SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
X ANNUAL REPORT FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
- --- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to__________
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COMMISSION FILE NO. 0-11174
WARWICK VALLEY TELEPHONE COMPANY
47 MAIN STREET
WARWICK, NEW YORK 10990
(845) 986-8080
14-1160510
(I.R.S. Employer Identification No.)
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Securities registered pursuant to Section 12(b) of the Act: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock (Without Par Value) NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. ___
Indicate by check mark if registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YES X NO .
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The number of shares of Warwick Valley Telephone Company Common Stock
outstanding as of March 14, 2003 was 1,799,862. The aggregate market value of
Warwick Valley Telephone Company Common Stock held by non-affiliates of the
registrant as of March 14, 2003 was $136,573,528.56.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated:
(1) Portions of Warwick Valley Telephone Company Annual Report to
Shareholders for the fiscal year ended December 31, 2002.
(Parts I & II)
(2) Proxy Statement for the 2003 Annual Meeting of Shareholders.
(Parts III & IV)
TABLE OF CONTENTS
ITEM PAGE
PART 1
1. Business 3
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART 2
5. Market for Registrant's Common Equity and Related Stockholder Matters 7
6. Selected Financial Data 8
7. Management's Discussion and Analysis of Financial Condition and Results of Operation 8
7a. Quantitative and Qualitative Disclosures about Market Risk 11
8. Financial Statements and Supplementary Data 11
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11
PART 3
10. Directors and Executive Officers of the Registrant 11
11. Executive Compensation 12
12. Security Ownership of Certain Beneficial Owners and Management 12
13. Certain Relationships and Related Transactions 12
14. Controls and Procedures
PART 4
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13
2
PART I.
ITEM 1. BUSINESS.
GENERAL
Warwick Valley Telephone Company (the "Company") was incorporated in
New York on January 16, 1902 and is qualified to do business as a foreign
corporation in New Jersey. The Company's executive offices are located at 47
Main Street, Warwick, New York 10990 (Tel. No. 845-986-8080). The Company
maintains an Internet site at http://wvtc.com (This web site address is for
information only and is not intended to be an active link or to incorporate any
web site information into this document.)
The Company provides telephone service to customers (30,261 access
lines) in the contiguous towns of Warwick, Goshen and Wallkill, New York, and
the townships of West Milford and Vernon, New Jersey. The Company's service area
is primarily rural and has an estimated population of 50,000.
BUSINESS OPERATIONS
The Company manages its operations as two business segments. Warwick
Valley Telephone Company's segments are strategic business units that offer
different products and services and are managed accordingly. We evaluate
performance based upon income before taxes adjusting for normalizing one time
items, if any. Currently, we have two reportable segments that reflect our
business: 1. Telephone (wireline) and 2. Online.
OPERATING SEGMENTS
TELEPHONE (WIRELINE)
The wireline segment provides landline telecommunications services
including local, network access, long distance services, and messaging and sells
customer premise and private business exchange equipment and directory services.
SERVICES AND PRODUCTS
Local exchange services - Local exchange services include traditional
dial tone primarily used to make or receive voice, fax or analog modem
calls from a residence or business. Included under local exchange
services are custom calling services, such as Caller ID, Call Waiting,
voice mail and other enhanced services. These features allow users to
enable their local services with enhanced features such as displaying
the number and/or name of callers, signaling to the telephone user that
additional calls are coming and sending and receiving voice messages.
These services are not regulated by the FCC and are generally more
profitable.
Network access services - Network access services connect a customer's
telephone or other equipment to the transmission facilities of other
carriers that provide long distance and other communications services.
Long distance services - These services result from the transport of
intraLATA telecommunications traffic that is outside of a local calling
area. We provide wireline interLATA long distance (or commonly known as
traditional long distance service) to our customers.
Customer premises equipment (CPE) - CPE and other equipment sales range
from single-line and cordless telephones to sophisticated digital PBX
systems. PBX is a private telephone switching system, usually located
on a customer's premises, that provides for intra-premise telephone
services as well as access to the public switched network.
Directory services - Our directory service group publishes yellow and
white page directories and sells advertising in these directories.
The Company sells and leases telephone equipment both within its
territory and within the territories of other telephone companies. Residential
telephone equipment sales are made through the Company's retail stores, which
are located in the Company's main office in Warwick, New York and at Route 515
and Guthrie Drive in Vernon, New Jersey. The Company also sells and leases
business telephone systems both in its own territory and elsewhere. The sale of
telephone and other equipment does not constitute a material part of the
Company's business and is contained within local exchange services.
The Company has installed advanced digital switching equipment in all
of its exchanges and fiber optic routes between central offices and to all
neighboring telephone companies, and is currently constructing fiber optic
routes in other locations.
3
The Company has a wholly-owned subsidiary - Warwick Valley Long
Distance Company, Inc. ("WVLD") - that belongs to the telephone segment of the
operations. WVLD resells toll telephone service to the Company's subscribers.
For the fiscal year ended December 31, 2002 WVLD had a pre-tax profit of $885K,
an increase of $143K (or 19.2%) from 2001.
ONLINE
The Online segment provides high speed and dial up Internet services,
help desk operations, and video over VDSL.
Warwick Online (Online), our Internet and data subsidiary, offers the
following services: UltraLink (high speed DSL internet connection), dial-up
Internet service and Digital TV. During 2002 Online continued the successful
sale of UltraLink DSL. At year-end there were 3,402 UltraLink (DSL) customers,
a gain of 1,408 or 71% over 2001. Our DSL coverage (95% availability) and
penetration levels (18% of establishments passed) are among the best in the
nation when compared to the regional Bell companies (RBOC's) and other
independent telephone companies (ILEC's). Online ended the year with a total of
17,028 dial-up customers. Our customer dial up account loss of 4,325 continues
to be due to customer migration from dial-up to high-speed interconnections
(DSL and cable modem), primarily in areas where Online is unable to provide
the high-speed services. Online's dial-up Internet service revenues decreased
approximately 16.1% in 2002 as compared to 2001. Conversely, DSL revenue
increased $575K or 67% over 2001 due to a strong demand for high-speed
connections.
In April 2002 Online introduced its Digital TV product and became the
first telephone company in New York or New Jersey to provide digital television
over an existing copper infrastructure. Utilizing the NextLevel, Inc. VDSL (very
high speed digital subscriber line) platform, this broadcast quality service
allowed WVTC to leverage existing assets to develop a new revenue stream. By
creating the "Triple Play" bundle of voice and data along with video it also
provides an important customer retention tool. Online added 614 Digital TV
customers in 2002, producing revenues of $106K. This new service is on track
with the business plan. Management expects continued growth in 2003.
Total Online revenues decreased 1%, and net income showed a loss of
$1K, primarily due to acquisition costs, depreciation expense and launch
expenses associated with the DSL and digital TV products.
Financial information regarding the Company's two business segments is
found in Note 16 to the Consolidated Financial Statements incorporated in Part
II hereof by reference.
OTHER
The Company holds a 7.5% limited partnership interest in Orange
County-Poughkeepsie Limited Partnership (Partnership). The Partnership provides
wholesale cellular telephone service throughout the Orange-Poughkeepsie MSA.
Verizon Wireless, L.L.C. is the general partner and the majority owner with an
85% interest and the other limited partner is Taconic Telephone Corporation. In
recent years the Company has received significant distributions from this
partnership. The partnership's pre-tax income for the year ended December 31,
2002 was $97,369K representing an increase of $30,149K (or 44.9%) from $67,220K
(or 49.7%) in 2001. The Company's share of that pre-tax income was $7,302K.
Additionally, a true-up of Partnership income, which occurs annually due to the
late receipt of audited Partnership financials, in the amount of $277K is also
reflected in the 2002 results. The 2002 true-up to be reflected in 2003 results
will be a $39K decrease to income. Cash distributions from the Partnership to
the Company have been used to fund capital expenditures as well as to pay a
portion of the stated common stock dividend to our shareholders.
While we take our partnership duties seriously, Verizon Wireless drives
the decisions necessary to keep the Partnership successful. Ongoing cash
distributions will be made according to the needs of the business as determined
by Verizon Wireless. Given the competitive nature of the telecommunications
business, it cannot be assumed that past cash and current levels of cash
distributions will continue indefinitely. The Partnership is experiencing
intensified competition. This competition could, we believe, potentially have an
effect on the rates the Partnership can charge and on the level of expenses it
must incur to compete effectively.
The Company owns a 8.9% share of Hudson Valley DataNet, L.L.C. ("HVDN").
HVDN connected its first customers in February 2001 and currently has broadband
facilities throughout Orange, Dutchess and Ulster Counties. According to HVDN
management, its results in 2002 were positive, both from a network expansion and
customer acquisition standpoint. In 2002, the Company achieved positive net
income, less than two years after activating its first customer. Further, HVDN
was able to sign several long-term contracts with national carriers and Fortune
100 companies.
The Company also owns 17% of ZefCom, L.L.C., d.b.a. Telispire, a consortium
of small telephone companies that resells Sprint PCS under private label. ZefCom
has been negatively affected by the general downturn of the wireless industry
and has had difficulty in executing its original business plan. The outlook for
ZefCom is uncertain.
4
MAJOR CUSTOMERS
No customer accounted for more than 10% of our consolidated revenues in
2002, 2001, and 2000.
