer, or in any other capacity, any other corporation, domestic or foreign, any partnership, joint venture, trust, employee benefit plan or other enterprise or organization, whether profit or nonprofit, shall be indemnified by the Company against the reasonable expenses (including attorney’s fees, judgments, fines, and amounts paid in  78       settlement) actually incurred by him as a result of such action or proceeding, or any appeal therein, to the full extent permissible under the New York Business Corporation Law,  Section 2. Insurance. The Company may purchase and maintain insurance to indemnify the Company and its directors and officers to the extent permitted under the New York Business Corporation Law.  Section 3. Preservation of Rights. Neither the amendment or repeal of this Article X, nor the adoption of any provision of these By-Laws inconsistent with this Article X, shall eliminate or reduce the protection afforded by this Article X to a director or officer of the Company in respect to any matter which occurred or any action or proceeding which accrued or arose, prior to such amendment, repeal or adoption.  ARTICLE XI.  AMENDMENTS  Section 1. Power to Amend. The Board of Directors shall have the power to amend, repeal or adopt By-Laws at any regular or special meeting of the Board; provided, however, that any Bylaw adopted by the Board may be amended or repealed by vote of the holders of shares entitled at the time to vote for the election of directors; provided, further, that any amendment or repeal of ARTICLE III, Section 3, or this ARTICLE XI, Section 1, of these By-Laws, or any part of either thereof, shall in each event require ratification by the vote of the holders of seventy percent (70%) of the combined voting power of the shares of the corporation’s capital stock entitled at the time to vote for the election of directors; and provided, further, that the Board of Directors shall not amend the By-Laws unless notice thereof, containing a statement of the proposed amendment, shall have been given at a prior meeting of the Board.  Section 2. Amendment Affecting Election of Directors; Notice . If any By-law regulating an impending election of directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By-law so adopted, amended or repealed, together with a concise statement of the changes effected by such adoption, amendment or repeal.  79       EX-10 3 l18366aexv10.htm EX-10 SEVERENCE AGREEMENT WITH LARRY DRAKE    EX-10       EXHIBIT 10  WARWICK VALLEY TELEPHONE COMPANY 47 Main Street P.O. Box 592 Warwick, New York 10990-0592  September 2, 2005  Mr. Larry D. Drake 10 Patriot Way Glenwood, NJ 07418                      Re: Separation Agreement     Dear Larry:        This letter explains the separation benefits available to you and what you need to do to receive them. When you sign this letter, it will constitute the Agreement between you and Warwick Valley Telephone Company (hereinafter referred to as the “Employer”) on the terms of your separation from employment with the Employer.  Your employment terminated effective July 13, 2005.  You will be paid your earned salary and all other amounts the Employer owes to you through the date of your termination. This payment will be made according to the Employer’s regular payroll schedule and practices.  Except as described in paragraph 6(iv) below, all of your group insurance benefits and all other benefits of employment will end on your last day of work. You will receive by separate cover information regarding your rights to health insurance continuation at your expense, and your retirement benefits. To the extent that you have such rights, nothing in this Agreement will impair those rights.  By signing this letter, you agree that, with the exception of the payments and/or benefits to be made pursuant to paragraph 6(i) through and including paragraph 6(v) of this Agreement, upon receipt of the payment described in paragraph 2, you will have received all wages, benefits and other compensation due to you based upon your employment with the Employer.  You have returned or will immediately return to the Employer all property of the Employer that is in your possession, including any information you have (in whatever form) about the Employer’s practices, procedures, trade secrets, customer lists, or product marketing. Such materials include the company vehicle, all credit cards, keys, passwords, documents, photographs, notebooks, computer programs, price lists, customer lists, samples, lists of suppliers and all other materials (as well as all copies) relating in any way to the business of the Employer. Notwithstanding anything to the contrary contained herein, it is specifically understood and agreed that the Employer is providing you with a laptop computer and NexTel cellular telephone (both of which are currently in your possession) without charge, and that ownership of said laptop computer and cellular telephone is hereby transferred to you.  80       Although you are not otherwise entitled to it, in consideration of your acceptance of this Separation Agreement, the Employer will provide you with the following:  A separation benefit of $98,863.97, less customary payroll deductions. This separation payment is equivalent to 7 months (or equivalent to 30 1/3 weeks) of your current base rate of pay.  A supplemental separation benefit in the gross amount of $153,962.29 less withholdings. This will be payable in a lump sum as soon as practicable after the effective date of this Agreement as defined in paragraph 20 below and in no event later than December 31, 2005.  The separation benefit described in paragraph 6(i) will be paid weekly, in accordance with the Employer’s regular payroll schedule and practices. These payments will commence with the first regular pay period after the “effective date” of this Agreement as defined in paragraph 20, below. All payments under said paragraph 6(i) will be completed on or about March 7, 2006, but no later than March 15, 2006.  