[WVT COMMUNICATIONS LOGO]
Celebrating 100 years of telecommunications excellence
The year 2002 marks WVT Communication's 100th year of serving the communications
needs of the local communities which we serve. It also marks another financially
successful year for the Company and its shareholders. Your Company's common
stock price did not follow the industry trend downward. WWVY closed the year at
an all time high of $69.50 per share, up 24.1% from its close on January 2,
2002.
Beginning as a small, local telephone company in January 1902, WVT
Communications now provides not only a wide range of traditional telephone
services and equipment but also vital communications links such as Internet,
broadband, and digital television. We have always prided ourselves on our
progressive attitude and pioneering spirit. Our success can be attributed to our
tradition, our visionary leaders, our highly skilled, dedicated and energetic
workforce as well as our loyal customers.
The communications needs of the communities we serve have changed dramatically
over the past 100 years and WVT Communications has kept and will keep pace with
the challenge to provide the highest level of products, service and customer
care.
We are proud of the vital role we have played in bringing advanced technologies
to our area and look forward to continuing our legacy for another 100 years!
/s/ Wisner H. Buckbee
Wisner H. Buckbee
Chairman of the Board
TABLE OF CONTENTS
CHAIRMAN'S LETTER
WVT-A CENTURY OF SERVICE ................................................ 2-3
PRESIDENT'S MESSAGE ..................................................... 4
FINANCIAL HIGHLIGHTS .................................................... 7
MANAGEMENT'S DISCUSSION ................................................. 8-9
CONSOLIDATED BALANCE SHEET .............................................. 10
CONSOLIDATED STATEMENT OF INCOME ........................................ 11
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY .......................... 12
CONSOLIDATED STATEMENT OF CASH FLOWS .................................... 13
NOTES TO FINANCIAL STATEMENTS ........................................... 14-25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ...................... 26
PERFORMANCE HIGHLIGHTS AND RISK ......................................... 27
CONCERNING THE COMPANY'S COMMON STOCK AND INFORMATION ABOUT AUDITORS .... 28
BOARD OF DIRECTORS AND OFFICERS ......................................... INSIDE BACK COVER
WVT COMMUNICATIONS
WVT --
A CENTURY OF SERVICE
WVT Communications, as Warwick Valley Telephone is also known, is alive and
well after 100 years in the telecommunications business. Our founders could
never have imagined the dramatic transformation from wooden telephones and
plug-in switchboards of yesteryear to the digital switches and routers that
provide our updated technology of today.
Our company has seen many changes since its inception. In 1902, a group of 25
residents decided to start their own telephone company. We soon graduated to an
actual operator who earned $10 a month, running a classic plug-in switchboard
connecting 134 customers in the village with 66 more rural party lines. The
telephone began to intensify and broaden communication in a more secular way.
It also cemented the many little communities that make up Warwick and
contributed to a sense of community and place. Though it's something most people
take for granted, that impact continues to be felt.
Today, we serve 30,000 customers from northern New Jersey to Middletown, NY,
all hooked up to banks of digital switching equipment, high-speed Internet
routers and fiber-optic digital video networks.
We continue to be fiercely independent - one of just a few dozen independent
telephone companies left in NY and the only one left in NJ. As more and more
independents throw in the towel, selling out to the aggregators, the Board of
Directors and WVT Management do not see this as the direction to go.
PAGE 2
WVT COMMUNICATIONS
In order to remain a viable company, we have to look at being more and more
innovative, and innovative we are. We were one of the first companies to go
all-digital in the late 1980's. We introduced our own long distance company and
by 1995, launched our own Internet service, Warwick Online, offering customers
dial-up access to the World Wide Web.
Shortly after the launch, WVT again took a pioneering chance offering ISDN
service - then the state-of-the-art in Internet access. We were the first in the
region to introduce DSL, the next generation of high-speed Internet access, in
1998.
Now we have broken ground again with the April 2002 launch of our own digital
television system. The fiber-optic network currently offers 145 channels of
crystal-clear digital TV, high-speed Internet, and telephone service over
existing copper wires, all through one residential gateway connected to the
customer's TV set. Years ago, everyone thought copper wire was going the way of
the dinosaur. So far, that investment is paying off.
