UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A AMENDMENT NO. 1
X ANNUAL REPORT PURSUANT TO SECTION 13 OR
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15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 14-1160510
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
47 MAIN STREET, WARWICK, NEW YORK 10990
(ADDRESS OF PRINCIPAL EXECUTIVE) (ZIP CODE)
REGISTRANT'S TELEPHONE, INCLUDING AREA CODE (845) 986-8080
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 Shares ($.01 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
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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 Shares
outstanding as of March 5, 2004 was 5,984,550. The aggregate market value of
Warwick Valley Telephone Company Common Shares held by non-affiliates computed
by reference to the price at which the Common Shares were sold on March 5, 2004
was $157,692,893.
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 the Proxy Statement for the 2004 Annual Meeting of
Shareholders (Part III)
TABLE OF CONTENTS
PAGE
Explanatory Note ............................................................................. 3
PART II
Cautionary Language Concerning Forward-Looking Statements .................................... 3
ITEM
6. Selected Financial Data 3
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 4
8. Financial Statements and Supplementary Data 12
9A. Controls and Procedures 12
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13
Signatures 15
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EXPLANATORY NOTE
This Report on Form 10-K/A constitutes Amendment No. 1 ("Amendment No. 1") to
the Annual Report on Form 10-K of Warwick Valley Telephone Company (the
"Company") for the period ended December 31, 2003, which was originally filed on
March 26, 2004 (the "Original Form 10-K"). This Amendment No. 1 is being filed
to amend Item 6 (Selected Financial Data), Item 7 (Management's Discussion and
Analysis of Financial Condition and Results of Operations), Item 8 (Financial
Statements and Supplementary Data), Item 9A (Controls and Procedures) and Item
15 (Exhibits, Financial Statement Schedules and Reports on Form 8-K) to reflect
certain restatements to the Company's revenues and related matters that became
necessary as described under the caption "Restatement" in Item 7 and in Note 2
to the Consolidated Financial Statements included herein. The remainder of the
Original Form 10-K is unchanged and is not reproduced in this Amendment No. 1.
Except for the matters that led to the restatement just referred to, this
Amendment No. 1 does not reflect events occurring after the filing of the
Original Form 10-K and does not modify or update the disclosures therein in any
way other than as required to reflect the amendments described above.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K/A, 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.
ITEM 6. SELECTED FINANCIAL DATA.
($ in thousands except per share amounts)
For year ended December 31, 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated) (Restated)
Selected financial data:
Total revenues ** $28,649 $27,547 $27,418 $26,606 $23,134
Total expenses $25,472 $22,436 $20,792 $19,054 $17,127
Net income * ** $ 7,730 $ 7,632 $ 7,234 $ 6,956 $ 5,546
Total assets * ** $59,733 $54,970 $48,157 $42,474 $37,368
Long term obligations $ 6,926 $ 0 $ 4,000 $ 4,000 $ 4,000
Common Share data:
Net Income per Common Share * ** $ 1.43 $ 1.41 $ 1.33 $ 1.28 $ 1.01
Cash dividends per Common Share * $ .70 $ .58 $ .57 $ .52 $ .45
* These numbers reflect the three-for-one stock split which took place in
October 2003 and the change from the cost to equity method of accounting as
stated in the Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to the Financial Statements (see notes 9 and
13).
** These numbers reflect the restatement of prior years' results as noted above
and explained in greater detail in the Accompanying Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes to the
Financial Statements (see note 2).
-3-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company operates in the communications services industry and
provides telephone, directory advertising services, Internet, Video and other
services to its customers.
You should read this discussion in conjunction with the consolidated financial
statements and the accompanying notes. The presentation of dollar amounts in
this discussion is in thousands except for share and per share amounts.
The Company is restating certain portions of its Management's Discussion and
Analysis. See Note 2 for discussion of Restatement of Consolidated Financial
Statements. Except as stated herein, this amendment does not reflect events
occurring after the filing of the Original Form 10-K.
RESTATEMENT
On December 4, 1998, the New York State Public Service Commission ("NYPSC")
issued Cases 94-C-0095 and 28425 ("Order"), which required the Company to reduce
traffic sensitive access charges to inter-exchange carriers. This Order was
effective from January 1, 1999 to present and consequently had no impact on
periods prior to that date. The Company has determined that it did not reduce
traffic sensitive charges to inter-exchange carriers during the period January
1, 1999 to March 31, 2004, as stipulated by the Order. As a result, the Company
recorded additional revenues from inter-exchange carriers in the amount equal to
the difference between the rate charged and the rate that would comply with the
Order. Accordingly, the Company has restated its financial statements for all
prior periods affected as the cumulative impact for periods prior to fiscal 2004
would have been material if recorded in the second quarter of 2004. The Company
has restated the prior periods to reduce revenue, accrue interest, and record
the related tax impact. The following tables present the impact of the
restatement.
The NYPSC has not made a final determination regarding the amount of the
Company's obligation and whether the Company will be required to make a refund,
the way any refund would be calculated or of the amount or timing of any
payments. Therefore, the ultimate amount of repayment may differ from the
current liability and such difference, if any, would be reflected in earnings in
the period of settlement.