Your Group Life and AD&D insurance, long term disability insurance, telephone and toll services, DSL/Dial Up Internet Service and Digital TV service will continue through February 28, 2006. (Note: Since you were not enrolled in the Employer’s group health or dental plan, you are not eligible for COBRA coverage.) In the event that, on or prior to February 28, 2006, you re-locate your residence outside of the coverage area for DSL/Dial Up Internet Service and Digital TV service currently provided by the Employer, then the Employer shall be under no further obligation to make payment for such services.  Eligibility to receive all other retirement benefits under the Employer’s policies and plans, in accordance with the terms of such policies and plans, including your calculated retirement benefit under the Warwick Valley Telephone Company Retirement Plan for Management Employees (the “Plan”). Your calculated retirement benefit under the Plan is $13,607 per year. This benefit is subject to adjustment as provided in the Plan.  In the event that the Employer receives an inquiry from any person or entity with respect to your former employment with the Employer, the Employer shall provide a “Letter of Reference” (as set forth in Attachment “A” annexed hereto) to any such person or entity. Such letter shall be provided to you also upon execution of this Agreement and no other statement shall be made to any such person or entity making inquiry of the Employer or to any person or entity employed by or representing the Employer.  Except as otherwise set forth in this paragraph 8, you agree that by signing this Agreement you will give up your right to bring any legal claim against the Employer of any nature. The claims that you are giving up include, but are not limited to, claims related in any way, directly or indirectly, to your employment relationship with the Employer, including your separation from employment. This Separation Agreement is intended to be interpreted in the broadest possible manner to include all actual or potential legal claims that you may have against the Employer, except as specifically provided otherwise in this Agreement.       Specifically, you agree to fully and forever release all of your legal rights and claims against the Employer, whether or not presently known to you and including future legal rights and claims if based in whole or in part on acts or omissions occurring before you deliver this signed Agreement to the Employer. You agree that the legal rights and claims that you are giving up include, but are not limited to, your rights, if any, under all State and federal statutes that protect you from discrimination in employment, such as the Age Discrimination in Employment Act (the “ADEA”), Title VII of the Civil Rights Act of 1964, as amended, the Rehabilitation Act of 1973, the Americans With Disabilities Act, the Equal Pay Act, the New York Human Rights Law and any similar State or local statute, regulation or order. You also agree that the legal rights and claims that you are giving up include your rights, if any, for unpaid wages or benefits under all State and federal statutes such as the Fair Labor Standards Act, the Family and Medical Leave Act, the Employee Retirement and Income Security Act (ERISA), the New York Labor Law and any similar State or local statute, regulation or order. You agree that the legal rights and claims that you are giving up include all common law rights and claims, such as a breach of express or implied contract, tort (whether negligent or intentional), wrongful discharge, constructive discharge, infliction of emotional distress, defamation, promissory estoppel, and any claim for fraud, omission or misrepresentation. You also agree that you are giving up and forever releasing any right that you may have to attorneys’ fees for any of the foregoing rights and claims.  81            You agree that the release described in this paragraph 8 applies not only to the Employer, but also to the Employer’s predecessors, and past, current and future subsidiaries, related entities, officers, directors, shareholders, agents, attorneys, employees, successors, or assigns. You also agree that this Agreement may be used as a complete defense in the future if you bring any claim that you have released in this paragraph 8.       The claims that you are giving up and releasing do not include your vested rights, if any, under any qualified retirement plan in which you participate, and your COBRA, unemployment compensation and worker’s compensation rights, if any. Nothing in this release shall be construed to constitute a waiver of (a) any claims you may have against the Employer that arise from acts or omissions that occur after the date you sign this Agreement, (b) your right to file an administrative charge with any governmental agency where the waiver of that right is prohibited by law, (c) your right to participate in any administrative or court investigation, hearing or proceeding, or (d) your right to enforce the terms and conditions of this Agreement in a court of competent jurisdiction as set forth in paragraph 16 hereof. You agree, however, to waive and release any right to receive any individual remedy or to recover any individual monetary or non-monetary damages or attorneys fees as a result of any such administrative charge or proceeding. In addition, this release does not affect your rights as expressly created by this Agreement, and does not limit your ability to enforce this Agreement.  82       You will not, unless required or otherwise permitted by law, disclose to others any information regarding the Employer’s proprietary practices, procedures, sales, marketing, and trade secrets. You agree to keep and treat all such information as proprietary and confidential.  You also agree that for a period of one year following the effective termination date, you will not, directly or indirectly, on behalf of yourself or any other person or entity, solicit or recruit any employees of the Employer to leave the Employer and/or perform work or services for another employer.  