RECENT DEVELOPMENTS
On February 18, 2003, the Company closed a commitment with CoBank, ACB with
respect to an $18,475K unsecured term credit facility. Under conditions set by
the New York Public Service Commission, the Company may use the proceeds of the
loan to refinance the current $4,000K portion which was formerly long-term debt
and a $3,000K line of credit. The Company may use the remaining amount available
under the facility - $11,475K - to finance capital expenditures and to pay the
expenses and fees incurred by the Company in connection with the closing of the
loan. In addition the Company may re-borrow amounts repaid under the facility,
which will remain available to the Company until September 30, 2004. The Company
has drawn on the term credit facility and paid off an existing $3,000K line of
credit. The Company intends to repay the $4,000K referred to above in long-term
debt at its December 1, 2003 maturity date. The Company has no present
requirements that necessitate the immediate use of the remaining unused credit.
(See Exhibit 4d.)
COMPETITION
The Company's residential customers can purchase telephone sets
(including cellular sets) and equipment compatible and operational with the
Company's telephone and cellular systems at other retail outlets inside and
outside the Company's territory and not affiliated with the Company. Such
outlets include other telephone company telephone stores, department stores,
discount stores, mail-order services and Internet websites. Businesses in the
Company's service area are also allowed to purchase equipment compatible and
operational with the Company's system from other telephone and "interconnect"
companies. The Company's territory is surrounded by the territories of Bell
Atlantic, Frontier, A Citizens Communications Company and Sprint-United
Telephone, all of which offer residential and business telephone equipment.
There are also several interconnect companies located within a 30-mile radius of
Warwick, New York.
The Telecommunications Act of 1996 (the "Act") created a nationwide
structure in which competition is allowed and encouraged between local exchange
carriers, interexchange carriers, competitive access providers, cable TV
companies and other entities. The markets affected first have been the regional
toll areas in both states. Regional toll competition has had the effect of
reducing the Company's revenues. The reduction in regional toll revenues for the
year ended December 31, 2002 was $79K (or 9.0%) in New York and $119K (or 9.1%)
in New Jersey. Under the Act, the Company itself can provide competitive local
exchange telephone service outside its franchised territory. The Company is
currently competing with Frontier, A Citizens Communications Company in the
Middletown, New York area for local service through access lines. The Company is
reviewing plans to provide limited service in other surrounding areas in both
New York and New Jersey. There can be no assurances that the Company will employ
any such additional plans, or that other companies will not begin providing
competitive local exchange telephone service in the Company's franchise
territory.
The Company currently provides access to the national and international
calling markets as well as intrastate calling markets through all interested
inter-exchange carriers, including WVLD. Equal access ("one-plus") service to
all toll carriers has been available to the Company's customers since August 1,
1991. Access to the remainder of the intrastate calling markets is provided by
the Company as well as other exchange carriers. WVLD, as an inter-exchange
carrier, competes against all such other carriers, including accelerating
wireless competition, providing full toll services to its customers at
discounted rates.
Online competes both on the basis of service and price. There are
numerous competitors throughout Online's market area whose services are
available to customers. During 2002, the Company's DSL product enjoyed strong
expansion, growing to an 18.0% penetration level of establishments passed.
Whether growth and pricing levels can be maintained depends, in part, on the
actions of existing competitors, the possible entry into the market of new
competitors, the rate of technological change and the level of demand for
services. In addition, our digital TV product was launched in April and it
competes heavily against entrenched cable and satellite TV companies.
GOVERNMENT REGULATION
The Company's New York telephone service operations are subject to the
jurisdiction of the New York State Public Service Commission ("NYSPSC"), the
Company's New Jersey telephone service operations, to the jurisdiction of the
New Jersey Board of Public Utilities ("NJBPU"). These two bodies have regulatory
authority over the Company with respect to rates, facilities, services, reports,
issuance of securities and other matters. Interstate toll and access services
are subject to the jurisdiction of the Federal Communications Commission
("FCC"). Video operations are also under NYSPSC, NJBPU and FCC jurisdiction.
The Company depends heavily on its network access revenues, receiving
approximately $8,492K (or 30.7%) of its revenues from this source. The Company
receives reimbursement from carriers in the form of charges for providing
carriers access to and from the Company's local network.
5
Pursuant to FCC requirements, the Company was obligated to make
contributions to a long-term support fund of the National Exchange Carrier
Association. On January 1, 1998, a new funding mechanism went into effect,
pursuant to which all carriers contribute to a Universal Service Fund
established by the FCC to cover high cost areas, low income customers, schools,
libraries and rural health care providers. The Company's obligation to this fund
for the year ended December 31, 2002 was $186K and for 2003 will be
approximately $192K. Quarterly updates modify the amounts contributed.
Management does not currently expect that the amount contributed by the Company
will change significantly.
Also as of January 1, 1998, the Company began receiving substantial
funds from the Universal Service Fund. As a result of the FCC order establishing
the Universal Service Fund, all local exchange carriers were required to reduce
access charges billed to toll carriers. To offset this revenue reduction, the
high cost portion of the Universal Service Fund provides payments monthly to
carriers satisfying the characteristics set forth in the order. At the current
level of support, the Company received $3,337K during the fiscal year ended
December 31, 2002 and expects to receive $3,000K in the fiscal year ending
December 31, 2003.
In the Company's two New Jersey exchanges, intrastate toll revenues are
retained by toll carriers, of which the Company is one. The associated access
charges are retained by the Company. Revenues resulting from traffic between the
Company and Bell Atlantic and United Telephone are adjusted by charges payable
to each company for terminating traffic.
In addition to charging for access to and from the Company's local
network, the Company bills and collects charges for most interstate and
intrastate toll messages carried on its facilities. Interstate billing and
collection services provided by the Company are not regulated. They are provided
under contract by the Company. Intrastate billing and collection remain partly
regulated in New York and fully regulated in New Jersey. The regulated services
are provided under tariff. Some carriers provide their own billing and
collection services.
IMPACT OF INFLATION
Although inflation has slowed in recent years, it is still a factor in
our economy and the Company continues to seek ways to mitigate its inpact. To
the extent permitted by competition or regulation, the Company passes increased
costs on to its customers by increasing sales prices over time.
EMPLOYEES
As of March 10, 2003 the Company had 101 full-time and 13 part-time
employees, including 82 non-management employees.
On November 5, 2001 employees belonging to the Warwick Valley Telephone
Company Employees' Association ("WVTEA") elected to become affiliated with Local
503 of the International Brotherhood of Electrical Workers ("IBEW"). The Company
now has 67 full-time and 11 part-time employees who belong to the IBEW; their
current five-year agreement with the Company expires on April 30, 2003.
RECENT TRANSACTIONS
During the first quarter of 2003, the Company offered an early
retirement package to certain eligible employees. Special termination benefits
of $2,028K resulted from this offer, which six employees accepted.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others the
following: general economic and business conditions, both nationally and in the
geographic regions in which the Company operates; industry capacity; demographic
changes; existing governmental regulations and changes in or the failure to
comply with, governmental regulations; legislative proposals relating to the
businesses in which the Company operates; competition; or the loss of any
significant ability to attract and retain qualified personnel. Given these
uncertainties, current and prospective investors should be cautioned in their
reliance on such forward-looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce the results of
any revision to any of the forward-looking statements contained herein to
reflect future events or developments.
6
ITEM 2. PROPERTIES.
The Company owns an approximately 22,000 square-foot building in
Warwick, New York, which houses its general offices, data processing equipment
and the central office switch for the Warwick exchange. In addition, the Company
owns several smaller buildings which serve as workshops, storage space or
garages or which house switching equipment at the Company's other exchanges. The
Company also owns a building at 24 John Street in Middletown, New York in order
to support its expanded dial tone operations in its Middletown exchange. The
Company rents store space located at Route 515 and Guthrie Drive in Vernon, New
Jersey. Of the Company's investment in telephone plant in service, central
office equipment represents approximately 38.5%; connecting lines and related
equipment, 34.2%; telephone instruments and related equipment 2.7%; land and
buildings 4.2%; internet equipment 7.5%; video equipment 4.9%; and other plant
equipment, 8.0 %. A substantial portion of the Company's properties is subject
to the lien of the Company's Indenture of Mortgage until the remaining
indebtness thereunder is repaid, which is anticipated to occur in December 2003.
ITEM 3. LEGAL PROCEEDINGS.
On October 1, 2002, the Company (traded on NASDAQ with the symbol WWVY)
filed an application with the Securities and Exchange Commission under Section
3(b)(2) of the Investment Company Act of 1940 for an order of exemption from the
provisions of that act. The Company had previously reported its intention to
file such an application in its Quarterly Report on Form 10-Q for the period
ended June 30, 2002. The Company does not believe it is an investment company
within the meaning of the Investment Company Act but concluded that it was
prudent to request an order of exemption because of the current profitability of
its long-standing 7.5% limited partnership interest in Orange
County-Poughkeepsie Limited Partnership. Shortly before its filing with the SEC,
the Company was served with a complaint filed by a shareholder with the U.S.
District Court for the Southern District of New York. The complaint alleged,
among other things, that the Company was required to either register as an
investment company or divest the partnership interest. Shortly after the
complaint was filed, the litigation was voluntarily stayed.
On February 3, 2003 the Company withdrew as unnecessary its application
under Section 3(b)(2) of the Investment Company Act, after the Company's Board
of Directors determined, based on information presented to it by investment
brokers and valuation experts, that the fair value of its "investment
securities," as defined in the Investment Company Act, was less than 40% of the
Company's total assets. That percentage is the level at which Section 3(a)(1)(C)
of that Act contemplates that a company which isn't primarily engaged in the
business of investing in securities might nevertheless be an investment company,
absent an exemption under Section 3(b)(2) or some other provision under that
Act. After the Company withdrew its application for exemption, the stay on the
litigation was lifted. The litigation remains in a very early stage and is being
vigorously defended by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of shareholders in the fourth quarter
of the fiscal year covered by this report.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ national market under
the symbol WWVY. As of March 15, 2003 there were 658 shareholders of record.