-4-
The impact of the restatement on the consolidated statement of income for the
years ended December 31, 2003, 2002, 2001, 2000 and 1999 was as follows:
2003 2002
-------------------------------------- --------------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
-------------------------------------- --------------------------------------
Operating revenues $ 28,843 $ (194) $ 28,649 $ 27,703 $ (156) $ 27,547
Operating income $ 3,371 $ (194) $ 3,177 $ 5,267 $ (156) $ 5,111
Interest expense $ (380) $ (34) $ (414) $ (318) $ (26) $ (344)
Total other income (expense) $ 8,460 $ (34) $ 8,426 $ 6,335 $ (26) $ 6,309
Income before income taxes $ 11,831 $ (228) $ 11,603 $ 11,602 $ (182) $ 11,420
Income taxes $ 3,952 $ (79) $ 3,873 $ 3,851 $ (63) $ 3,788
Net income $ 7,879 $ (149) $ 7,730 $ 7,751 $ (119) $ 7,632
Basic & diluted earnings per share $ 1.45 $ (0.02) $ 1.43 $ 1.43 $ (0.02) $ 1.41
2001 2000
-------------------------------------- --------------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
-------------------------------------- --------------------------------------
Operating revenues $ 27,538 $ (120) $ 27,418 $ 26,691 $ (85) $ 26,606
Operating income $ 6,746 $ (120) $ 6,626 $ 7,637 $ (85) $ 7,552
Interest expense $ (355) $ (17) $ (372) $ (588) $ (7) $ (595)
Total other income (expense) $ 4,243 $ (17) $ 4,226 $ 2,811 $ (8) $ 2,803
Income before income taxes $ 10,989 $ (137) $ 10,852 $ 10,448 $ (94) $ 10,354
Income taxes $ 3,665 $ (47) $ 3,618 $ 3,430 $ (32) $ 3,398
Net income $ 7,324 $ (90) $ 7,234 $ 7,018 $ (62) $ 6,956
Basic & diluted earnings per share $ 1.34 $ (0.01) $ 1.33 $ 1.29 $ (0.01) $ 1.28
1999
--------------------------------------
As
Previously As
Reported Adjustment Restated
--------------------------------------
Operating revenues $ 23,186 $ (52) $ 23,134
Operating income $ 6,059 $ (52) $ 6,007
Interest expense $ (594) $ (2) $ (596)
Total other income (expense) $ 1,891 $ (2) $ 1,889
Income before income taxes $ 7,950 $ (54) $ 7,896
Income taxes $ 2,368 $ (18) $ 2,350
Net income $ 5,582 $ (36) $ 5,546
Basic & diluted earnings per share $ 1.02 $ (0.01) $ 1.01
The impact of the restatement on the consolidated balance sheet for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999 was as follows:
2003 2002
------------------------------------ ------------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
------------------------------------ ------------------------------------
Total current assets $ 11,499 $ 240 $ 11,739 $ 7,454 $ 161 $ 7,615
Total assets $ 59,493 $ 240 $ 59,733 $ 54,809 $ 161 $ 54,970
Total current liabilities $ 4,838 $ 917 $ 5,755 $ 13,124 $ 466 $ 13,590
Total liabilities $ 21,153 $ 694 $ 21,847 $ 20,098 $ 466 $ 20,564
Retained earnings $ 38,670 $ (454) $ 38,216 $ 34,597 $ (305) $ 34,292
Total shareholders' equity $ 38,340 $ (454) $ 37,886 $ 34,711 $ (305) $ 34,406
Total liabilities and shareholders' equity $ 59,493 $ 240 $ 59,733 $ 54,809 $ 161 $ 54,970
2001 2000
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As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
------------------------------------ ------------------------------------
Total current assets $ 7,305 $ 99 $ 7,404 $ 6,982 $ 51 $ 7,033
Total assets $ 48,058 $ 99 $ 48,157 $ 42,423 $ 51 $ 42,474
Total current liabilities $ 8,888 $ 284 $ 9,172 $ 8,510 $ 147 $ 8,657
Total liabilities $ 17,410 $ 284 $ 17,694 $ 16,029 $ 147 $ 16,176
Retained earnings $ 30,062 $ (186) $ 29,876 $ 25,828 $ (96) $ 25,732
Total shareholders' equity $ 30,648 $ (186) $ 30,462 $ 26,394 $ (96) $ 26,298
Total liabilities and shareholders' equity $ 48,058 $ 99 $ 48,157 $ 42,423 $ 51 $ 42,474
1999
------------------------------------
As
Previously As
Reported Adjustment Restated
------------------------------------
Total current assets $ 6,266 $ 19 $ 6,285
Total assets $ 37,349 $ 19 $ 37,368
Total current liabilities $ 7,199 $ 55 $ 7,254
Total liabilities $ 14,619 $ 55 $ 14,674
Retained earnings $ 21,642 $ (36) $ 21,606
Total shareholders' equity $ 22,730 $ (36) $ 22,694
Total liabilities and shareholders' equity $ 37,349 $ 19 $ 37,368
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The impact of the restatement on the consolidated statement of cash flows for
the years ended December 31, 2003, 2002, 2001, 2000 and 1999 was as follows:
2003 2002
------------------------------------ ------------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
------------------------------------ ------------------------------------
Net income $ 7,879 $ (149) $ 7,730 $ 7,751 $ (119) $ 7,632
Deferred income taxes $ 304 $ (79) $ 225 $ 1,348 $ (63) $ 1,285
Increase in accrued access billing $ - $ 228 $ 228 $ - $ 182 $ 182
2001 2000
------------------------------------- ------------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
------------------------------------- ------------------------------------
Net income $ 7,324 $ (90) $ 7,234 $ 7,018 $ (62) $ 6,956
Deferred income taxes $ 4 $ (47) $ (43) $ 74 $ (32) $ 42
Increase in accrued access billing $ - $ 137 $ 137 $ - $ 94 $ 94
1999
--------------------------------------
As
Previously As
Reported Adjustment Restated
--------------------------------------
Net income $ 5,582 $ (36) $ 5,546
Deferred income taxes $ (264) $ (19) $ (283)
Increase in accrued access billing $ - $ 54 $ 54
OVERVIEW
Our revenue increased by 4% in 2003 as compared to 2002. Primary
contributors to the increase involved a price increase in network access
service, directory advertising growth, new DSL and Video customers and new
circuit revenue customers. Revenue increases were offset somewhat by the
elimination of second and third lines by customers, decreases in the average
minutes per call and in the number of intrastate calls, and the loss of dial-up
Internet customers outside of the Company's service territory. Expenses
increased due largely to additional pension and postretirement expenses, the
impact of early retirements, content costs due to increasing Video customers,
trunkline expenses, materials expense primarily related to our expanding DSL
customer base, increases in insurance premiums, professional expense, expanded
reporting requirements and additional proxy expenses due to shareholder actions.