The terms of this Separation Agreement, the benefit being paid under it or the fact of its payment, are confidential and may not be disclosed by you except that you may disclose this information to your spouse, attorney, accountant or other professional advisor to whom you must make the disclosure in order for them to render professional services to you. You will instruct them, however, to maintain the confidentiality of this information just as you must. In addition and notwithstanding anything to the contrary contained herein, you may also disclose the terms of this Separation Agreement, the benefit being paid under it or the act of its payment where you are required or compelled to do so by subpoena, an order of any judicial, quasi-judicial or administrative body, and/or where you are otherwise required to do so by law.  You agree that neither payment by the Employer of the amounts set forth in paragraph 6, nor any other term or condition of this Agreement, shall be construed by either you or the Employer, at any time, as an admission of liability or wrongdoing by the Employer.  You agree that you will not directly or indirectly make, or cause to be made, written or oral statements or other form of communication that is derogatory or disparaging to the Employer or its officers, directors, shareholders or employees.  The rights and benefits of the Employer under this Agreement shall be transferable to or enforceable by the Employer’s successors and assigns. You agree that this Agreement also binds all persons who might assert a legal right or claim on your behalf, such as your heirs, personal representatives and assigns, now and in the future. In addition, your rights and benefits under this Agreement shall be enforceable by your heirs, executors, representatives, administrators, successors and assigns, and same shall inure to their benefit.  You agree that the invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.  You agree that no promise, inducement or other agreement not expressly contained in this Separation Agreement or referred to in this Agreement, has been made conferring any benefit upon you. You also agree that this Agreement contains the entire agreement between you and the Employer with respect to any benefit conferred upon you. All prior agreements, understandings, representations, oral agreements and writings are expressly superseded hereby and are of no further force and effect, and you expressly agree that you are not relying on any representations that are not contained in this Agreement. This Agreement is entered into, governed by and construed in accordance with the laws of the State of New York. The Supreme Court of the State of New York, County of Orange and/or the United States District Court for the Southern District of New York are hereby designated as the two forums in which any action or proceeding arising from or in any way connected to this Agreement may be commenced, and the parties hereto hereby expressly consent to the personal jurisdiction of said courts.  You agree that you are voluntarily signing this Agreement, that you have not been pressured into agreeing to its terms and that you have enough information to decide whether to sign this Agreement. If, for any reason, you believe that this Agreement is not entirely voluntary, or if you believe that you do not have enough information, then you should not sign this Agreement.  You have up to 21 calendar days from the date of this letter to accept the terms of this Separation Agreement and return it to me. You may accept and return the Agreement at any time within those 21 days, but you are not required to do so and you may take the entire 21-day period.  You are advised to consult an attorney about this Agreement.  After you have accepted this Agreement, you will still have an additional 7 calendar days in which to  83       revoke your acceptance. To revoke, you must send me a written statement of revocation by registered mail, return receipt requested. If you do not revoke, the 8th day after the date of your acceptance will be the “effective date” of the Agreement, and you may not thereafter revoke it.       To accept this Agreement, please date and sign this letter and return it to me. (An extra copy for your files is enclosed.)                     Sincerely,                Zig Nowicki, CCP        Director of Information Technology        and Human Resources     By signing this letter, I acknowledge that I have had the opportunity to review this Separation Agreement carefully with an attorney of my choice. I have read this Agreement, I understand its terms and I voluntarily agree to them.  Dated: July 13, 2005                   /s/ Larry D. Drake              Larry D. Drake          84       EX-16 4 l18366aexv16.htm EX-16 LETTER FROM PRICEWATERHOUSE COOPERS    EX-16       EXHIBIT 16  September 29, 2005  Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549   Commissioners:   We have read the statements made by Warwick Valley Telephone Company, Inc. (copy attached), which we understand will be filed with the Commission, pursuant to Item 4.01 of Form 8-K, as part of Warwick Valley Telephone Company Inc.’s Form 8-K report dated September 29, 2005. We agree with the statements concerning our Firm in such Form 8-K.  Very truly yours,   /s/ PricewaterhouseCoopers LLP   85       EX-23.1 5 l18366aexv23w1.htm EX-23.1 CONSENT (WITHUMSMITH + BROWN, P.C.)    EX-23.1       EXHIBIT 23.1  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-46836 and 333-64799) of Warwick Valley Telephone Company of our report dated March 13, 2006 relating to the consolidated financial statements, financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.  /s/ WithumSmith+Brown, P.C. Princeton, New Jersey March 13, 2006   86       EX-23.2 6 l18366aexv23w2.htm EX-23.2 CONSENT (DELOITTE & TOUCHE LLP)    EX-23.2       CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-46836 and 333-64799) of Warwick Valley Telephone Company of our report dated November 15, 2005 relating to the consolidated financial statements and consolidated financial statement schedules, which appear in this Form 10-K.  /s/ PricewaterhouseCoopers LLP New York, New York March 24, 2006  87       EX-23.3 7 l18366aexv23w3.htm EX-23.3 CONSENT (PRICEWATERHOUSE COOPERS LLP)    EX-23.3       EXHIBIT 23.3  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We consent to the incorporation by reference in Registration Statements Nos. 33-46836 and 333-64799 on Form S-8 of Warwick Valley Telephone Company of our report relating to the financial statements of Orange County-Poughkeepsie Limited Partnership as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, dated March 13, 2006, (which report expresses on unqualified opinion and includes an explanatory paragraph regarding affiliate revenues) appearing in this Annual Report on Form 10-K of Warwick Valley Telephone Company for the year ended December 31, 2005.  /s/ Deloitte & Touche LLP New York, New York March 24, 2006   88       EX-31.1 8 l18366aexv31w1.htm EX-31.1 CERTIFICATION OF THE CEO    EX-31.1       EXHIBIT 31.1  CERTIFICATIONS  I, Herbert Gareiss, Jr. certify that:       1.   I have reviewed this annual report on Form 10-K of the Warwick Valley Telephone Company;        2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:         a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;        c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and         5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):         a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.    Date: March 27, 2006                    /s/ Herbert Gareiss, Jr.   Herbert Gareiss, Jr.            President, Chief Executive Office             89       EX-31.2 9 l18366aexv31w2.htm EX-31.2 CERTIFICATION OF THE CFO    EX-31.2       EXHIBIT 31.2  CERTIFICATIONS  I, Michael Cutler, certify that:       1.   I have reviewed this annual report on Form 10-K of the Warwick Valley Telephone Company;        2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:         a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;        c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and         5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):         a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.    Date: March 27, 2006.                     /s/ Michael Cutler   Michael Cutler            Chief Financial Officer             90       EX-32.1 10 l18366aexv32w1.htm EX-32.1 CERTIFICATION OF THE CEO SECTION 906 AND 1350    EX-32.1       EXHIBIT 32.1  CERTIFICATION PURSUANT TO 18 U.S.C. SECTIONS 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002  In connection with the Annual Report of Warwick Valley Telephone Company, (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Herbert Gareiss, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:       (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company to the best of my knowledge.    A signed original of this written statement required by section 906 has been provided to Warwick Valley Telephone Company and will be retained by Warwick Valley Telephone Company and furnished to the Securities and Exchange Commission or its staff upon request.                    /s/ Herbert Gareiss, Jr.   Herbert Gareiss, Jr. Chief Executive Officer            March 27, 2006             91       EX-32.2 11 l18366aexv32w2.htm EX-32.2 CERTIFICATION OF THE CFO SECTION 906 AND 1350    EX-32.2       EXHIBIT 32.2  CERTIFICATION PURSUANT TO 18 U.S.C. SECTIONS 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002  In connection with the Annual Report of Warwick Valley Telephone Company, (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Cutler, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:       (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company to the best of my knowledge.    A signed original of this written statement required by section 906 has been provided to Warwick Valley Telephone Company and will be retained by Warwick Valley Telephone Company and furnished to the Securities and Exchange Commission or its staff upon request.                    /s/ Michael Cutler   Michael Cutler Chief Financial OfficerMarch 27, 2006              92       EX-99 12 l18366aexv99.htm EX-99 ORANGE COUNTY POUGHKEEPSIE    EX-99       Exhibit 99       Orange County — Poughkeepsie       Limited Partnership       Report of Independent Registered Public Accounting Firm       Financial Statements       Years Ended December 31, 2005, 2004 and 2003 93       ORANGE COUNTY -  POUGHKEEPSIE LIMITED PARTNERSHIP  TABLE OF CONTENTS                  Page     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   1           Balance Sheets   2   December 31, 2005 and 2004               Statements of Operations   3   For the years ended December 31, 2005, 2004 and 2003               Statements of Changes in Partners’ Capital   4   For the years ended December 31, 2005, 2004 and 2003               Statements of Cash Flows   5   For the years ended December 31, 2005, 2004 and 2003               Notes to Financial Statements   6-12     94       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Partners of Orange County — Poughkeepsie Limited Partnership:  We have audited the accompanying balance sheets of Orange County — Poughkeepsie Limited Partnership (the “Partnership”), a majority owned partnership of Cellco Partnership d/b/a/ Verizon Wireless, as of December 31, 2005 and 2004, and the related statements of operations, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 2 and 4 to the financial statements approximately 98% of the Partnership’s revenue in each of the three years in the period ended December 31, 2005 is affiliate revenue.    /s/ Deloitte & Touche LLP New York, New York March 13, 2006   95       ORANGE COUNTY — POUGHKEEPSIE LIMITED PARTNERSHIP  BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (Dollars in Thousands)                              2005     2004       ASSETS                                       CURRENT ASSETS:                   Accounts receivable, net of allowance of $0 and $0   $ 254     $ 244     Unbilled affiliate revenue     1,599       1,249     Due from general partner     7,802       —     Prepaid expenses and other current assets     157       52                                         Total current assets     9,812       1,545                         PROPERTY, PLANT AND EQUIPMENT — Net     37,516       34,525                                         TOTAL ASSETS   $ 47,328     $ 36,070                                         LIABILITIES AND PARTNERS’ CAPITAL                                       CURRENT LIABILITIES:                   Accounts payable and accrued liabilities   $ 171     $ 436     Advance billings     261       144     Due to general partner     —       3,102                                         Total current liabilities     432       3,682                         COMMITMENTS AND CONTINGENCIES (NOTES 5 and 7)                                       PARTNERS’ CAPITAL     46,896       32,388                                         TOTAL LIABILITIES AND PARTNERS’ CAPITAL   $ 47,328     $ 36,070                       See notes to financial statements.  96       ORANGE COUNTY — POUGHKEEPSIE LIMITED PARTNERSHIP  STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Dollars in Thousands)                                      2005     2004     2003         OPERATING REVENUE (NOTES 2 and 4):                           Service revenues   $ 180,508     $ 163,367     $ 144,643                                                       OPERATING COSTS AND EXPENSES (NOTE 4):                           Cost of service (excluding depreciation and amortization related to network assets included below)     25,292       16,854       17,248     General and administrative     2,142       2,242       2,123     Depreciation and amortization     6,347       5,521       5,179     Net loss (gain) on sale of property, plant and equipment     1       60       (3 )                                                     Total operating costs and expenses     33,782       24,677       24,547                                                       OPERATING INCOME     146,726       138,690       120,096                                 INTEREST AND OTHER INCOME — Net     782       980       1,472                                                       NET INCOME   $ 147,508     $ 139,670     $ 121,568                                                       Allocation of Net Income:                           Limited partners   $ 22,126     $ 20,950     $ 18,236     General partners     125,382       118,720       103,332       See notes to financial statements.  97       ORANGE COUNTY — POUGHKEEPSIE LIMITED PARTNERSHIP  STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Dollars in Thousands)                                              General Partner     Limited Partners                               Warwick               Verizon     Taconic     Valley     Total         Wireless     Telephone     Telephone     Partners’         of the East LP     Corporation     Company     Capital         BALANCE, JANUARY 1, 2003   $ 53,678     $ 4,736     $ 4,736     $ 63,150     Net income     103,332       9,118       9,118       121,568     Distribution to partners     (114,750 )     (10,125 )     (10,125 )     (135,000 )                               BALANCE, DECEMBER 31, 2003     42,260       3,729       3,729       49,718     Net income     118,720       10,475       10,475       139,670     Distribution to partners     (133,450 )     (11,775 )     (11,775 )     (157,000 )                               BALANCE, DECEMBER 31, 2004     27,530       2,429       2,429       32,388     Net income     125,382       11,063       11,063       147,508     Distribution to partners     (113,050 )     (9,975 )     (9,975 )     (133,000 )                               BALANCE, DECEMBER 31, 2005   $ 39,862     $ 3,517     $ 3,517     $ 46,896                                   See notes to financial statements.  98       ORANGE COUNTY — POUGHKEEPSIE LIMITED PARTNERSHIP  STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Dollars in Thousands)                                      2005     2004     2003         CASH FLOWS FROM OPERATING ACTIVITIES:                           Net income   $ 147,508     $ 139,670     $ 121,568     Adjustments to reconcile net income to net cash provided by operating activities:                           Provision for losses on accounts receivable     —       —       30     Depreciation and amortization     6,347       5,521       5,179     Net loss / (gain) on sale of property, plant and equipment     1       60       (3 )   Changes in certain assets and liabilities:                           Accounts receivable     (10 )     (171 )     14     Unbilled revenue     (350 )     (383 )     259     Prepaid expenses and other current assets     (105 )     (3 )     (13 )   Accounts payable and accrued liabilities     (5 )     88       (887 )   Advance billings and other current liabilities     117       (166 )     63                                                       Net cash provided by operating activities     153,503       144,616       126,210                                                       CASH FLOWS FROM INVESTING ACTIVITIES:                           Capital expenditures, including purchases from affiliates, net     (9,599 )     (10,484 )     (5,325 )   Change in due from General Partner     (7,802 )     19,766       14,115                                                       Net cash used in / (provided by) investing activities     (17,401 )     9,282       8,790                                                       CASH FLOWS FROM FINANCING ACTIVITIES:                           Change in due to General Partner     (3,102 )     3,102       —     Distribution to partners     (133,000 )     (157,000 )     (135,000 )                                                     Net cash used in financing activities     (136,102 )     (153,898 )     (135,000 )                                                     INCREASE IN CASH     —       —       —                                 CASH, BEGINNING OF YEAR     —       —       —                                                       CASH, END OF YEAR   $ —     $ —     $ —                             See notes to financial statements.  