WVT is positioned for change while continuing our 100-year tradition of
prompt, courteous service, quality telecommunications and good value for our
customers and shareholders. The longevity and loyalty of our staff remains an
asset to our company. WVT is small enough to quickly respond to customers needs
and find growth opportunities, big enough to provide the latest technology.
Portions of the above text originally appeared in an article in the Times
Herald-Record, Middletown, NY, February 9, 2003.
PAGE 3
WVT COMMUNICATIONS
MESSAGE FROM THE PRESIDENT
One hundred years ago, WVT Communications (WVTC) was established to provide
what was then revolutionary telephone service to residents in Warwick, New York.
What was revolutionary then has now become standard, but a century of evolution
has both changed ordinary telephone service into something that was not even
imagined by the founders of our company and has expanded the array of services
we offer in ways that would amaze even our customers of only a generation ago.
The first year of the new century for WVTC turned out to be a challenging
one. I predicted as much last year in my president's summary, but little did I
know that in addition to the predictable challenges to be faced by WVTC and its
industry peers, our company would also be faced with some unprecedented ones as
well. Among several successful endeavors, some setbacks and a couple of
distractions, we concentrated on the execution of our strategy of growth through
leveraging existing assets. As a result our Company had solid earnings growth
again in 2002. The crowning achievement of 2002 was the successful launch of our
new Digital TV service, which has been well received by our customers. The
launch is an accomplishment to which each and every member of the employee team
has contributed.
The year 2002 was a very successful one for our shareholders. While other
telecommunications company stock prices continued to plunge throughout 2002, our
Company's stock achieved an all time high of $69.50, or an increase of
approximately 24.1% since the beginning of the year. While successful stock
performance is subject to the vagaries of the market, it is our belief that many
different factors contributed to the stock's success, including strong revenue
retention, cost containment, smart market initiatives, regular dividends, and
income from the Orange County-Poughkeepsie MSA Limited Partnership
(Partnership). WVTC is not a one-dimensional company.
CORE BUSINESSES
Local service, Warwick Valley Long Distance (WVLD), competitive local
exchange carrier (CLEC) operations (WVTC's out of area competitive telephone and
data service), directory services and network access services, comprise our core
businesses. The local service business produced revenue increases over 2001
results. This achievement occurred in spite of the fact that the Company
PAGE 4
WVT COMMUNICATIONS
ended the year with 28,807 regulated access lines, a net loss of 394, or 1.4%.
This loss of access lines continued a trend started in 2001 and was driven by
three primary causes: (1) the cancellation of second access lines by customers
purchasing high-speed Internet connections (DSL); (2) the general economic
downturn; and (3) to a lesser extent, by consumers choosing alternative products
such as wireless and voice over Internet protocol (VOIP). Despite the loss in
access lines, local service revenues grew 4.5%, a significant achievement
compared to industry-wide results.
WVLD competes with other interexchange carriers (IXC's) to provide message
toll service to 37% of our customers, a very good penetration rate compared to
the industry. At year-end WVLD served 10,876 access lines, an annual decrease of
180 or 1.6%. Some of this decline was due to loss of second lines; however, some
business was lost to other IXC's. The corresponding revenue decrease was $151K
or 7.2%.
WVT Communications began CLEC operations in Middletown, NY, in 1999;
Scotchtown, NY, in 2001; and Vernon, NJ, in 2002. The customer base grew by 343
access lines to a total of 1,454 at the end of 2002, a 31% increase. Revenues of
$1.7 million were $512K less than in 2001 due to a reduction in reciprocal
compensation revenues mandated by the Federal Communications Commission. After a
slow start due to environmental litigation, Mt. Creek Resort, our anchor
customer in New Jersey, has its building program back on track. As a result, the
NJ CLEC should experience significant growth in 2003.
The CLEC recently concluded negotiations to expand the broadband services
currently provided to two Fortune 500 customers in Vernon, NJ. These broadband
services are provided through an interconnection of WVTC's fiber optic network,
the fiber network of Hudson Valley DataNet, L.L.C. (HVDN), and Northeast Optical
Networks (NEON) and now produce $350K of annual gross broadband revenue.