In 2002 our year over year revenue performance was essentially flat due
to significant reciprocal compensation income reductions as a result of Federal
Communication Commission ("FCC") order 01-131, which in 2002 mandated the phase
out of reciprocal compensation. Intrastate interLATA revenue continued its
downward trend as did long distance revenue due to competitive pressures from
long distance carriers and wireless providers. Loss of dial-up Internet revenue
kept Internet revenues flat in spite of increases in DSL revenue and the launch
of our Video product. Expense increases were due to the launch of our Video
product, significant postretirement medical benefit expense increases, higher
bad debt due to the MCI/Worldcom bankruptcy and more depreciation expense
because of the Company's network upgrades.
The Company's core businesses -Telephone and Online- continue to be
fundamentally sound and profitable businesses. Although operating income has
declined over the past several years, such a decline is due at least in part to
the Company's repositioning itself in order to face changing technology and
anticipate customer demands. The Company is committed to increasing shareholder
value through ongoing innovation and successful execution of a strategic plan
that results in profitable products and services.
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
Certain of these accounting policies require management to make estimates and
assumptions about future events that could materially affect the reported
amounts of assets, liabilities, revenues and expenses and any disclosure of
contingent assets and liabilities. In the opinion of the Company's management,
all adjustments (consisting of normal recurring accruals) considered necessary
for fair presentation have been included.
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.
Our investments in the Orange County-Poughkeepsie Limited Partnership
("O-P") and Zefcom, LLC ("Zefcom") are accounted for under the equity method of
accounting. Our other investment Data Communications Group, Inc. is accounted
for under the cost method of accounting.
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
-6-
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
The Company's rates are regulated by the FCC, the NYPSC and the New
Jersey Board of Public Utilities ("NJBPU") and therefore the Company reflects
the effects of the ratemaking actions of these regulatory bodies in its
financial statements. Accordingly, the Company follows the accounting prescribed
by Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the
Effects of Certain Types of Regulation." The Company periodically reviews the
continued applicability of SFAS No. 71 based on the current regulatory and
competitive environment.
The rates that the Company charges to its customers for regulated
services were established in its 1993 rate case with the NYPSC. The Company has
not filed a rate case since that time. If the Company should submit a rate case
with the NYPSC in the future, it is uncertain as to what the outcome of the rate
case would be and how it would effect Company's results of operations and
financial position.
The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") 104 "Revenue Recognition in Financial Statements". Telephone
revenues are primarily derived from usage of the Company's network and
facilities. Telephone access revenues are recognized over the period that the
corresponding services are rendered to customers. Network access revenues are
recognized over the period that the corresponding services are rendered to the
customer. Long distance revenue is recognized monthly as services are provided.
Directory advertising revenue is recorded rateably over the life of the
directory. Online services, which include DSL and Video, are recorded when
rendered. Other services and sales revenue is recognized when monthly services
are provided.
The Company records deferred taxes that arise from temporary differences
resulting from differences between the financial statement and the tax basis of
assets and liabilities. Deferred taxes are classified as current or non-current,
depending on the classification of the assets and liabilities to which they
relate. The Company's deferred taxes result principally from differences in
depreciation and in the accounting for pensions and other postretirement
benefits. Investment tax credits are amortized as a reduction to the provision
for income taxes over the useful lives of the assets that produced the credits.
The Company records property, plant and equipment at cost. Construction
costs, labor and applicable overhead related to installations and interest
during construction are capitalized. Costs of maintenance and repairs of
property, plant and equipment are charged to operating expense. The estimated
useful life of support equipment (buildings, vehicles, computers, etc.) ranges
from 2.6 to 19 years. The estimated useful lives of communication and network
equipment range from 10.5 to 15 years. The estimated useful lives of buildings
and other equipment range from 13.7 to 50 years. The calculation of depreciation
expense is computed using the straight line method. In accordance with
regulatory accounting guidelines when units of property are retired, sold or
otherwise disposed of in the ordinary course of business, the gross book value
is charged to accumulated depreciation with no gain or loss recognized.
Certain direct development costs associated with internal-use software
are capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects.
CONSOLIDATED RESULTS OF OPERATIONS - 2003 VS. 2002 ($ IN THOUSANDS)
We will discuss factors that affected our overall results for the past
two years. We will also discuss our expected revenue and expense trends for 2004
in our "Operating Environment and our Trends of the Business" section.
OPERATING REVENUES
The Company's operating revenues increased $1,102, or 4%, in 2003 and
$129, or 1%, in 2002. The increase in 2003 was due primarily to a price increase
for certain network access services and the addition of DSL and Video customers.
During 2003, 1,717 new DSL customers increased our overall penetration rate to
27.5%, one of the highest penetration rates in the country. The launch of our
Video product continued during 2003 and added 1,063 new customers. During the
last quarter of 2003, a new marketing campaign was aimed specifically at
potential Long Distance customers. For the last three months of 2003, year over
year revenue increases resulted and the previously ongoing revenue losses were
stemmed. In addition, directory advertising revenue increased 8% over 2002 due
to customer support for our white/yellow page book. Revenue increases were
affected somewhat by the elimination of second and third lines by customers.
-7-
For 2002, operating revenues increased $129, or 1%, over 2001 as a
result of a $1,311 increase in network access service revenue reflecting
favorable rate increases and a larger allocated share of pooled revenues from
USAC. A $787, or 63%, decline in reciprocal compensation revenue impacted our
Middletown CLEC revenues. The decline was due to FCC order 01-131, which
mandated the phase-out of reciprocal compensation revenue in 2003. Also
contributing to revenue declines was lower revenue generation in long distance
services which produced decreases of $269, or 6%. The decrease in our long
distance products resulted from continued competitive pressures and changing
customer calling preferences. The Company experienced dial-up Internet revenue
loss from customers who switched to DSL or other higher speed services offered
by competitors in areas beyond the reach of our own DSL service.