99       ORANGE COUNTY — POUGHKEEPSIE LIMITED PARTNERSHIP  NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 (Dollars in Thousands)     1.   ORGANIZATION AND MANAGEMENT    Orange County — Poughkeepsie Limited Partnership — Orange County — Poughkeepsie Limited Partnership (the “Partnership”) was formed in 1987. The principal activity of the Partnership is providing wholesale cellular service to resellers who operate principally in the Orange County and Poughkeepsie, New York metropolitan service areas.                           The partners and their respective ownership percentages as of December 31, 2005, 2004 and 2003 are as follows:                    Managing and general partner:                       Verizon Wireless of the East LP*     85.0 %               Limited partners:                       Taconic Telephone Corporation (“Taconic”)     7.5 %   Warwick Valley Telephone Company (“Warwick”)     7.5 %            *   Verizon Wireless of the East LP (the “General Partner”) is a partnership between Verizon Wireless of Georgia LLC and Verizon Wireless Acquisition South LLC, which hold a controlling interest, and Price Communications which has a preferred interest. Verizon Wireless of the East LP is a partnership which is consolidated by Cellco Partnership (d/b/a Verizon Wireless) (“Cellco”).        2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES    Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used for, but not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, fair value of financial instruments, depreciation and amortization, useful lives and impairment of assets, accrued expenses, taxes, and contingencies. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary.  Revenue Recognition — The Partnership earns revenue by providing access to the network (access revenue) and for usage of the network (airtime/usage revenue), which includes roaming and long distance revenue. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings. Airtime/usage revenue, roaming revenue and long distance revenue are recognized when service is rendered and included in unbilled revenue until billed. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates. The Partnership will continues to re-evaluate the rates on a periodic basis (see Note 4). The Partnership’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements and Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition.  100       Approximately 98% of the Partnership’s 2005, 2004 and 2003 revenue is affiliate revenue due to the fact that Cellco is the Partnership’s primary reseller. The wholesale rates charged to Cellco do not necessarily reflect current market rates. The Partnership continues to re-evaluate the rates and expects these rates to be reduced in the future consistent with market trends and the terms of the limited partnership agreement (See Note 4).  Cellular service revenues resulting from a cellsite agreement with Cellco are recognized based upon an allocation of airtime minutes (See Note 4).  Operating Costs and Expenses — Operating costs and expenses include costs and expenses incurred directly by the Partnership, as well as an allocation of certain administrative and operating costs incurred by the General Partner or its affiliates on behalf of the Partnership. Services performed on behalf of the Partnership are provided by employees of Cellco. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. The Partnership believes such allocations, principally based on the Partnership’s percentage of total customers, customer gross additions, or minutes-of-use, are reasonable.  Property, Plant and Equipment — Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on Mobile Telephone Switching Offices (“MTSOs”) and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred.  Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the Statements of Operations.  Network engineering costs incurred during the construction phase of the Partnership’s network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction in progress until the projects are completed and placed into service.  FCC Licenses — The Federal Communications Commission (“FCC”) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993 the FCC adopted specific standards to apply to cellular renewals, concluding it will reward a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely. All wireless licenses issued by the FCC that authorize the Partnership to provide cellular services are recorded on the books of Cellco. The current term of the Partnership’s FCC licenses expire in January 2008. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnership’s wireless licenses.  Valuation of Assets — Long-lived assets, including property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.  101       As discussed above, the FCC license under which the Partnership operates is recorded on the books of Cellco. Cellco does not charge the Partnership for the use of any FCC license recorded on its books. However, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellco’s national footprint. Accordingly, the FCC licenses, including the license under which the Partnership operates, recorded on the books of Cellco are evaluated for impairment by Cellco, under the guidance set forth in Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  The FCC licenses are treated as an indefinite life intangible asset on the books of Cellco under the provisions of SFAS No. 142 and are not amortized, but rather are tested for impairment annually or between annual dates, if events or circumstances warrant. All of the licenses in Cellco’s nationwide footprint are tested in the aggregate for impairment under SFAS No. 142. When testing the carrying value of the wireless licenses in 2004 and 2003 for impairment, Cellco determined the fair value of the aggregated wireless licenses by subtracting from enterprise discounted cash flows (net of debt) the fair value of all of the other net tangible and intangible assets of Cellco, including previously unrecognized intangible assets. This approach is generally referred to as the residual method. In addition, the fair value of the aggregated wireless licenses was then subjected to a reasonableness analysis using public information of comparable wireless carriers. If the fair value of the aggregated wireless licenses as determined above was less than the aggregated carrying amount of the licenses, an impairment would have been recognized by Cellco and then may have been allocated to the Partnership. During 2004 and 2003, tests for impairment were performed with no impairment recognized.  