WVTC's directory services department continues to publish a superior book.
The 2002-2003 directory produced gross sales of $1,320K, a 13.6% increase over
last year's $1,160K book. Its net contribution to operating revenues was $674K.
Network access revenues, charges to interexchange IXC's, increased by
$1,047K or 14%. This increase was the result of higher Universal Service
revenues, increased special access minutes and price increases for some access
elements.
VIDEO AND DATA SERVICES
Warwick Online (WOL), our Internet, data and video subsidiary, offers the
following services: UltraLink (high-speed DSL Internet connection), dial-up
Internet service, and Digital TV. WOL continued the successful sale of UltraLink
DSL in 2002. At year end there were 3,402 UltraLink customers, a gain of 1,408
PAGE 5
PRESIDENT'S MESSAGE
WVT COMMUNICATIONS
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 and other independent telcos (ILECs). WOL ended the
year with a total of 20,430 dial-up and DSL customers, a loss of 2,917. This
loss in accounts continues to be due to customer migration from dial-up to
high-speed interconnections (DSL and cable modem), primarily in areas where WOL
is unable to provide the high-speed services. WOL's dial-up Internet service
revenues decreased approximately $854K or 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, WOL continued to execute our growth strategy through the
introduction of our Digital TV product and became the first telephone company in
New York and 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. WOL added 614 Digital TV customers in 2002,
producing revenues of $106K. This new service is on track with the business plan
and should continue to grow in 2003.
Total WOL revenues decreased 1% in 2002 and net income was a loss of $1K
before eliminations, primarily due to acquisition costs, depreciation expense
and launch expenses associated with the DSL and Digital TV products.
ORANGE-POUGHKEEPSIE PARTNERSHIP
The Company owns a 7.5% limited partnership interest in the Orange
County-Poughkeepsie MSA Limited Partnership (Partnership). Verizon Wireless,
L.L.C. is the general partner and the majority owner with an 85% interest. The
Partnership provides wholesale cellular telephone service throughout the
Orange-Poughkeepsie MSA. The Partnership has exhibited substantial year over
year growth for the past several years which has been nothing short of
remarkable. The 2002 net income from the Partnership was $7,500K, an increase of
$2,600K or 52% over 2001.
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.
OPERATING RESULTS
Our strategic efforts delivered another year of successful operational
performance and execution in 2002. Total operating revenues increased slightly
less than 1% year over year and this result reflects the strength of our
diversified revenue base. WVTC's aggressive entrance into the video business,
the one-time impact of MCI/WorldCom bad debt, and significant increases in
pension and benefit expenses combined to reduce operating income by 22% over the
prior year.
Earnings increased 9.6%, a level of increase that was also affected by the
factors mentioned in the previous paragraph. The increase in earnings was also
generated, despite these factors, not only by the increase in income from the
Partnership, but also by the successful efforts of WVTC to replace lost revenues
through sales of new Digital TV service, continued growth in DSL, and through
aggressive efforts to control expenses.
Shareholder dividends increased 4.1% to $1.77 per share.
STRATEGIC PARTNERS
WVT Communications owns a 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, 2002 produced positive results, both from a network expansion and
customer acquisition standpoint. In 2002, the company attained positive net
income less than two years after activating its first customer. Further, the
signing of long-term contracts from national carriers and Fortune 100 companies
highlighted the year. These long-term contracts should bode well for the future.
WVTC also owns 17% of ZefCom, L.L.C., dba Telispire, a consortium of small
telephone companies that resell Sprint PCS under private label. Telispire has
been negatively impacted by the general downturn of the wireless industry and
has had difficulty executing
PAGE 6
FINANCIAL HIGHLIGHTS
WVT COMMUNICATIONS
the original business plan. Management has a guarded outlook for the future
financial health of ZefCom.