OPERATING EXPENSES
Our operating expenses increased $3,036, or 14%, in 2003 and $1,644, or
8%, in 2002. Expenses rose $806 in 2003 over 2002 because of significant
increases in pension and postretirement expenses. The pension and postretirement
increase was primarily due to a decreased asset base of our employee pension and
postretirement benefit plans from net investment losses and the reduction in the
discount rate from 7.25% to 6.75%. Content costs increased $384 largely due to
the addition of new Video customers, depreciation costs increased by $899 due to
our capital expansion, trunkline costs increased $644 due to anticipated higher
capacity needs, material expenses were up $280 mainly due to new DSL and Video
customers and increases of $182 for director and officer liability insurance
premiums. Lastly, reported operating expenses include expenses for pension and
postretirement benefits of $675 in connection with voluntary enhanced retirement
programs offered to certain management and non-management employees as part of a
work force reduction program and the capping of the non-management pension plan.
In 2002, operating expenses increased $1,644 over 2001 due to $560 of
additional costs associated with the launch of the Video product, $459 due to
costs associated with the Company's defined postretirement medical benefits
plan, $350 because of additional bad debt expense from the MCI/Worldcom
bankruptcy, and $227 due to higher depreciation expense from network upgrades.
OTHER INCOME (EXPENSES)
Other income (expenses) increased $2,117, or 34%, in 2003 as compared to
a $2,083 increase in 2002 over the prior year. The increase was primarily due to
income from O-P. Income from O-P does not automatically result in a full cash
distribution to the Company. Depending upon the business needs of O-P, some cash
is usually kept by the partnership for its operations. The increase in O-P
income is again due to strong call volume. 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. Also affecting other income was the Company's
share of Zefcom's 2003 loss which was $232 as compared to $846 and $385 in 2002
and 2001, respectively.
SEGMENT RESULTS OVERVIEW
The TELEPHONE OPERATIONS SEGMENT accounted for approximately 77% of our
consolidated operating revenues and operates as a retail and wholesale seller of
communications services. We provide landline telecommunications services,
including local networks, network access, long distance voice, customer premise
equipment, private branch exchange equipment and directory advertising services
(yellow and white pages advertising and electronic publishing).
During the last quarter of 2003, a significant marketing effort was
undertaken in order to promote the Company's long-distance product. As a result
187 new subscribers were added. Also in the last quarter of 2003, the Company
experienced a reduction in trunkline requirements and expects to see the
benefits of this reduction in 2004.
The ONLINE SEGMENT accounted for approximately 23% of our consolidated
segment operating revenues. This segment provides high speed (DSL) and dial-up
Internet services, help desk operations and beginning in 2002 Video over VDSL (a
digital TV product).
During 2003 Online incurred $377 more in costs in 2003 than in 2002 due
to a higher utilization of telephone company personnel for VDSL and DSL product
rollouts.
-8-
TELEPHONE
Local network service-revenue decreased $65, or 2%, from 2002 due
essentially to the loss of 659 access lines. Our access line loss was
due primarily to customers eliminating their second and third lines.
Within this revenue group, calling feature revenue increased 4% due to
focused marketing plans and successful sales efforts by our customer
representatives.
Network access service-which includes end user, local switching support,
switched access and special access revenue categories, was up 8% overall
compared to 2002. The increase was due primarily to switched access
price increases.
Long distance service- which includes services resulting from the
transport of intraLATA (outside of local calling area) and interLATA
(traditional long distance) was down $180, or 5%, in comparison to 2002.
The decrease was due entirely to a decrease in intraLATA traffic due to
fewer call minutes and the increasing use of cell phones. At the end of
the third quarter, the Company began a significant marketing campaign to
win back interLATA customers. As a result, the Company obtained 187 new
customers and experienced flat year over year interLATA revenue
performance.
Directory advertising revenues- increased $111, or 8%, over 2002 because
of customer acceptance of various promotions that were aimed at
increasing advertising space taken by existing customers. The promotions
also included an Internet bundle whereby the customer's information
would be added to an Internet directory. The unit also launched an
innovative Woman's Directory.
Other service and sales revenues-which includes services related to
billing and collections provided to other carriers, inside wire revenue,
circuit revenue and reciprocal compensation-increased $147, or 5%, over
2002 due in large part to a $271, or a 248%, increase in circuit revenue
which was offset in part by a $150 or 32% decrease in reciprocal
compensation due to lower rates that were mandated by the FCC.
Telephone operations expenses increased $1,561 or 8%, over 2002. The
increase was due essentially to three significant causes. First, benefit
expenses increased $578 over the prior year due to a decreased asset base caused
by investment losses and a decrease in the discount rate. During the year, the
Company took steps to control this cost category by capping the non-management
pension fund as of December 31, 2003. Second, the segment's trunkline charges
increased $437 over 2002 as a result of network capacity demands. Third, $182 in
additional expense was incurred because of higher insurance costs (primarily
directors and officers liability insurance), higher professional fees and proxy
expenses that were incurred due to shareholder actions.
Depreciation expense increased $514 over 2002 due to capital additions
made to modernize our existing plant and due to an acceleration of the
completion process of construction work (thus adding depreciable plant faster
than in prior years).
Other income (expenses) rose $2,117, or 34%. During the year, O-P
experienced revenue growth of 26% over 2002 due to higher access, usage and long
distance revenues.
ONLINE
Online revenues increased $369, or 6%, over 2002 due to significant
increases in DSL customers and Video customers. At the end of 2003, the Company
achieved a 27.5% penetration of DSL customers, one of the highest penetrations
in the United States and a 61% year over year increase in revenue. Video
customers have been added at a steady rate as the product is rolled out across
our service territory in conjunction with our Video product. Total Video revenue
was up $695 over the prior year. Offsetting these results was a decline in
dial-up revenue of $1,201, or 25%, which resulted from a significant loss of
customers outside of the Company's service territory to providers of higher
speed services. The Company will probably continue to lose dial-up customers
outside of the Company's service territory because it is unable to provide
higher speed services to them.