On September 29, 2004, the SEC issued a Staff Announcement No. D-108, “Use of the Residual Method to Value Acquired Assets other than Goodwill.” This Staff Announcement requires SEC registrants to adopt a direct value method of assigning value to intangible assets, including wireless licenses, acquired in a business combination under SFAS No. 141, “Business Combinations,” effective for all business combinations completed after September 29, 2004. Further, all intangible assets, including wireless licenses, valued under the residual method prior to this adoption are required to be tested for impairment using a direct value method no later than the beginning of 2005. Any impairment of intangible assets recognized upon application of a direct value method by entities previously applying the residual method should be reported as a cumulative effect of a change in accounting principle. Under this Staff Announcement, the reclassification of recorded balances from wireless licenses to goodwill prior to the adoption of this Staff Announcement is prohibited.  Cellco evaluated its wireless licenses for potential impairment using a direct value methodology as of January 1, 2005 and December 15, 2005 in accordance with SEC Staff Announcement No. D-108. The valuation and analyses prepared in connection with the adoption of a direct value method and subsequent revaluation resulted in no adjustment to the carrying value of Cellco’s wireless licenses and, accordingly, had no effect on its financial statements. Future tests for impairment will be performed at least annually and more often if events or circumstances warrant.  Concentrations — To the extent the Partnership’s customer receivables become delinquent, collection activities commence. The General Partner accounts for 83.8% and 80.4% of the accounts receivable balance at December 31, 2005, and 2004 respectively. The Partnership maintains an allowance for losses, as necessary, based on the expected collectibility of accounts receivable.  Approximately 98% of the Partnership’s 2005, 2004 and 2003 revenue is affiliate revenue.  Cellco and the Partnership rely on local and long-distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership’s operating results.  102       Although Cellco and the General Partner attempt to maintain multiple vendors for equipment, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership’s operations. If the suppliers are unable to meet the General Partner’s needs as it builds out its network infrastructure and sells service, delays and increased costs in the expansion of the Partnership’s network infrastructure or losses of potential customers could result, which would adversely affect operating results.  Financial Instruments — The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.  Income Taxes — The Partnership is not a taxable entity for Federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually.  Segments — The Partnership has one reportable business segment and operates domestically only. The Partnership’s products and services are materially comprised of wireless telecommunications services.  Due to/from General Partner — Due to/from General Partner principally represents the Partnership’s cash position. The General Partner manages all cash, investing and financing activities of the Partnership. As such, the change in Due from General Partners is reflected as an investing activity in the Statements of Cash Flows while the change in Due to General Partner is reflected as a financing activity. The Partnership reclassified its 2004 and 2003 Statements of Cash Flows to conform to the 2005 presentation. Additionally, administrative and operating costs incurred by the General Partner on behalf of the Partnership are charged to the Partnership through this account. Interest expense/income is based on the average monthly outstanding balance in this account and is calculated by applying Cellco’s average cost of borrowing from Verizon Global Funding, a wholly owned subsidiary of Verizon Communications. The cost of borrowing was approximately 4.8%, 5.9%, and 5.0% for the years ended December 31, 2005, 2004 and 2003, respectively. Included in Interest and Other Income, Net is net interest income related to the Due from General Partner balance of $782, $980 and $1,472 for the years ended December 31, 2005, 2004 and 2003, respectively.  Recently Issued Accounting Pronouncements — In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of SFAS No. 143.” This interpretation clarifies that the term “conditional asset retirement obligation” refers to a legal obligation to perform a future asset retirement when uncertainty exists about the timing and/or method of settlement of the obligation. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists, as defined by the interpretation. An entity is required to recognize a liability for the fair value of the obligation if the fair value of the liability can be reasonably estimated. The Partnership adopted the interpretation on December 31, 2005. The adoption of this interpretation of SFAS No. 143 did not have a material impact on the Partnership’s financial statements.  Distributions — The Partnership is required to make distributions to its partners on a quarterly basis based upon the Partnership’s operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution.  