LOOKING AHEAD
With an eye to 2003 and beyond, we can see uncertainty looming for the
telecommunications industry. Competition is beginning to make inroads even into
rural areas such as those WVTC serves. There will also be new regulatory changes
at the state and national levels which may threaten our traditional revenue
sources. In order to meet the challenge of competition and regulatory change, it
is my firm conviction that we must be able to satisfy the ever-growing appetite
for voice, video and data services and to do it over one facility, to control
the "last mile." Ahead of our competition, we have begun to do just that.
We must also continue to utilize our core assets and to make significant
new investments for the continued development of new and expanded business as
opportunities arise. We will strive to increase our market share in the voice,
video and data markets; continue our CLEC edge-out strategy; and look at new
opportunities. In addition, we must continue to maintain our normal excellent
level of service in our regulated telephone operations so that competition will
not find a chink in our armor. In order to insure the company's funding
requirements for these initiatives, we have concluded an $18,475K unsecured term
credit facility with CoBank, ACB, as of February 18, 2003.
In 2003 we are faced with the challenge of managing our new and existing
ventures wisely and attaining new levels of productivity so that we may continue
to deliver a respectable return for the shareholders. Your management and
employee teams stand ready and able to meet any challenge the next century may
bring.
/s/ M. Lynn Pike
M. Lynn Pike
President and C.E.O.
FINANCIAL HIGHLIGHTS
2002 2001
$ in Thousands
Total Revenues $27,703 $27,538
Net Income $ 8,297 $ 7,572
Earnings Per Share $ 4.59 $ 4.18
Book Value $ 19.42 $ 16.85
Cash Dividend
per Common Share $ 1.77 $ 1.70
Access Lines in Service 30,261 30,312
Online Subscribers 20,430 23,347
WVT Long Distance
Subscribers 10,876 11,056
Digital TV Subscribers (VDSL) 614 0
PAGE 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
WVT COMMUNICATIONS
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 (or 7.9%) 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%) 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 to the increase was a $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%) decline in reciprocal
compensation which 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%). 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.
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 to $2,553K (or 55%) 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 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 increases 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 Note 17 to the Consolidated Financial Statements.)
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,
PAGE 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
WVT COMMUNICATIONS
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 as
network upgrades.
The Partnership is licensed to operate as the wire-line licensee in both
Orange and Dutchess Counties, New York. The Company received distributions from
the Partnership amounting to $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 WVT
Communications 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 WVT Communications were $3,191K, $3,065K and
$2,807K in 2002, 2001, and 2000, respectively. WVT Communications dividend
policy considers both the expectations and requirements of shareholders 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 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 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. 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.
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. 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual stockholders' report, 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.
PAGE 9
CONSOLIDATED BALANCE SHEET
WVT COMMUNICATIONS
$ 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 & 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 & Equipment 39,505 35,070
-------- --------
TOTAL ASSETS $ 55,537 $ 47,510
======== ========
LIABILITIES 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 Liabilities 13,200 9,097
-------- --------
Long-term Debt 0 4,000
-------- --------
Deferred Credits and Other Long-term Liabilities
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 Liabilities 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.
PAGE 10
CONSOLIDATED STATEMENT OF INCOME
WVT COMMUNICATIONS
$ in Thousands
--------------
FOR THE YEARS ENDED 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.
PAGE 11
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
WVT COMMUNICATIONS
$ 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 -- $ 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 $ 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.
PAGE 12
CONSOLIDATED STATEMENT OF CASH FLOWS
WVT COMMUNICATIONS
$ in Thousands
--------------
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 customer 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.
PAGE 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
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 collection services to interexchange carriers, the sale and
leasing of telecommunications equipment, paging and 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 material 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 SFAS 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 SFAS
No. 71, the impairment tests of SFAS No. 144 do not apply to these assets.
Warwick Valley Telephone Company is a regulated telephone company. As noted
in SFAS 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
PAGE 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 SFAS No. 144.
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
PAGE 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MATERIALS 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 Materials 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
====== ======
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 use 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.
PAGE 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
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
======= =======
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 an 8.9% ownership interest in Hudson Valley DataNet, L.L.C.
(HVDN), in return for its initial capital contribution of $1 million. 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.
PAGE 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
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
===== =====
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
$ in Thousands
--------------
2002 2001
------ ------
First Mortgage Bonds
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).