Online expenses increased $1,033, or 16%, due in substantial part to
increased benefit expenses of $203 and $377 in expense due to additional charges
related to the rollout of its Video and DSL products. Depreciation expenses
increased $395 due to equipment additions for Internet services and also to
faster capital project job completion, which allowed plant to be placed in
service at a faster pace than before.
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INVESTMENT IN ZEFCOM
The Company has a 17% ownership interest in Zefcom. This investment has
historically been recorded on the cost method of accounting. Zefcom formed an
Executive Operating Committee consisting of representatives from three of the
investors in Zefcom. The Operating Committee's responsibilities are to assist
management as necessary in relations with consultants and prospective investors,
and in matters of finance. As a result, the Operating Committee exerts
significant influence over the financial and operating decisions of Zefcom.
The Company's Chief Executive Officer was elected to this committee.
Accordingly, the Company, through its representation on this Operating
Committee, began exerting significant influence on the financial and operating
decisions of Zefcom in the fourth quarter of 2003. As a result of this change,
the Company changed its accounting for the Zefcom investment from the cost
method to the equity method of accounting.
In accordance with generally accepted accounting principles, the Company
has adjusted its prior period financial results to record its 17% investment in
Zefcom as if it had been accounted for under the equity method of accounting.
Zefcom's losses have been reflected in the Company's current and prior year
financial statements. For the years ended December 31, 2002 and 2001 the net
effect of the change was to decrease net income after taxes by $546 or $0.10 per
basic and diluted share and $248 or $0.05 per basic and diluted share,
respectively. The effect of the change on the December 31, 2002 balance sheet
was to reduce Investments by $1,231.
LIQUIDITY
The Company had $5,717 of cash and cash equivalents available at
December 31, 2003. The Company has a $4,000 line of credit with a bank, of which
the entire amount remained unused at December 31, 2003. Interest on the line of
credit is at a variable rate and borrowings are on a demand basis without
restrictions. In addition, on February 18, 2003, the Company closed a commitment
with CoBank, ACB with respect to an $18.5 million unsecured term credit facility
at a variable rate (approximately 3% for the period February 18 through December
31, 2003). Under conditions set by the NYPSC, the Company was allowed to use a
portion of the proceeds from this loan to refinance $4,000 of long-term debt and
repay $3,000 under a line of credit. The Company may use the remaining amount
available under the facility - $11.5 million - to finance capital expenditures
and pay expenses and fees associated with borrowings made under the facility.
The Company may also re-borrow amounts repaid under the facility, which will
remain available to the Company until September 30, 2004. In February 2003, the
Company used $3,149 of the credit facility funds to repay $3,000 line of credit,
plus accrued interest, and closing costs associated with the facility. The
Company made an additional draw to repay $4,000 in long-term debt that matured
in December 2003.
CASH FROM OPERATING ACTIVITIES
The Company's primary source of funds continues to be cash generated
from operations, as shown in the consolidated statement of cash flows. For the
years ended December 31, 2003, 2002 and 2001, respectively, cash from operating
activities was less than our capital expenditures due to the Company's continued
growth in the Video business.
CASH FROM INVESTING ACTIVITIES
Capital expenditures totaled $6,261, $8,399 and $9,446 for the years
ended December 31, 2003, 2002 and 2001, respectively. The decreases of $2,138 in
2003 over 2002 and $1,047 in 2002 over 2001 were primarily due to the fact that
the construction of our Video infrastructure which began in 2001 was essentially
completed in 2002.
The Company's cash distribution from O-P for the Company's share of
O-P's earnings increased by approximately $4,125 (or 69%) to $10,125 during
2003, compared to $6,000 for 2002. O-P's earnings are distributed to the Company
on a quarterly basis at the discretion of the general partner.
CASH FROM FINANCING ACTIVITIES
Dividends, as adjusted for the stock split, declared by the Board of
Directors of the Company, were $0.70 per share for the year ended December 31,
2003 as compared to $0.58 for 2002 and $0.57 in 2001. The total dividends paid
as of December 31, 2003 on its common shares by the Company were $3,781 compared
to $3,191 in 2002 and $3,065 in 2001.
-10-
In 2003, 2002 and 2001, respectively, the Company had short-term lines
of credit arrangements with two banks which were utilized to assist in the
funding of working capital requirements and capital expenditures. These
borrowings were short-term in nature and normally repaid from operating cash
within a year. As noted above, borrowings from one line of credit were paid in
full in February 2003 out of the proceeds from the CoBank transaction.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2003 the Company did not have any material
off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Below is a summary of the Company's material contractual obligations and
commitments as of December 31:
<Table>
<Caption>
Payments Due by Period
($ in thousands)
Less More
than 1-3 3-5 than
1 Year Years Years 5 Years Total
-------------------------------------------------------------------------
Long-term debt, including current maturities (a) $ 223 $ 1,787 $ 1,787 $ 3,352 $ 7,149
Operating leases (b) 159 318 234 410 1,121
Purchase obligations (c) 772 880 0 0 1,652
Other long-term obligations (d) 1,139 0 0 0 1,139
-------------------------------------------------------------------------
Total contractual obligations and commitments $ 2,293 $ 2,985 $ 2,021 $ 3,762 $ 11,061
=========================================================================
(a) Pursuant to the loan agreement, principal payments relating to
long-term debt commence in October 2004 and continue for 32
consecutive quarters until repaid in full.
(b) The Company leases tower space for transmission of content for its
Video product, in addition the Company also leases office space and
vehicles.
(c) Represents agreements to purchase trunklines from other carriers for
transmission of voice, data and video.
(d) Company minimum required contributions for its pension and
postretirement plans. These amounts were not estimable for the years
after 2004.