The Company has paid quarterly cash dividends on its common stock since
April 1931 and semi-annually from July 1907 until December 1930. Quarterly cash
dividends are usually declared in February, May, August and November and are
paid March 31, June 30, September 30 and December 20.
Cash dividends paid per share for December 30 (in cents):
Quarter 2002 2001
----------------------------------------------------
First (March 31) .43 .41
Second (June 30) .43 .41
Third (September 30) .43 .41
Fourth (December 20) .48 .43
----------------------------------------------------
TOTAL 1.77 1.70
====================================================
7
The NASDAQ high and low bid prices for the Company's common stock for the first,
second, third and fourth quarters of 2002 and 2001 were as follows:
QUARTER ENDED
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
- -----------------------------------------------------------------------------
High $57.98 $64.20 $61.12 $69.50
Low $52.75 $57.00 $47.50 $50.51
QUARTER ENDED
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
- -----------------------------------------------------------------------------
High $44.00 $43.75 $53.95 $58.50
Low $38.25 $39.25 $41.00 $50.25
ITEM 6. SELECTED FINANCIAL DATA.
($ in Thousands)
For year ended December 31, 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
Selected financial data:
Total revenues $27,703 $27,538 $26,691 $23,186 $21,362
Total expenses 22,436 20,792 19,054 17,127 14,409
Net income 8,297 7,572 7,018 5,582 4,042
Total assets 55,537 47,510 42,013 36,977 33,242
Long term obligations 0 4,000 4,000 4,000 7,000
Common stock data:
Income per share 4.59 4.18 3.88 3.06 2.21
Cash dividend per common share $ 1.77 $ 1.70 $ 1.56 $ 1.34 $ 1.12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(Dollars in thousands except per share amounts.)
WVT Communications is a company that operates in the communications
services industry. The Company provides wireline, equipment, directory
advertising services, Internet, video and other services to our customers.
You should read this discussion in conjunction with the consolidated
financial statements and the accompanying notes. A reference in this Item to a
Note refers to the accompanying Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS - 2002 VS. 2001
The Company's net income from all sources increased $725K (or 9.6%) to
$8,297K for the twelve-month period ended December 31, 2002, as compared to an
increase of $554K for the corresponding period in 2001.
Operating revenues increased $165K (or 0.6%) to $27,703K for the year
ended December 31, 2002, as compared to $27,538K for 2001, as a result of a
$1,047K (or 14.0%) increase in network access service revenues reflecting
favorable rate increases and a larger allocated share of pooled revenues from
the Universal Service Fund. Also contributing was the $191K (or 4.5%) increase
in local service revenues resulting from the continued use of newly marketed
services, partially offset by a $787K (or 63.0%) decline in reciprocal
compensation which negatively impacted our Middletown CLEC revenues. Per FCC
order 01-131 this type of revenue will continue to decline until completely
phased out in 2003. Revenue increases were also offset by lower revenues
generated by long distance sales and long distance network services which, when
combined, totaled a decrease of $269K (or 6.4%). The decrease reflects continued
competitive pressures from other long distance carriers and wireless providers.
Revenues generated from the sale of Internet services remained relatively flat
when compared to 2001 (down $59K or 1.0%). Increases in DSL revenues and
additional revenues generated by the launching of the video service in 2002 were
offset by a decrease in revenues generated by dial-up Internet customers who
switched to DSL services offered by competitors in areas beyond the reach of our
own DSL service.
8
Total operating expense increases were held to $1,644K (or 7.9%) or
$22,436K for the year ended December 31, 2002, as compared to $20,792K (or 9.1%)
for the previous year. This increase primarily reflects $560K of additional
operating costs associated with the launch of the video product in 2002, $459K
of additional expenses associated with the Company's defined postretirement
medical benefits plan, $350K of additional bad debt expense due to the
MCI/WorldCom bankruptcy, and higher depreciation expense of $227K reflecting the
Company's network upgrades.
Other income (expenses) increased $2,553K (or 55.0%) to $7,181K for the
year ended December 31, 2002, as compared to $4,628K for the previous year. This
increase is mainly due to increased income from the the Partnership. Income
earned from the Partnership does not automatically result in a full cash
distribution to the Company. Increased Partnership call volume was the primary
factor for the year over year net income increase. It should be noted that there
is no guarantee that call volume will remain strong, that expense allocations
from the general partner will remain the same, and that the significant year
over year income increases will continue.
RESULTS OF OPERATIONS - 2001 VS. 2000
The Company's net income from all sources increased $554K (or 7.9%) to
$7,572K for the twelve-month period ended December 31, 2001, as compared to an
increase of $1,436K (or 25.7%) for the corresponding period in 2000.
Operating revenues increased $847K (or 3.2%) to $27,538K for the year
ended December 31, 2001, as compared to $26,691K for 2000, as a result of a
$419K (or 7.0%) increase in Online revenues due to the Company continually
offering customers new services, an increase in network access service revenues
of $648K (or 9.5%) primarily due to the sale of dedicated trunks and local
service revenues increasing by $281K (or 7.1%) as a result of continuous
increased use of newly marketed services. These increases were offset by a
reduction of $449K (or 26.3%) for reciprocal compensation due to rate decreases
effective July and December in 2001 for the Company's Competitive Local Exchange
Carrier (CLEC) in Middletown.
Total operating expenses increased $1,738K (or 9.1%) to $20,792K for
the year ended December 31, 2001, as compared to $19,054K for the previous year.
An increase in wages and benefits of $802K (or 9.0%) and an increase in both
telecommunication and Internet facilities of $734K (or 35.9%) were the main
factors in the increase.
Other income (expenses) increased to $4,628K in 2001 from $2,811K in
2000. This increase resulted mainly from an increase in income from the
Partnership, reflecting a year over year increase in call volume.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $1,641K of cash and cash equivalents available at
December 31, 2002. The Company has lines of credit with two banks totaling
$10,000K of which $5,000K remains unused. $2,500K of the total line of credit is
at a variable lending rate and borrowings are on a demand basis without
restrictions. (See also Part I, Item 1, Recent Developments.)
CASH FROM OPERATING ACTIVITIES
During 2002, 2001 and 2000 the Company's primary source of funds
continued to be cash generated from operations, as shown in the consolidated
statements of cash flows. For 2002 and 2000, net cash from operating activities
exceeded capital expenditures; this excess is referred to as free cash flow, a
supplemental measure of liquidity. Free cash flow was $291K and $1,466K in 2002
and 2000, respectively. In 2001, net cash from operating activities was less
than capital expenditures due to the Company's entrance into the video business.
CASH FROM INVESTING ACTIVITIES
Capital expenditures totaled $8,420K, $9,396K and $5,069K for the
twelve months ended December 31, 2002, 2001, and 2000, respectively. The
majority of these expenditures can be attributed to the Company's expansion into
the video business and network upgrades.
In order to provide the high-quality communications services expected
from our customers, the Company continued to invest in and upgrade its property,
plant and equipment. The amount of investment is influenced by demand for
services and products, ongoing growth as well as regulatory commitments and
plant refurbishment.
In 2003, management expects total capital spending to be between
$6,000K and $8,000K. These capital expenditures will relate primarily to the
continued expansion of the video and DSL services provided to our customers, as
well network upgrades.
9
The Partnership is licensed to operate as the wire line licensee in
both Orange and Dutchess Counties, New York. The Company received cash
distributions from the Partnership amounting to $6,000K, and $5,283K in 2002 and
2001, respectively. Although it is likely that increased competitive pressure
will eventually affect the profitability of the partnership, it is reasonable to
expect that cash distributions will occur at approximately the current level in
the near term.
On July 28, 2000 the Company purchased an 8.9% ownership interest in
(HVDN) for $1,000K. HVDN is a competitive telecommunications company that will
offer high-speed bandwidth throughout the region.
The Company had a 17.0% interest in Zefcom, L.L.C., a licensed reseller
of wireless services. As of December 31, 2002 the Company had made capital
contributions totaling $2,000K, pursuant to the terms of the investment
agreement with Zefcom.
CASH FROM FINANCING ACTIVITIES
Common stock dividends declared by the Board of Directors of Warwick
Valley Telephone Company achieved $1.77 per share as of December 31, 2002, $1.70
per share as of December 31, 2001 and $1.56 per share as of December 31, 2000.
Total dividends paid for common stock by Warwick Valley Telephone Company were
$3,191K, $3,065K and $2,807K in 2002, 2001 and 2000, respectively. Warwick
Valley Telephone Company dividend policy considers both the expectations and
requirements of shareowners and the internal requirements of the Company.
SEGMENTED OPERATIONS
In 1998 the Company began business segment reporting to reflect the
predominance of its two major operating segments, telephone operations
(wireline) and Online service provider. The Company currently reports its
operating results in two segments: Warwick Valley Telephone and Warwick Online.
Each of the Company's segment results before eliminations is reviewed below.
The wireline segment, which accounted for approximately 79% of our
operating revenues in 2002, provides landline telecommunications services,
including local, network access, long distance services, and sells customer
premise and private business exchange equipment.
The telephone operations revenue increase of $723K (or 3.1%) for the
year ended December 31, 2002 as compared to $1,051K (or 4.8%) for 2001 was due
to the higher network access rates, increased share of Universal Service Fund
pooled revenues, sales of dedicated trunklines and the continued marketing of
newly introduced services to local customers, offset by lower reciprocal
compensation in the Middletown CLEC and lower long distance network service and
sales revenues.
The telephone operations expenses increased $977K (or 5.7%) for the
year ended December 31, 2002 as compared to $1,226K (or 7.5%) for 2001 due to
increased costs associated with employee postretirement benefits and bad debt
expense resulting from the MCI/WorldCom bankruptcy.