PAGE 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
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 73
------- ------- -------
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
======= ======= =======
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.
PAGE 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
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
===== ===== ===== ===== ===== =====
PAGE 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
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 13,704 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) 894 1,025 (326) (345)
cost
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)
======== ======== ======== ========
PAGE 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Actuarial assumptions used to calculate the projected benefit obligation
were as follows for the years ended December 31:
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%
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 healthcare costs and market interest rates.
The healthcare 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 healthcare 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 healthcare 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.
PAGE 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
10. RELATED PARTY TRANSACTIONS
The Company expended approximately $494K, $323K, $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
Directors members are also trustees of the Warwick Savings Bank, where 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 Stock Preferred Stock Common 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.
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.
PAGE 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
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:
2002
$ in Thousands
--------------
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
2001
$ in Thousands
--------------
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
PAGE 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WVT COMMUNICATIONS
16. BUSINESS SEGMENTS (CONTINUED)
2000
$ in Thousands
--------------
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, WVT Communications (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)
$ in Thousands
--------------
Fiscal Year Quarters
--------------------
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
PAGE 25
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
WVT COMMUNICATIONS
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. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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.
Bush & Germain, PC
PAGE 26
PERFORMANCE HIGHLIGHTS
WVT COMMUNICATIONS
For years ended or at December 31, 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SELECTED FINANCIAL DATA $ in Thousands
--------------
Total revenues $ 27,703 $ 27,538 $ 26,691 $ 23,186 $ 21,362
Telephone operating revenues 23,757 23,034 21,983 19,557 16,189
Total expenses 22,436 20,792 19,054 17,127 14,409
Telephone operating expenses 18,486 17,509 16,283 14,869 11,079
Net income 8,297 7,572 7,018 5,582 4,042
Total assets 55,537 47,510 42,013 36,977 33,242
Current assets 7,394 6,835 6,982 6,266 6,255
Current liabilities 13,200 9,097 8,510 7,198 3,758
Long-term obligations -- 4,000 4,000 4,000 7,000
Percentage of debt
to total capital 20.2 24.9 25.3 25.8 27.4
Shareholders' equity $ 35,505 $ 30,896 $ 26,394 $ 22,730 $ 19,572
COMMON STOCK DATA
Income applicable to
common stock $ 8,272 $ 7,547 $ 6,993 $ 5,557 $ 4,017
Income per share 4.59 4.18 3.88 3.06 2.21
Book value 19.42 16.85 14.29 12.23 10.51
Cash dividends
per common share $ 1.77 $ 1.70 $ 1.56 $ 1.34 $ 1.12
Shareholders of record 655 673 642 655 648
Average shares outstanding 1,802,828 1,803,936 1,811,653 1,817,531 1,813,792
GENERAL
Access lines in service 30,261 30,312 30,601 28,935 26,786
Carrier access minutes 197,362,669 198,234,021 185,006,652 174,174,099 151,797,771
QUANTITATIVE AND QUALITIATIVE 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 a fixed rate. 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 $3,000,000 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%.
PAGE 27
CONCERNING THE COMPANY'S COMMON STOCK
WVT COMMUNICATIONS
On April 28, 1998 Warwick Valley Telephone Company's common stock began trading
on the NASDAQ National Market under the symbol WWVY. Private sales are also made
by holders of the Company's common stock from time to time. At March 1, 2003
there were 655 holders of the Company's common stock.
The Company has paid consecutive cash dividends on its common stock quarterly
since April 1, 1931 and semi-annually from July 1, 1907 until December 31, 1930.
The practice of the Company has been to reinvest a substantial portion of its
earnings in its capital plant. While the present intention of the Board of
Directors is to continue declaring cash dividends, future dividends will
necessarily depend on the Company's earnings, capital requirements, developments
in the telephone industry and general economic conditions, among other factors.
In 2002, the common stock dividend was $1.77 per share. In 2001, the Company
paid a dividend on its common stock of $1.70 per share.
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:
PRICE OF THE COMPANY'S COMMON STOCK
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
PRICE OF THE COMPANY'S COMMON STOCK
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
INFORMATION ABOUT AUDITORS
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.
PAGE 28