OTHER EVENTS
From time to time shareholders have suggested that the Company should
somehow distribute its O-P interest to the shareholders as a group, rather than
using the income from O-P in some other fashion. Currently, some of that income
helps to modernize and expand services and to pay other expenses, reducing the
need to incur debt; the rest is available to be paid as dividends to
shareholders. Some of the proposals from shareholders would involve issuing debt
securities, dividending out the proceeds and using O-P income to pay interest;
one would involve the sale of O-P interest followed by the payment of a special
dividend; and others would involve making a special dividend of O-P interest or
spinning it off. After careful consideration of the Company's business needs and
of tax and legal advice, the Board does not believe that any of these proposals
have advantages that are more beneficial to the Company's customers and
shareholders than the current uses to which the income from O-P is put. The
Company and the Board believes that a brief explanation of this position would
be helpful to shareholders.
The issuance of debt to be repaid in cash creates timing risks in
connection with repayment, especially if the principal is payable in full at
maturity, as is usually the case. Exchangeable or convertible debt would result
in the taxation of the Company upon the exchange or conversion, as if O-P
interest had been sold for the amount of the debt. A sale or a dividend of O-P
interest would result in the Company's being taxed on the difference between the
amount it paid for O-P interest and the sale price or (in the case of a
dividend) the fair market value; in addition, the shareholders would pay tax on
what they received. In the case of a dividend, the Company would have to use
other funds to pay its taxes, since a dividend does not provide funds to the
Company. The sale of some types of secured debt would be treated similarly. A
spin-off would require O-P interest and a small active business to be put in a
corporation. The spin-off itself would not be taxable to the Company or its
shareholders; however, the need to use a
-11-
corporation would result in double taxation: the corporation itself would pay
tax on the income from O-P interest, and then its shareholders would pay taxes
on the dividends they receive. Because its investments would not be diversified,
the spin-off would not be eligible for taxation as a so-called registered
investment company. As far as taxes are concerned, this is just like the current
situation, in which the Company holds O-P interest.
In addition, most of the proposals would require the approval of O-P's
general partner. Disapproval is permitted if it is reasonable; refusal to give
approval would essentially result in preventing further Company action on a
proposal. The Company believes the chances of approval are low in most
instances. Dividending out O-P interest would require complex efforts to prevent
O-P from becoming a publicly traded partnership for tax purposes, and would
require O-P to file reports with the SEC as well. Publicly traded partnerships
are taxed as corporations, leading to two levels of taxation. These issues would
make it especially difficult, the Company believes, to obtain the approval of
O-P's general partner. All of the proposals would require the approval of the
NYPSC. A spin-off would require the new corporation holding O-P interest to
register as an investment company, which would increase the cost of the spin-off
and make it difficult or impossible for the Company to effectively assist in
managing the active business that is required to be in the corporation with O-P
interest. For the reasons just summarized, the Board has decided that retaining
the Company's current relationship to O-P is preferable to implementing any of
the proposals or variations thereof.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
2004 REVENUE TRENDS
For 2004, management expects current economic, competitive and
regulatory trends to continue. Access lines should continue to slowly decrease
and dial-up revenue loss should continue at approximately the same rate as in
2003. We expect such losses to be offset by increasing DSL and Video revenue as
well as from successful marketing of our other products through new bundling
packages. Long distance revenue should exhibit very modest growth. Overall,
management expects total consolidated revenue to be only slightly ahead of 2003.
2004 EXPENSE TRENDS
We expect that pension and retiree medical cost expense trends will be
the same as 2003. Certain factors, such as investment returns, depend largely on
trends in the U.S. securities markets and the general U.S. economy. Our ability
to improve the performance of those factors is limited. In particular, any
weakness in securities markets could result in investment losses and a decline
in plan assets. However, as a result of capping the non-management pension plan
as of December 31, 2003, expense savings year over year are expected to occur.
During 2003, the Company reached a five year agreement with the IBEW. As
part of this agreement, labor cost for our union employees will increase 3% per
year as per the contract.
As a result of new agreements with various carriers, trunkline costs are
expected to decrease by 10 to 20 percent.
Lastly, as a result of new requirements related to the Sarbanes-Oxley
Act, the Company expects compliance costs to increase in 2004 as compared to
2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15(a) below for Index to restated Financial Information
Selected revised supplementary quarterly financial data can be found in
Note 16 of Notes to the Consolidated Financial Statements.
ITEM 9A. CONTROLS AND PROCEDURES.
1. Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act).
These rules refer to the controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in
the reports that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Our Chief Executive
Officer and our Principal Accounting Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report, and they have concluded that such controls
and
-12-
procedures were not effective as of December 31, 2003 since the material
weakness described below was identified. Our Chief Executive Officer and our
Principal Accounting Officer believe that such controls and procedures have
now been rendered effective in the third quarter of 2004 because of the
changes described below.
2. Changes in internal controls over financial reporting
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect
our transactions and that our established policies and procedures are
followed for financial reporting purposes as they relate to disclosures and
procedures. For the fourth quarter ended December 31, 2003, there were no
changes in our disclosure controls or in other factors that materially
affected or were reasonably likely to materially affect such controls.
During the second quarter of 2004 it was discovered that a material weakness
existed in internal controls related to the Company's N.Y. Intrastate access
tariff filings. A material weakness, as defined, is a significant deficiency
or combination of significant deficiencies that results in a
more-than-remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. The
identified deficiency was that the Company inadvertently did not monitor a
NYPSC order regarding the implementation of N.Y. Intrastate Access rates. As
a result of the findings, the Company has assigned a designated contact for
all written correspondence from regulatory agencies. This contact will be
responsible for summarizing, recording and analyzing all material received
from regulatory agencies and disseminating all such material to the proper
department. If any department receives information directly from a
regulatory agency they are instructed to forward it to the designated
contact for the Company. In addition, the Company's Controller's Group will
review all such correspondence from regulatory agencies and will document
the related accounting and financial reporting issues. The evaluation
process will be reviewed by the Chief Financial Officer and periodically by
the Company's Audit Committee. Finally, the process will be subject to
random and periodic reviews by senior management to verify that regulatory
information has been distributed appropriately, analyzed and that the
Company is in full compliance with all regulatory requirements.