The Online segment accounted for 21% of our operating revenue in 2002
and provides high speed and dial up Internet services, help desk operations and
video over VDSL.
Online revenues decreased $59K (or 1.0%) for the year ended December
31, 2002 as compared to an increase of $420K (or 7.0%) for 2001 as increased
revenues from DSL and video were offset by decreases in dial-up Internet
revenues.
Online expenses increased $1,166K (or 22.6%) for the year ended
December 31, 2002 as compared to $1,136K (or 28.1%) for 2001 mainly due to costs
associated with the introduction of video services in 2002, including the cost
of purchasing additional access lines to transmit video over VDSL.
Comparative financial information regarding the operation of the
Company's two business segments for the period from 2000 through 2002 can be
found in Note 16 of the consolidated financial statements.
ACCOUNTING POLICIES AND STANDARDS
Our significant policies can be found in Note 1 of the consolidated
financial statements.
10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not hold or issue derivative instruments for any
purposes or other financial instruments for trading purposes. The Company's only
assets exposed to market risk are its interest bearing bank accounts, into which
the Company deposits its excess operating funds on a daily basis. The Company's
mortgage liabilities currently bear interest at fixed rates. If the Company
refinances its liabilities when they mature the nature and amount of the
applicable interest rate or rates will be determined at that time. The Company
also has a line of credit which accrues interest at 0.75% below the prime rate.
On May 1, 2000 the Company repaid its $3,000K Series I bond with short-term
borrowing. The Company has the option of renewing such short-term borrowing
every thirty, sixty or ninety days at prime rate or LIBOR rate plus 1.75%. (See
also Part I, Item 1, Recent Developments.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15(a)(1) on page 13 for Index to Financial Information.
Selected supplementary quarterly financial data can be found in Note 18
of Notes to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company's independent auditors, Bush & Germain, P.C., are
withdrawing from serving the Company in that capacity. The Company has not yet
engaged a successor. The report by Bush & Germain on the Company's financial
statements for the years 2001 and 2002 did not contain any adverse opinion,
disclaimer of opinions, or qualifications or modifications as to uncertainty,
audit scope or accounting principles. Bush & Germain has decided that it no
longer wishes to audit public companies but has agreed to continue providing
review and audit services until the Company has engaged a successor. For the
years 2001 and 2002 and for the year 2003 until the date hereof, there have not
been any disagreements between the Company and Bush & Germain regarding
accounting principles or practices, financial statement disclosures or auditing
scope or procedures. The Company and its Audit Committee are actively searching
for a new audit firm. Our goal is to conclude this search as soon as possible.
When the Company engages a successor audit firm, it will report the engagement
on Form 8-K.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and background of each of the Company's Board of
Directors and nominees for Board of Directors are incorporated by reference
under the caption "Information about Directors and Nominees for Election of
Directors" in the Company's Proxy Statement for its 2003 Annual Meeting of
Shareholders.
At the upcoming Shareholders Annual Meeting on April 25, 2003 both
Howard Conklin, Jr. and Henry L. Nielsen, Jr. will be retiring from the Board of
Directors.
The following is a list of names, ages and background of our current
executive officers:
M. Lynn Pike, 56, is President and Chief Executive Officer, and
Director of Warwick Valley Telephone Company. Pike, the sixth president in the
Company's 101 year history, joined the company in January 2000. He has over 30
years experience in the telephone industry, including previous positions in
California, Maine, Alaska and Hungary. Mr. Pike serves as president of the
Albert Wisner Public Library Board of Trustees, Warwick, NY and is on the board
of ZefCom L.L.C., Texas. A graduate of the University of Redlands, California,
Mr. Pike was previously general manager of Geneseo Telephone Co. and chief
operating officer of Illinois PCS, a regional wireless venture in Illinois.
Herbert Gareiss Jr., 57, is Vice President of Regulatory, Compliance
and Planning; Secretary; and Director of Warwick Valley Telephone Company. Mr.
Gareiss joined the Company in June 1980 as assistant secretary/assistant
treasurer, and became vice president in 1990. He was elected to the board of
directors in 1999. Past president of the Warwick Valley Chamber of Commerce, he
serves as the Chairman of the Board of Trustees of SUNY Orange and as financial
secretary of the Sugar Loaf United Methodist Church. He holds a B.A. from
Gettysburg College and an M.B.A. in Management and Finance from Fairleigh
Dickinson University.
Larry D. Drake, 59, is Vice President of Operations and Technology of
Warwick Valley Telephone Company. Mr. Drake joined the Company in August 1998.
Mr. Drake was previously the Vice President Network Service, Shenandoah
Telephone Company, Edinburg, Virginia. Former positions include Direct-Technical
Liaison, United States Telephone Association, Washington, DC and technical
positions at AT&T, Bellcore and BellSouth. He is a member of
11
the Chamber of Commerces of Warwick, NY and Vernon, NJ. A graduate of Midland
Technical College and the University of South Carolina, Drake holds an M.B.A.
from Fairleigh Dickinson University.
Brenda A. Schadt, 58, is Vice President of Customer Service and
Directory of Warwick Valley Telephone Company. Mrs. Schadt began her career at
the Company in June 1962 as an operator and has worked throughout the Company,
serving as data processing manager, customer service manager, marketing manager
and directory services manager. She was selected as vice president in September
1999. She is a member of the Orange County United Way, southern division.
Philip Grybas, 55, is Vice President, Treasurer, and Chief Financial
Officer of Warwick Valley Telephone Company. Before joining the Company in
August 2001, he was an associate consultant at TEG, a performance management
analyst firm, whose corporate headquarters are in Indianapolis, IN. Prior to
that position, he was a senior manager, finance expert and advisor at SBC
Communications, for the Hungarian National Telephone Company (MATAV). He has
over 18 years experience in telecommunications the majority of which was spent
with the former Ameritech Corp. A member of the Illinois Society of CPAs, Mr.
Grybas holds a B.A. from the University of St. Thomas, an M.B.A. from DePaul
University, and an M.S. in International Relations from Creighton University.
Executive officers are elected by the Company's Board of Directors and
their terms of office continue until the next annual meeting of the Board. There
are no family relationships among the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the information under the caption
"Executive Compensation" in the Company's Proxy Statement for its 2003 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by references to the information under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 2003 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company expended approximately $494K, $323K and $256K during 2002,
2001, and 2000, respectively, in insurance premiums for required insurance
coverage. These expenditures were made to an insurance agency in which Corinna
S. Lewis, a member of the Board of Directors has a small financial interest.
Board of Director member, Fred M. Knipp, is a trustee of the Warwick
Savings Bank, at which the Company has its principal bank accounts and temporary
investments.
ITEM 14. CONTROLS AND PROCEDURES.
Based on their evaluation as of a date within 90 days of the filing of
this Annual Report, our principal executive officer and our principal financial
officer have concluded that our disclosure controls and procedures (as defined
in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) are effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses and, therefore,
there were no corrective actions taken.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States. The
integrity and objectivity of the data in these financial statements, including
estimates and judgments relating to matters not concluded by year end, are the
responsibility of management, as is all other information included in the Annual
Report, unless otherwise indicated.
The financial statements of Warwick Valley Telephone Company have been
audited by Bush & Germain, independent auditors. Management has made available
to Bush and Germain all of the Company's financial records and related data, as
well as the minutes of shareowners' and directors' meetings. Furthermore,
management believes that all representations made to Bush & Germain during its
audit were valid and appropriate.
12
Management has established and maintains a system of internal
accounting controls that provides reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition and the prevention and detection of fraudulent
financial reporting. The concept of reasonable assurance recognizes that the
costs of an internal accounting controls system should not exceed, in
management's judgement, the benefits to be derived.
Management also seeks to ensure the objectivity and integrity of its
financial data by the careful selection of its managers, by organizational
arrangements that provide an appropriate division of responsibility and by
communication programs aimed at ensuring that its policies, standards and
managerial authorities are understood throughout the organization.
The Audit Committee of the Board of Directors, which consists of
directors who are independent, meets periodically with management and the
independent auditors to review the manner in which they are performing their
respective responsibilities and to discuss auditing, internal accounting
controls and financial reporting matters. The independent auditors meet alone
with the Audit Committee and have access to the Audit Committee at any time.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following items are filed as part of this Annual Report:
1. Financial Statements
Page
Independent Certified Public Accountants, Bush & Germain, PC 18
Consolidated Statement of Income-Years Ended December 31, 2002, 2001
and 2000 19
Consolidated Balance Sheet-December 31, 2002 and 2001 20
Consolidated Statement of Stockholders' Equity-Years Ended December
31, 2002, 2001 and 2000 21
Consolidated Statement of Cash Flows-Years Ended December 31, 2002,
2001 and 2000 22
Notes to Consolidated Financial Statements 23-32
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this
Annual Report. All other financial statement schedules have been omitted because
they are not applicable or the information required is presented in the
Company's consolidated financial statements and notes thereto under Item 8 of
this Annual Report.
WARWICK VALLEY TELEPHONE COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ 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
Uncollectibles:
Year 2002 $ 65 $465 $ 42 $144 $428
Year 2001 $ 65 $ 98 $106 $204 $ 65
Year 2000 $ 65 $ 40 $ 66 $106 $ 65
(a) Provision for uncollectibles as stated in statements of income.
(b) Amounts previously written off which were credited directly to this
account when recovered.
(c) Amounts written off as uncollectible.
3. Exhibits
Index to Exhibits on page 33.
13
(b) Reports on Form 8-K:
1. On October 2, 2002, the Company reported its filing of a
request for exemption under Section 3(b)(2) of the Investment
Company Act and that it had been served with a complaint by a
shareholder alleging that it should register as an investment
company.