103          3.   PROPERTY, PLANT AND EQUIPMENT, NET                             Property, plant and equipment, net, consists of the following as of December 31, 2005 and 2004:                                  Useful Lives   2005     2004             Buildings   10-40 years   $ 13,408     $ 11,223     Wireless plant equipment   3-15 years     58,087       51,940     Furniture, fixtures and equipment   2-5 years     303       361     Leasehold Improvements   5 years     2,149       1,725                                                           73,947       65,249                             Less accumulated depreciation         (36,431 )     (30,724 )                                               Property, plant and equipment, net       $ 37,516     $ 34,525                           Capitalized network engineering costs of $406 and $245 were recorded during the years ended December 31, 2005 and 2004, respectively. Construction-in-progress included in certain of the classifications shown above, principally wireless plant equipment, amounted to $2,368 and $1,767 at December 31, 2005 and 2004, respectively. Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $6,347, $5,521 and $5,179, respectively.     4.   TRANSACTIONS WITH AFFILIATES                             Significant transactions with affiliates (Cellco and its related entities), including allocations and direct charges, are summarized as follows for the years ended December 31, 2005, 2004 and 2003:                                      2005   2004   2003         Revenue:                           Operating revenues (b)   $ 176,310     $ 158,571     $ 138,796     Cellsite allocated revenues (c)     1,377       1,506       2,963     Cost of Service:                           Direct telecommunication charges (a)     6,355       1,697       274     Long distance charges     8,208       5,580       4,971     Allocation of cost of service (a)     3,364       3,360       3,315     Allocation of switch usage cost (a)     5,519       4,705       7,256     Selling, General and Administrative:                           Allocation of certain general and administrative expenses (a)     1,672       2,198       1,797                   (a)   Expenses were allocated based on the Partnership’s percentage of total customers, customer gross additions or minutes-of-use where applicable. The Partnership believes the allocations are reasonable.     (b)   Affiliate operating revenues primarily represent revenues generated from transactions with Cellco, the Partnership’s primary reseller. The wholesale rates charged to Cellco do not necessarily reflect current market rates. The Partnership continues to re-evaluate the rates and expects these rates to be reduced in the future consistent with market trends and the terms of the limited partnership agreement.     (c)   Cellsite allocated revenues, based on the Partnership’s percentage of minutes of use, result from the Partnership sharing a cell site with the Catskills RSA Limited Partnership, an affiliate entity.    All affiliate transactions captured above are based on actual amounts directly incurred by Cellco on behalf of the Partnership and/or allocations from Cellco. Revenues and expenses were allocated based on the Partnership’s percentage of total customers, gross customer additions or minutes of use where applicable. The General Partner believes the allocations are reasonable. The affiliate transactions are not necessarily conducted at arm’s length.  104       The Partnership had net purchases of plant, property, and equipment with affiliates of $4,738, $7,245 and $3,935 in 2005, 2004 and 2003, respectively.     5.   COMMITMENTS    The General Partner, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities and equipment used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended December 31, 2005, 2004 and 2003, the Partnership recognized a total of $1,845, $1,446 and $1,234, respectively, as rent expense related to payments under these operating leases, which was included in cost of service and general and administrative expenses in the accompanying Statements of Operations.  Aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options that are not reasonably assured, for the years shown are as follows:                  Years   Amount             2006   $ 1,612     2007     1,468     2008     1,370     2009     798     2010     186     2011 and thereafter     372                           Total minimum payments   $ 5,806                      From time to time the General Partner enters into purchase commitments, primarily for network equipment, on behalf of the Partnership.     6.   VALUATION AND QUALIFYING ACCOUNTS                                                Balance at   Additions   Write-offs   Balance at       Beginning   Charged to   Net of   End       of the Year   Operations   Recoveries   of the Year           Accounts Receivable Allowances:                                   2005   $ —     $ —     $ —     $ —     2004   $ 20     $ —     $ (20 )   $ —     2003     1       49       (30 )     20          7.   CONTINGENCIES    Cellco is subject to various lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also defending lawsuits filed against itself and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the  105       Partnership and/or insurance coverage. Attorney Generals in a number of states also are investigating certain sales, marketing and advertising practices. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance.  The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 2005 cannot be ascertained. The potential effect, if any, on the financial condition and results of operations of the Partnership, in the period in which these matters are resolved, may be material.  In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco’s legal counsel cannot give assurance as to the outcome of each of these matters, in management’s opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial statements of the Partnership.  ******  106       -----END PRIVACY-ENHANCED MESSAGE-----