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 (Restated)
Page
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP-December 31, 2003 16
Report of Independent Auditor
Bush & Germain, PC-December 31, 2002 and 2001 17
Consolidated Statements of Income-Years Ended December 31, 2003, 2002 and 2001 18
Consolidated Balance Sheets-December 31, 2003 and 2002 19
Consolidated Statements of Cash Flows-Years Ended December 31, 2003, 2002 and 2001 20
Consolidated Statements of Shareholders' Equity-Years Ended December 31, 2003, 2002
and 2001 21
Notes to Consolidated Financial Statements 22-34
2. Financial Statement Schedules
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP 35
Schedule II. Valuation and Qualifying Accounts 36
3. Exhibits
Index to Exhibits 37
(b) Reports on Form 8-K:
Not applicable.
-13-
3. Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE
3(a) Articles of Incorporation, Incorporated by reference to
as amended Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q
for September 2003
3(b) By-Laws Incorporated by reference to
Exhibit 3(b) to the Company's
Annual Report on Form 10-K
for 2002
4(a) Form of Common Shares Incorporated by reference to
Certificate, as amended Exhibit 4 to the Company's
Quarterly Report on Form
10-Q for September 2003
4(b) CoBank Loan Agreement Incorporated by reference to
Exhibit 4(d) to the Company's
Annual Report on Form 10-K
for 2002
14 Warwick Valley Telephone Company Incorporated by reference
Code of Ethics to Exhibit 14 to the Company's
Annual Report on Form 10-K for 2003
21 Significant Subsidiaries of Registrant Incorporated by reference
to Exhibit 21 to the Company's Annual
Report on Form 10-K for 2003
23.1 Consent of Independent Auditors Filed herewith
Bush & Germain, PC
23.2 Consent of Independent Registered Public Accounting Firm
Deloitte & Touche LLP Filed herewith
23.3 Consent of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP Filed herewith
24 Orange County-Poughkeepsie Limited Partnership Incorporated by reference
Financial Statements as of December 31, 2003 to the Company's Annual
and 2002 and for the years ended December 31, 2003, Report on Form 10-K for
2002 and 2001 2003
31.1 Certification signed by Herbert Gareiss, Jr. Filed herewith
Chief Executive Officer.
31.2 Certification signed by Kevin J. Kerr- Filed herewith
Principal Accounting Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, Filed herewith
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 signed by
Herbert Gareiss, Jr.-Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section Filed herewith
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 signed
by Kevin J. Kerr-Principal Accounting 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: November 10, 2004 /s/ Herbert Gareiss, Jr.
----------------------------------
Herbert Gareiss, Jr.
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 10th day of November, 2004.
SIGNATURE TITLE
/s/ Kevin J. Kerr Principal Accounting Officer
- --------------------------------------------
Kevin J. Kerr
/s/ Fred. M. Knipp Director
- --------------------------------------------
Fred. M. Knipp
/s/ Wisner H. Buckbee Director
- --------------------------------------------
Wisner H. Buckbee
Director
- --------------------------------------------
Rafael Collado
Director
- --------------------------------------------
Joseph E. DeLuca
/s/ Philip S. Demarest Director
- --------------------------------------------
Philip S. Demarest
/s/ Robert J. DeValentino Director
- --------------------------------------------
Robert J. DeValentino
/s/ Corinna S. Lewis Director
- --------------------------------------------
Corinna S. Lewis
-15-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Warwick Valley Telephone Company:
In our opinion, based on our audit and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Warwick Valley Telephone Company ("WVTC")
and their subsidiaries at December 31, 2003, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of WVTC's management; our responsibility is to
express an opinion on these financial statements based on our audit. We did not
audit the financial statements of the Orange County-Poughkeepsie Limited
Partnership (the "O-P Partnership"), an investment that was reflected in the
consolidated financial statements of WVTC using the equity method of accounting.
The investment in O-P partnership represented 6.3% of total assets as of
December 31, 2003 and 79% of income before income taxes for the year ended
December 31, 2003. The financial statements of O-P Partnership were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for O-P
Partnership, is based solely on the report of the other auditors. We conducted
our audit of WVTC's financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for our opinion.
As disclosed in Note 2, the Company has restated its financial statements as of
December 31, 2003 and for the year then ended.
As disclosed in Note 3 to the financial statements, WVTC changed its accounting
for asset retirement costs as of January 1, 2003.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 24, 2004, except for Note 2 as to which the date is July 1, 2004
-16-
BUSH & GERMAIN, PC
Certified Public Accountants
901 Lodi Street
Syracuse, New York 13203
phone: (315) 424-1145
fax: (315) 424-1457
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 the
years then ended. Our audits also include the financial statement schedule
listed in the Index at Item 15 (a)(2). These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with 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 the years then ended 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.
As discussed in Note 2, the Company has restated its financial
statements as of December 31, 2002, and 2001 and for the years then ended.
As disclosed in Note 9 to the financial statements, Warwick Valley
Telephone Company adopted the equity method of accounting for one of its
investments in 2003, which had previously been recorded under the cost method.
/s/ Bush & Germain, P.C.