2. On February 4, 2003 the Company reported that it had withdrawn
the request for exemption referred to above.
3. On February 26, 2003 the Company reported that it had closed a
commitment with CoBank, ACB with respect to an $18,475K
unsecured term credit facility.
3. Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE
3(a) Articles of Incorporation, Incorporated by reference to
as amended Exhibit 3(a) to the Company's
Annual Report on Form 10-K
for 1997
3(b) By-Laws, Filed herewith
as amended
4(a) Form of Common Stock Incorporated by reference to
Certificate, as amended Exhibit 4(a) to the Company's
Annual Report on Form 10-K
for 1997
4(b) Indenture of Mortgage, dated Incorporated by reference to
November 1, 1952, and all Exhibit 4(d) to the Company's
indentures supplemental Registration Statement on
thereto, except the Eighth Form 10 (File No. 0-11174),
Supplemental Indenture dated April 29, 1983
4(c) Ninth Supplemental Incorporated by reference to
Indenture, dated as of Exhibit 4(e) to the Company's
October 1, 1993, to the Annual Report on Form 10-K
Indenture of Mortgage, for 1997
dated November 1, 1952,
including form of 7.05%
First Mortgage Bond,
Series J, Due December 1, 2003
4(d) CoBank Loan Agreement Filed herewith
16 Consent of Independent Auditors Filed herewith
21 Significant Subsidiaries of Registrant Filed herewith
24 Orange County-Poughkeepsie Per regulation 210.3-09(b),
filed as an amendment to
this report.
Limited Partnership Financial
Statements for the years ended
December 31, 2002 and 2001
99.1 Certification pursuant to 18 U.S.C. Filed herewith
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 signed by M. Lynn Pike -
principal Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Filed herewith
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 signed by Phillip A. Grybas -
principal Executive Officer.
14
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 25, 2003 By /s/ M. Lynn Pike
--------------------
M. Lynn Pike
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated and on the 25th day of March, 2003.
SIGNATURE TITLE
/s/ Herbert Gareiss, Jr. Vice President, Secretary and Director
- ----------------------------------
Herbert Gareiss, Jr.
/s/ Philip A. Grybas Vice President and Treasurer
- ---------------------------------- (Principal Financial and Accounting
Philip A. Grybas Officer)
Director
/s/ Fred M. Knipp
- ----------------------------------
Fred M. Knipp
/s/ Wisner H. Buckbee Director
- ----------------------------------
Wisner H. Buckbee
/s/ Howard Conklin, Jr. Director
- ----------------------------------
Howard Conklin, Jr.
/s/ Joseph E. DeLuca Director
- ----------------------------------
Joseph E. DeLuca
- ---------------------------------- Director
Philip S. Demarest
/s/ Robert J. DeValentino Director
- ----------------------------------
Robert J. DeValentino
Director
- -----------------------------------
Corinna S. Lewis
Director
- -----------------------------------
Henry L. Nielsen, Jr.
15
CERTIFICATIONS
I, M. Lynn Pike, Chief Executive Officer of Warwick Valley Telephone Company,
certify that:
1. I have reviewed this annual report on Form 10-K of Warwick Valley Telephone
Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures 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 annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 /s/ M. Lynn Pike
----------------
Name: M. Lynn Pike
Title: President, Chief Executive Officer
16
I, Philip A. Grybas, Chief Financial Officer of Warwick Valley Telephone
Company, certify that:
1. I have reviewed this annual report on Form 10-K of Warwick Valley Telephone
Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures 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 annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 /s/ Philip A. Grybas
--------------------
Name: Philip A. Grybas
Title: Vice President, Chief Financial Officer
17
BUSH & GERMAIN, PC
Certified Public Accountants
901 Lodi Street
Syracuse, New York 13203
phone: (315) 424-1145
fax: (315) 424-1457
January 30, 2003
To the Board of Directors
Warwick Valley Telephone Company
P.O. Box 592
Warwick, New York 10990
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Warwick
Valley Telephone Company as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. Our audits also
include the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Warwick
Valley Telephone Company as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Bush & Germain, P.C.
18
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF INCOME
($ in Thousands except per share amounts)
FOR THE YEARS ENDING DECEMBER 31, 2002 2001 2000
-------------- -------------- --------------
OPERATING REVENUES:
Local network service $ 4,440 $ 4,249 $ 3,968
Network access service 8,492 7,445 6,797
Long distance network service 2,007 2,125 2,357
Directory advertising 1,318 1,160 1,060
Long distance sales 1,939 2,090 2,016
Internet services 6,330 6,389 5,969
Other services and sales 3,177 4,080 4,524
--------------- --------------- ---------------
Total operating revenues 27,703 27,538 26,691
--------------- --------------- ---------------
OPERATING EXPENSES:
Plant specific 4,328 3,494 3,196
Plant non-specific:
Depreciation 3,991 3,764 3,248
Other 2,225 2,018 1,506
Customer operations 4,203 4,687 4,279
Corporate operations 3,887 3,079 3,051
Cost of services and sales 2,242 2,215 2,101
Property, revenue and payroll taxes 1,560 1,535 1,673
--------------- --------------- ---------------
Total operating expenses 22,436 20,792 19,054
--------------- --------------- ---------------
OPERATING INCOME 5,267 6,746 7,637
OTHER INCOME (EXPENSES):
Interest expense (562) (651) (612)
Interest income 6 13 25
Income from cellular partnership 7,579 4,991 3,255
Other income (expense) 158 275 143
--------------- --------------- ---------------
Total other income (expense) - net 7,181 4,628 2,811
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 12,448 11,374 10,448
FEDERAL INCOME TAXES 4,151 3,802 3,430
NET INCOME 8,297 7,572 7,018
PREFERRED DIVIDENDS 25 25 25
--------------- --------------- ---------------
INCOME APPLICABLE TO COMMON STOCK $ 8,272 $ 7,547 $ 6,993
=============== ================ ===============
NET INCOME PER AVERAGE SHARE OF
OUTSTANDING COMMON STOCK $ 4.59 $ 4.18 $ 3.88
=============== =============== ===============
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING 1,802,828 1,803,936 1,811,653
=============== =============== ===============
Please see the accompanying notes, which are an integral part of the
financial statements.
19
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEET
($ in Thousands)
DECEMBER 31, DECEMBER 31,
ASSETS 2002 2001
-------------- --------------
Current Assets:
Cash $ 1,641 $ 581
Accounts receivable - net of reserve for uncollectibles 3,428 3,438
Refundable income taxes 313 0
Materials and supplies 1,468 2,271
Prepaid expenses 544 545
-------------- --------------
Total Current Assets 7,394 6,835
-------------- --------------
Noncurrent Assets:
Unamortized debt issuance expense 5 10
Intangible asset - pension 831 0
Other deferred charges 27 198
Investments 7,775 5,397
-------------- --------------
Total Noncurrent Assets 8,638 5,605
-------------- --------------
Property, Plant and Equipment:
Plant in service 63,358 56,462
Plant under construction 1,974 4,455
-------------- --------------
65,332 60,917
Less: Accumulated depreciation 25,827 25,847
-------------- --------------
Total Property, Plant and Equipment 39,505 35,070
-------------- --------------
TOTAL ASSETS $ 55,537 $ 47,510
============== ==============
LIABILITES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 5,000 $ 6,250
Current maturities of long term debt 4,000 0
Accounts payable 2,652 1,919
Advance billing and payments 230 202
Customer deposits 125 128
Accrued taxes 66 65
Accrued interest 74 30
Pension and postretirement benefits 516 209
Other accrued expenses 537 294
-------------- --------------
Total Current Liabilites 13,200 9,097
-------------- --------------
-------------- --------------
Long-term Debt 0 4,000
-------------- --------------
Deferred Credits and Other Long Term Liabilites:
Accumulated deferred federal income taxes 3,978 2,348
Unamortized investment tax credits 22 47
Other deferred credits 20 60
Pension and postretirement benefits 2,812 1,062
-------------- --------------
Total Deferred Credits and Other Long Term Liabilites 6,832 3,517
-------------- --------------
Stockholders' Equity:
Preferred stock - 5% cumulative; $100 par value;
Authorized 7,500 shares; Issued and outstanding 5,000 shares 500 500
Common stock - no par value; Authorized shares 2,160,000 3,481 3,471
Issued 1,994,270 for 12/31/02 and 1,994,080 for 12/31/01
Treasury stock at cost, 194,561 shares for 12/31/02 and 190,497 for 12/31/01 (3,598) (3,385)
Minimum pension liability (269) 0
Retained earnings 35,391 30,310
-------------- --------------
Total Stockholders' Equity 35,505 30,896
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,537 $ 47,510
============== ==============
Please see the accompanying notes, which are an integral part of the
financial statements.
20
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($ in Thousands)
ACCUMULATED
OTHER
TREASURY PREFERRED COMMON RETAINED COMPREHENSIVE
STOCK STOCK STOCK EARNINGS INCOME/(LOSS) TOTAL
-------- --------- ------- --------- -------------- ---------
Balance, December 31, 1999 $ (2,780) $ 500 $ 3,368 $ 21,642 $ $ 22,730
Net income for the year 7,018 7,018
Dividends:
Common ($1.56 per share) (2,807) (2,807)
Preferred ($5.00 per share) (25) (25)
Sale of Common Stock 83 83
Purchase of Treasury Stock (605) (605)
--------- -------- -------- --------- ------ ----------
Balance, December 31, 2000 $ (3,385) $ 500 $ 3,451 $ 25,828 $ 0 $ 26,394
Net income for the year 7,572 7,572
Dividends:
Common ($.1.70 per share) (3,065) (3,065)
Preferred ($5.00 per share) (25) (25)
Sale of Common Stock 20 20
Purchase of Treasury Stock
--------- -------- -------- --------- ------- --------
Balance, December 31, 2001 $ (3,385) $ 500 $ 3,471 $ 30,310 $ 0 $ 30,896
Net income for the year 8,297 8,297
Minimum Pension Liability (269) (269)
---------
Total Comprehensive Income (Loss) 8,028
Dividends:
Common ($1.77 per share) (3,191) (3,191)
Preferred ($5.00 per share) (25) (25)
Sale of Common Stock 10 10
Purchase of Treasury Stock (213) (213)
--------- -------- -------- --------- ------- ---------
BALANCE, DECEMBER 31, 2002 $ (3,598) $ 500 $ 3,481 $ 35,391 $ (269) $ 35,505
========= ======== ======== ========= ======= =========
Please see the accompanying notes, which are an integral part of the
financial statements.
21
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOW
($ in Thousands)
FOR THE YEARS ENDING DECEMBER 31, 2002 2001 2000
-------------- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 8,297 $ 7,572 $ 7,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,991 3,764 3,248
Deferred income tax and investment tax credit 1,605 119 74
Interest charged to construction (238) (283) (85)
Income from partnership (7,579) (4,991) (3,255)
Change in assets and liabilities:
(Increase) Decrease in accounts receivable 10 653 (75)
(Increase) Decrease in materials and supplies 803 (606) (683)
(Increase) Decrease in prepaid expenses 1 (57) (87)
(Increase) Decrease in deferred charges 171 (104) 131
Increase (Decrease) in accounts payable 733 (881) 83
Increase (Decrease) in customers' deposits (3) (3) 1
Increase (Decrease) in advance billing and payment 28 8 194
Increase (Decrease) in accrued expenses (268) 40 (40)
Increase (Decrease) in pension and postretirement benefits 957 498 (13)
Increase (Decrease) in other liabilities 203 (87) 24
-------------- ------------ ------------
Net cash provided by operating activities 8,711 5,642 6,535
-------------- ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (8,420) (9,396) (5,069)
Interest charged to construction 238 283 85
Distribution from partnership 6,000 5,283 2,625
Capital contributions (800) (200) (2,000)
-------------- ------------ ------------
Net cash used in investing activities (2,982) (4,030) (4,359)
-------------- ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (1,250) 1,300 4,050
Repayment of long term debt 0 0 (3,000)
Dividends (3,216) (3,090) (2,832)
Sale of common stock 10 20 83
Purchase of treasury stock (213) 0 (604)
-------------- ------------ ------------
Net cash provided by (used in) financing activities (4,669) (1,770) (2,303)
-------------- ------------ ------------
Increase (Decrease) in cash and cash equivalents 1,060 (158) (127)
Cash and cash equivalents at beginning of year 581 739 866
-------------- ------------ ------------
Cash and cash equivalents at end of year $ 1,641 $ 581 $ 739
============== ============ ============
Please see the accompanying notes, which are an integral part of the
financial statements.
22
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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 and
cellular telephone service to residential and business customers, access
and billing and collection services to interexchange carriers, the sale and
leasing of telecommunications equipment, paging, Internet access and video
service.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions
and balances have been eliminated in the consolidated financial statements.
Certain prior year amounts have been reclassified to conform with the
financial statements in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
REVENUE RECOGNITION
The Company earns revenue principally by providing communication related
services to its customers, which include end users who purchase local
service, toll service, Internet access, video over VDSL and interexchange
carriers who resell network access services. These revenues are recognized
when the services are provided.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB No. 101). SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Based upon a review of our revenue recognition
policies, we concluded that the adoption of SAB No. 101 did not require a
change in those policies nor did it materially affect the timing or amount
of revenue recognition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period
in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from acquisition, construction,
development and/or normal use of assets. The Company also records a
corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation will be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying
the obligation. The Company is required to adopt SFAS No. 143 on January 1,
2003 and it is not expected to have any impact on our results of operations
or our financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. Warwick Valley Telephone Company's review of asset impairment
under FASB No. 144 for year end December 31, 2002 focused upon the carrying
value of Property, Plant and Equipment. Since approximately 88% of the
Company's fixed assets are used for its regulated operations as a
telecommunications service provider and fall under the requirements of FASB
No. 71, the impairment tests of FASB No. 144 do not apply to these assets.
Warwick Valley Telephone Company is a regulated telephone company. As noted
in FASB No. 71 Section 5 paragraphs a-c, Warwick Valley Telephone Company's
rates for regulated services/products are subject to approval by an
independent third party regulator, such rates are designed to recover the
costs of providing the regulated service and it is reasonable to assume
that the rates are set at levels that will recover Warwick Valley Telephone
Company's costs. As a rate regulated enterprise, the Company's plant used
in regulated operations is used as a basis in setting rates. The carrying
value of these fixed assets will be recovered in the rates charged to
customers in the long run. The deregulated plant and equipment of the
Company is depreciated over a short life cycle. Our examination of the
carrying value of these deregulated assets has determined that the value on
our books is well less than the future expected cash flow from them. The
Company believes that the carrying value of all other long-lived assets is
lower than the recoverable amount as measured in FASB No. 144.
23
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect the
adoption of SFAS No. 146 to have any material impact on its operating
results or financial position.
DEPRECIATION
Depreciation is based on the cost of depreciable plant in service and is
calculated on the straight-line method using estimated service lives of the
various classes of plant. Depreciation as a percent of average depreciable
telephone plant was 6.72%, 7.39%, and 6.86%, for the years 2002, 2001 and
2000, respectively.
CAPITALIZATION OF CERTAIN COSTS AND EXPENSES
The Company has consistently followed the practice of capitalizing certain
costs related to construction, including payroll and payroll related costs
and significant costs of capital incurred during construction. The income
which results from capitalizing interest during construction is not
currently realized but, under the regulatory rate-making process, is
recovered by revenues.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
FEDERAL INCOME TAXES
The Company records deferred taxes that arise from temporary differences
resulting from differences between the financial statement and tax basis of
assets and liabilities. Deferred taxes are classified as current or
non-current, depending on the classification of the assets and liabilities
to which they relate. Deferred taxes arising from temporary differences
that are not related to an asset or liability are classified as current or
non-current depending on the periods in which the temporary differences are
expected to reverse. The Company's deferred taxes result principally from
differences in depreciation and in the accounting for pensions and other
postretirement benefits.
Investment tax credits have been normalized and are being amortized to
income over the average life of the related telephone plant and other
equipment.
RESERVE FOR UNCOLLECTIBLES
The Company uses the reserve method to record uncollectible accounts. The
reserve for uncollectibles was $428K and $65K as of December 31, 2002 and
2001, respectively. An increase in the amount of approximately $350K was
booked in reserve for uncollectibles primarily due to the events of the
MCI/WorldCom bankruptcy.
CASH FLOW STATEMENT
Cash and cash equivalents consist principally of demand deposits and are in
accounts which are insured by the Federal Deposit Insurance Corporation
(F.D.I.C.) up to $100K at each financial institution. As of December 31,
2002 the amount of cash in excess of these F.D.I.C. insured limits was
approximately $911K. The following is a list of interest and federal income
tax payments for each of the three years in the period ending December 31:
($ in Thousands)
2002 2001 2000
-----------------------------------
Interest $ 589 $ 650 $ 657
Federal income taxes $ 2,585 $ 3,689 $ 3,360
MATERIAL AND SUPPLIES
New material and reusable materials are carried at average original cost,
except that specific costs are used in the case of large individual items.
As of December 31, 2002 and 2001 the Material and Supplies inventory
consisted of the following:
($ in Thousands)
2002 2001
-------------------
Inventory for outside plant $ 330 $ 653
Inventory for inside plant 650 1,157
Inventory for online plant 257 205
Inventory for video plant 56 0
Inventory of equipment held for sale or lease 175 256
-------- --------
$ 1,468 $ 2,271
======== ========
24
RETIREMENT AND/OR DISPOSITION OF PROPERTY
When depreciable property is retired, the amount at which it is carried
plus the cost of removal is charged to the depreciation reserve and any
salvage is credited thereto. Expenditures for maintenance and repairs are
charged against income; renewals and betterments are capitalized.
OTHER SERVICES AND SALES REVENUES
Other services and sales revenues consisted of the following for each of
the three years in the period ended December 31:
($ in Thousands)
2002 2001 2000
------ ------ ------
Rent revenue $ 507 $ 431 $ 343
Billing and collection revenue 796 891 966
Other 1,874 2,758 3,215
------ ------ ------
$3,177 $4,080 $4,524
====== ====== ======
2. PROPERTY, PLANT AND EQUIPMENT
Plant in service, at cost, consisted of the following at December 31:
($ in Thousands)
2002 2001
----------------------
Land, buildings, furniture and office equipment $ 5,666 $ 5,327
Vehicles and work equipment 2,048 1,839
Central office equipment 24,384 22,947
Customer premise equipment 1,731 1,710
Outside plant equipment 21,671 19,387
Video equipment 3,109 0
Internet equipment 4,749 5,252
------- -------
$63,358 $56,462
======= =======
It is our policy to capitalize certain costs incurred in connection with
developing or obtaining internal software. Capitalized software costs are
included in Property, Plant and Equipment and are amortized using estimated
service lives of the various classes of telephone plant.
3. DEPRECIATION RESERVE
Depreciation reserve consisted of the following at December 31:
($ in Thousands)
2002 2001
-------------------
Buildings, furniture and office equipment $ 2,702 $ 2,449
Vehicles and work equipment 1,170 1,041
Central office equipment 11,906 12,697
Customer premise equipment 1,071 985
Outside plant equipment 6,378 5,640
Video equipment 105 0
Internet equipment 2,495 3,035
------- -------
$25,827 $25,847
======= =======
25
4. INVESTMENTS
Investments consisted of the following at December 31:
($ in Thousands)
2002 2001
----------------------
Investment in cellular partnership $ 4,775 $ 3,197
Investment in Hudson Valley DataNet 1,000 1,000
Investment in wireless company 2,000 1,200
--------- --------
$ 7,775 $ 5,397
========= ========
The cellular partnership investment represents the Company's 7.5% interest
as a limited partner in the Orange County-Poughkeepsie MSA Limited
Partnership, a cellular telephone operation which is recorded on the equity
method. The majority owner and general partner is Verizon Wireless, L.L.C.
Income from this investment amounted to $7,579K and $4,991K for the two
years ended December 31, 2002. Distributions received from the partnership
amounted to $6,000K and $5,283K for 2002 and 2001, respectively.
Undistributed earnings related to this investment amounted to $4,525K and
$2,947K for December 2002 and 2001, respectively.
The following is a summary of financial position and results of operations
of the Orange County -Poughkeepsie MSA Limited Partnership as of and for
the years ending December 31:
($ in Thousands)
2002 2001
-----------------------
Current assets $ 35,157 $ 20,249
Property, plant and equipment, net 29,473 26,057
Total assets 64,632 46,311
Current liabilities 1,482 530
Partners capital 63,150 45,781
Revenues 114,591 81,952
Net income 97,369 67,220
Immaterial differences, as defined by GAAP, have historically occurred due
to the late receipt of final audited Partnership numbers. Such minor
differences, if any, will be reflected in the first quarter of 2003
results.
The Company has a 8.9% ownership interest in Hudson Valley DataNet, L.L.C.
("HVDN"), in return for its initial capital contribution of $1,000K. HVDN
is a competitive telecommunications company that offers high-speed
bandwidth throughout the region of Orange, Dutchess and Ulster counties.
The Company owns a 17.0% interest in Zefcom, L.L.C., a licensed reseller of
wireless services. The Company has made a cumulative capital investment of
$2,000K.
Both of these companies are in the beginning stages of operations and both
are recorded on the cost method.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) plus results of
certain stockholders' equity changes not reflected in the consolidated
statement of income. The Company's only component of accumulated other
comprehensive income (loss) consists of a minimum pension liability
generated in the year ending December 31, 2002. Prior to this year there
were no components of comprehensive income.
($ in Thousands)
2002 2001
--------------------
Minimum pension liability
arising in current period $(408) $ 0
Related deferred income taxes 139 0
------ ----
Total comprehensive loss $(269) $ 0
====== ====
26
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
($ in Thousands)
First Mortgage Bonds 2002 2001
-------------------- --------------------
7.05% Series "J" (due 12/01/2003) $ 4,000 $ 4,000
Less: Current maturities of long-term debt 4,000 0
-------- --------
Total Long-term debt $ 0 $ 4,000
======== ========
Telephone properties have been pledged as collateral on the first mortgage
bonds. Under provisions of the bond indentures, as amended, the payment of
dividends or a distribution of assets to stockholders to the extent of 75%
of the Company's net income earned during the calendar year will be
allowed, providing "net operating income" exceeds interest expense 1.5
times.
The first mortgage bonds, Series "J" bond, may not be redeemed prior to the
maturity date.
7. NOTES PAYABLE
The Company has an unsecured line of credit in the amount of $5,000K with
the Warwick Savings Bank, which expires in June 2003. Any borrowings under
this line of credit are on a demand basis and are without restrictions, at
a variable lending rate.
The total unused line of credit available at December 31, 2002 was $5,000K
of which the Company had no outstanding balance. The balance outstanding as
of December 31, 2001 was $1,250K, bearing interest at a rate of 4.0%.
The Company has an outstanding line of credit in the amount of $6,000K with
the Bank of New York, which expires on March 31, 2003. This is an unsecured
note that is renewable solely at the Bank's option.
Interest is paid monthly calculated on the unpaid balance, using either the
Bank's Alternate Base Rate or the LIBOR based rate. The interest rate on
the outstanding balance of $5,000K as of December 31, 2002 was 3.4%. On
February 18, 2003, the Company repaid the outstanding balance of $5,000K
plus accrued interest. The funds to repay $3,000K of this debt were made
available through an unsecured credit facility consummated with CoBank, ACB
on February 18, 2003 (see note 17). The balance of the debt was repaid
through a $2,000K draw on the line of credit with the Warwick Savings Bank
(see above).
8. FEDERAL INCOME TAXES
The following tabulation is a reconciliation of the federal income tax
expense as reported in these financial statements with the tax expense
computed by applying the statutory federal income tax rate of 34% to
pre-tax income.
($ in Thousands)
2002 2001 2000
-----------------------------------------
Current federal income taxes $ 3,001 $ 3,714 $ 3,358
-------- -------- --------
Deferrals, net of reversals:
Depreciation 1,481 229 162
Cost of removal 14 6 3
Pension & postretirement benefits (319) (112) (55)
Amortization of investment tax credit (25) (34) (37)
Other (1) (1) (1)
-------- -------- --------
1,150 88 72
-------- -------- --------
Total F.I.T. expense $ 4,151 $ 3,802 $ 3,430
Reversals of deferred taxes 51 56 58
Other 30 9 64
-------- -------- --------
FEDERAL INCOME TAX AT
STATUTORY RATE $ 4,232 $ 3,867 $ 3,552
======== ======== ========
27
The following components comprise the net deferred tax liability reported
as of December 31:
($ in Thousands)
2002 2001
---------------------
Deferred tax liabilities $ 4,893 $ 2,817
Deferred tax assets 915 469
--------- --------
Net deferred tax liability $ 3,978 $ 2,348
========= ========
The deferred tax liability consists principally of temporary differences
due to differences in depreciation methods for financial reporting and tax
reporting. The deferred tax asset consists principally of temporary
differences due to the reporting of pension and deferred compensation
obligations. Due to the minimum pension liability the Company was required
to record in 2002, there was an increase in the deferred tax assets of
$139K to reflect the tax impact of the charge to comprehensive income.
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has two defined benefit pension plans covering all management
and non-management employees who are at least 21 years of age and have
completed one year of service. Benefits are based on years of service and
the average of the employee's three highest consecutive years' base
compensation. The Company's policy is to fund the minimum required
contribution disregarding any credit balance arising from excess amounts
contributed in the past. Per regulatory requirements, the amounts expensed
were $435K, $370K and $102K for the years ended December 31, 2002, 2001 and
2000, respectively.
The Company sponsors a non-contributory, defined benefit postretirement
medical benefit plan that covers all employees that retire directly from
active service on or after age 55 with at least 10 years of service or
after age 65 with at least 5 years of service. The projected unit credit
actuarial method was used in determining the cost of future benefits. The
Company's funding policy is to contribute the maximum allowed under current
Internal Revenue Service regulations. Assets of the plan are principally
invested in common stocks and a money market fund.
The components of the pension and postretirement expense (credit) were as
follows for the years ended December 31:
($ in Thousands)
Pension Benefits Postretirement Benefits
2002 2001 2000 2002 2001 2000
---------------------------------------- ----------------------------------------
Service cost $ 397 $ 334 $ 253 $ 136 $ 77 $ 63
---------------------------------------- ----------------------------------------
Interest cost on benefit
obligation 878 788 680 255 154 137
Amortization of transition
obligation 0 53 53 52 52 51
Amortization of prior
service (credit) cost 132 69 41 (20) (20) (20)
Recognized net actuarial
(gain) loss (34) (205) (310) 155 28 13
Expected return on
plan assets (810) (915) (873) (101) 0 0
Special termination benefits 0 321 0 0 (102) (95)
--------------------------------------- ----------------------------------------
Net periodic (credit)
expense $ 563 $ 445 $(156) $ 477 $ 189 $ 149
======================================= ========================================
28
The following table presents a summary of plan assets, projected benefit
obligation and funded status of the plans at December 31:
($ in Thousands)
Pension Benefits Postretirement Benefits
2002 2001 2002 2001
---------------------------- -----------------------------
Fair value of plan assets at
beginning of year $ 10,853 $ 11,655 $ 1,259 $ 1,270
Employer contributions 0 0 89 89
Actual return on plan assets (661) (421) (60) (41)
Benefits paid (1,296) (381) (84) (59)
---------------------------- -----------------------------
Fair value of plan assets at end
of year 8,896 10,853 1,204 1,259
---------------------------- -----------------------------
Projected benefit obligation
at beginning of year 12,688 10,131 2,344 2,077
Benefits earned 392 327 136 77
Interest cost on projected benefit
obligation 877 788 255 154
Amendments 0 721 0 0
Actuarial (gain) loss 1,044 781 1,515 94
Benefits paid (1,297) (381) (84) (58)
Special termination benefits 0 321 0 0
---------------------------- -----------------------------
Projected benefit obligation at year
end 13,794 12,688 4,166 2,344
---------------------------- -----------------------------
Plan assets in excess of (less than)
projected benefit obligation (4,810) (1,835) (2,962) (1,085)
Unrecognized actuarial (gain) loss 2,630 87 2,312 792
Unrecognized prior service (credit)
cost 894 1,025 (326) (345)
Unrecognized net transition
obligation 0 0 516 566
---------------------------- -----------------------------
Prepaid (accrued) benefit cost $ (1,286) $ (723) $ (460) $ (72)
============================ =============================
Amount Recognized in the Consolidated Balance Sheets Consists of:
Accrued benefit cost $ (2,525) $ (723) $ (460) $ (72)
Intangible asset 831 0 0 0
Accumulated other comprehensive loss 408 0 0 0
---------------------------- -----------------------------
Net amount recognized $ (1,286) $ (723) $ (460) $ (72)
============================ =============================
Actuarial assumptions used to calculate the projected benefit obligation
were as follows for the years ended December 31:
($ in Thousands)
Pension Benefits Postretirement Benefits
2002 2001 2002 2001
-------------------------- --------------------------------
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plans 8.00% 8.00% 8.00% 8.00%
Rate of compensation increase 5.50% 5.50% --- ---
Healthcare cost trend --- --- 9.00 - 11.00% 8.00%
29
The large increase in expense in 2002 for the postretirement health
benefits was due to an increase in the healthcare cost trend rate and also
due to a lower discount rate. Both of these changes reflect current market
conditions regarding health care costs and market interest rates.
The health care cost trend rate was increased in 2002 to 9.0% for the
pre-65 trend rate and 11.0% for the post-65 trend rate, with each of these
grading down to 5.0% by 0.5% per year. 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, 2002 approximately
$696K and the aggregate of the service and interest cost components of
postretirement expense for the year then ended by approximately $74K. A
1.0% decrease in the health care cost trend rate would decrease these
components by approximately $566K and $59K, respectively.
During 2002 the continued decline in the equity markets resulted in a
negative return on the Company's pension plan assets and a decline in the
discount rate used to estimate the pension liability. As a result, 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, 2002. The effect of this
adjustment was an increase in intangible assets of $831K, an increase in
the pension liability of $1,239K and a charge to comprehensive income for
$408K. The amount of the intangible asset represents the prior service
costs that have 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 flow.
The increase in pension expense in 2001 was due to special termination
benefits provided under an early retirement program and due to certain
amendments increasing the benefits under the plan. There was a liability
established for $220K for certain post-employment benefits to be paid to
terminated employees in addition to the additional benefits provided under
the pension plan above, as of December 31, 2001.
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 2002 the Company made a matching
contribution up to 9.0% of an eligible participant's compensation for
management and clerical employees and up to 6.0% for plant employees. The
Company contributed and expensed $403K, $433K, and $389K, for the years
ended December 31, 2002, 2001, and 2000, respectively.
The Company has deferred compensation agreements in place for certain
officers which become 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 $345K and $340K as
of December 31, 2002 and 2001, respectively.
10. RELATED PARTY TRANSACTIONS
The Company expended approximately $494K, $323K and $256K during 2002,
2001, and 2000, respectively, in insurance premiums for required insurance
coverage. These expenditures were made to an insurance agency in which a
member of the Board of Directors has a financial interest. Two Board of
Director members are also trustees of the Warwick Savings Bank, at which
the Company has its principal bank accounts and temporary investments.
11. COMMON STOCK
Earnings per share are based on the weighted average number of shares
outstanding of 1,802,828, 1,803,936, and 1,811,653 for the years ended
December 31, 2002, 2001, and 2000, respectively. The following schedule
summarizes the changes in the number of shares issued of capital stock for
the year ended December 31, 2002:
Treasury Preferred Common
Stock Stock Stock
--------- ------- ----------
Balance, January 1, 2002 190,497 5,000 1,994,080
Additional shares issued 4,064 0 190
Shares redeemed 0 0 0
--------- ------ -----------
Balance, December 31, 2002 194,561 5,000 1,994,270
========= ====== ===========
12. TREASURY STOCK
The Company accounts for treasury stock using the cost method of
accounting.
30
13. PREFERRED STOCK
The preferred stock may be redeemed by the Company on any dividend payment
date at par plus accumulated dividends. Preferred stock ranks prior to the
common stock both as to dividends and on liquidation, but has no general
voting rights. However, if preferred stock dividends are in default in an
amount equal to six quarterly dividends, the holder of preferred stock
shall have the right to elect a majority of the Board of Directors and such
voting rights would continue until all dividends in arrears have been paid.
14. COMMITMENTS
The Company is required to make certain contributions to national and state
associations as part of the industry practice of pooling revenues and
redistributing to members based on cost to provide services or some other
method. The Company's contributions for 2002 amounted to approximately
$186K and is expected to be $192K for 2003. The amounts paid to these pools
are considered part of the cost of providing access service to
interexchange carriers and are included in the rates charged to them.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
due to the short maturity of the instruments. The fair value of the
Company's long-term debt approximates the carrying value of $4,000K due to
the short maturity of the debt. The fair value of other financial
instruments is estimated by management to approximate the carrying value.
16. BUSINESS SEGMENTS
The Company reports segmented information according to Statement of
Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which requires
reporting segment information consistent with the way management internally
disaggregates an entity's operations to assess performance and to allocate
resources. The Company's segments are strategic business units that offer
different products and services and are managed accordingly. We evaluate
performance based upon income before taxes adjusting for normalizing one
time items, if any. Currently, we have two reportable segments that reflect
our business: 1. Telephone (wireline) and 2. Online.
The wireline segment provides landline telecommunications services,
including local, network access, long distance services and messaging, and
sells customer premise, private business exchange equipment and yellow and
white pages advertising and electronic publishing.
The Online segment provides high speed and dial up Internet services, help
desk operations and video over VDSL.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 1. The Company evaluates
performance of the segments based on segment operating income. The Company
accounts for intersegment sales at current market price or in accordance
with regulatory requirements.
The following information summarizes the Company's business segments for
the years 2002, 2001, and 2000:
($ in Thousands)
2002
Intercompany Consolidated
Telephone Online Elimination Total
----------------------------------------------------------------
Operating revenues $ 23,757 $ 6,330 $ (2,384) $ 27,703
Operating expenses 18,486 6,334 (2,384) 22,436
Other income (expenses) 7,178 3 0 7,181
Federal income taxes 4,151 0 0 4,151
--------- -------- --------- ---------
Net income $ 8,298 $ (1) $ 0 $ 8,297
========= ======== ========= =========
Assets $ 47,623 $ 7,914 $ 0 $ 55,537
Capital Expenditures $ 4,702 $ 3,718 $ 0 $ 8,420
31
($ in Thousands)
2001
Intercompany Consolidated
Telephone Online Elimination Total
----------------------------------------------------------------
Operating revenues $ 23,034 $ 6,389 $ (1,885) $ 27,538
Operating expenses 17,509 5,168 (1,885) 20,792
Other income (expenses) 4,621 7 0 4,628
Federal income taxes 3,384 418 0 3,802
--------- -------- --------- ----------
Net income $ 6,762 $ 810 $ 0 $ 7,572
========= ======== ========= =========
Assets $ 43,222 $ 4,288 $ 0 $ 47,510
Capital Expenditures $ 8,036 $ 1,360 $ 0 $ 9,396
($ in Thousands)
2000
Intercompany Consolidated
Telephone Online Elimination Total
----------------------------------------------------------------
Operating revenues $ 21,983 $ 5,969 $ (1,261) $ 26,691
Operating expenses 16,283 4,032 (1,261) 19,054
Other income (expenses) 2,799 12 0 2,811
Federal income taxes 2,767 663 0 3,430
--------- -------- --------- ---------
Net income $ 5,732 $ 1,286 $ 0 $ 7,018
========= ======== ========= =========
Assets $ 38,275 $ 3,738 $ 0 $ 42,013
Capital Expenditures $ 4,079 $ 990 $ 0 $ 5,069
17. SUBSEQUENT EVENTS
On February 18, 2003, Warwick Valley Telephone Company closed a commitment
with CoBank, ACB with respect to an $18,475K unsecured term credit
facility. Under conditions set by the New York Public Service Commission,
the Company may use the proceeds of the loan to refinance approximately
$4,000K in existing long-term debt and $3,000K under a line of credit. The
Company may use the remaining amount available under the facility -
$11,475K - to finance capital expenditures and to pay the expenses and fees
incurred by the Company in connection with the closing of the loan. In
addition the Company may re-borrow amounts repaid under the facility, which
will remain available to the Company until September 30, 2004. The Company
has drawn on the term credit facility and paid off an existing $3,000K line
of credit. The Company intends to repay the $4,000K in long-term debt at
its December 1, 2003 maturity date. The Company has no present requirements
that necessitate the immediate use of the remaining unused credit.
18. QUARTERLY INFORMATION (UNAUDITED)
Fiscal Year Quarters
($ in Thousands)
First Second Third Fourth Total
---------------------------------------------------------------------
Year ended December 31, 2002
Revenue $6,585 $6,638 $6,995 $7,485 $ 27,703
Operating Income 1,331 1,212 1,536 1,188 5,267
Net Income 1,797 2,187 2,201 2,112 8,297
Earnings per share .99 1.21 1.22 1.17 4.59
Year ended December 31, 2001
Revenue $6,980 $6,830 $6,867 $6,861 $27,538
Operating Income 1,738 1,610 2,049 1,349 6,746
Net Income 1,725 1,913 2,087 1,847 7,572
Earnings per share .96 1.06 1.15 1.01 4.18
32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
3(b) By-Laws, as amended 34
4(d) CoBank Loan Agreement 44
16 Consent of Independent Auditors - Bush & Germain 81
21 Significant Subsidiaries of Registrant 82
24 Orange County-Poughkeepsie Limited Partnership
Financial Statements for the years ended See note
December 2002, 2001 and 2000 below
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed by
M. Lynn Pike - principal Executive Officer. 83
99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed by
Phillip A. Grybas - principal Executive Officer. 84
Per Reg. 210-3-09(b), the required Orange/Poughkeepsie audited financial
statements will be filed as an amendment to this report. The Company is waiting
for the consent form from the Orange/Poughkeepsie independent auditors which
will permit use of such financial statements within its 10-K.
33