Syracuse, New York
January 30, 2003, except for Note 2 as to which the date is July 1, 2004
-17-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands except per share amounts)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
----------- ----------- -----------
(RESTATED) (RESTATED) (RESTATED)
Operating Revenues:
Local network service $ 4,075 $ 4,140 $ 4,249
Network access service 9,356 8,636 7,325
Long distance services 3,766 3,946 4,215
Directory advertising 1,429 1,318 1,160
Online services 6,699 6,330 6,389
Other services and sales 3,324 3,177 4,080
----------- ----------- -----------
Total operating revenues $ 28,649 $ 27,547 $ 27,418
----------- ----------- -----------
Operating Expenses:
Plant specific $ 4,738 $ 4,328 $ 3,494
Plant non-specific:
Depreciation & amortization 4,901 3,991 3,764
Other 2,846 2,225 2,018
Customer operations 4,483 4,203 4,687
Corporate operations 4,562 3,887 3,079
Cost of services and sales 2,470 2,242 2,215
Property, revenue and payroll taxes 1,472 1,560 1,535
----------- ----------- -----------
Total operating expenses $ 25,472 $ 22,436 $ 20,792
----------- ----------- -----------
OPERATING INCOME $ 3,177 $ 5,111 $ 6,626
Other Income (Expenses)
Interest income (expense), net of capitalized interest $ (414) $ (344) $ (372)
Income from equity method investments 8,846 6,733 4,606
Other income (expense) (6) (80) (8)
----------- ----------- -----------
Total other income (expense) - net $ 8,426 $ 6,309 $ 4,226
----------- ----------- -----------
INCOME BEFORE INCOME TAXES $ 11,603 $ 11,420 $ 10,852
Income Taxes $ 3,873 $ 3,788 $ 3,618
----------- ----------- -----------
Net Income $ 7,730 $ 7,632 $ 7,234
Preferred Dividends $ 25 $ 25 $ 25
----------- ----------- -----------
Income Applicable to Common Stock $ 7,705 $ 7,607 $ 7,209
=========== =========== ===========
Basic & Diluted Earnings per Share of
Outstanding Common Stock $ 1.43 $ 1.41 $ 1.33
=========== =========== ===========
Weighted Average Shares of Common Stock
Outstanding 5,400,873 5,408,484 5,411,808
=========== =========== ===========
Please see the accompanying notes, which are an integral part of the
consolidated financial statements.
-18-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
($ in thousands except share amounts)
DECEMBER 31, DECEMBER 31,
ASSETS 2003 2002
------------ ------------
(RESTATED) (RESTATED)
Current assets:
Cash and cash equivalents $ 5,717 $ 1,641
Accounts receivable - net of reserve for uncollectibles - $144 and $508 respectively 3,420 3,126
Other accounts receivable 273 615
Materials and supplies 1,153 1,468
Prepaid expenses 681 544
Deferred income taxes 495 221
---------- ----------
Total Current Assets $ 11,739 $ 7,615
---------- ----------
Property, plant and equipment, net 41,322 39,947
Unamortized debt issuance costs 115 5
Intangible asset - pension 744 831
Other deferred charges 510 27
Investments 5,303 6,545
---------- ----------
TOTAL ASSETS $ 59,733 $ 54,970
========== ==========
LIABILITIES
Current Liabilities:
Accounts payable $ 1,559 $ 2,082
Notes payable 0 5,000
Current maturities of long term debt 223 4,000
Advance billing and payments 247 230
Customer deposits 135 125
Accrued taxes 506 48
Pension and post retirement benefit obligations 1,139 516
Accrued access billing 694 466
Other accrued expenses 1,252 1,123
---------- ----------
Total Current Liabilities $ 5,755 $ 13,590
---------- ----------
Long-term debt 6,926 0
Deferred income taxes 4,119 3,620
Other liabilities and deferred credits 536 483
Post retirement benefit obligations 4,511 2,871
---------- ----------
TOTAL LIABILITIES $ 21,847 $ 20,564
---------- ----------
Shareholders' Equity
Preferred Shares - $100 par value; authorized and issued shares 5,000;
$0.01 par value authorized and unissued shares 10,000,000; $ 500 $ 500
Common stock - $0.01 par value; authorized shares 10,000,000 60 60
5,984,883 for 12/31/03 and 5,982,810 for 12/31/02
Treasury stock - $0.01 par value, 583,683 shares for 12/31/03 and 12/31/02,
respectively (3,598) (3,598)
Additional paid in capital 3,473 3,421
Accumulated other comprehensive income (765) (269)
Retained earnings 38,216 34,292
---------- ----------
Total Shareholders' Equity $ 37,886 $ 34,406
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,733 $ 54,970
========== ==========
Please see accompanying notes, which are an integral part of the consolidated
financial statements.
-19-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands )
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
-------- -------- --------
(RESTATED) (RESTATED) (RESTATED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 7,730 $ 7,632 $ 7,234
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,901 3,991 3,764
Deferred income taxes 225 1,285 (43)
Interest charged to construction (42) (238) (283)
Income from equity method investments (8,846) (6,733) (4,606)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (294) 312 541
(Increase) Decrease in other receivables 342 (615) 112
(Increase) Decrease in materials and supplies 315 803 (606)
(Increase) Decrease in prepaid expenses (137) 1 (57)
(Increase) Decrease in deferred charges (482) 171 (104)
Increase (Decrease) in accounts payable (523) 163 (881)
Increase (Decrease) in customers' deposits 9 (3) (3)
Increase (Decrease) in advance billing and payment 17 28 8
Increase (Decrease) in accrued taxes 458 (16) 40
Increase (Decrease) in pension and postretirement
benefit obligation 1,856 1,014 498
Increase (Decrease) in other accrued expenses 129 802 (90)
Increase (Decrease) in accrued access billing 228 182 137
Increase (Decrease) in other liabilities and deferred credits 53 (89) 31
-------- -------- --------
Net cash provided by operating activities $ 5,939 $ 8,690 $ 5,692
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,261) (8,399) (9,446)
Interest charged to construction 42 238 283
Distribution from partnership 10,125 6,000 5,283
Investment contributions (38) (800) (200)
-------- -------- --------
Net cash provided by (used in) investing activities $ 3,868 $ (2,961) $ (4,080)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments of notes payable (9,000) (1,250) 1,300
Proceeds from issuance of long term debt 7,149 -- --
Unamortized debt issuance (126) -- --
Dividends(Common & Preferred) (3,806) (3,216) (3,090)
Sale of common stock 52 10 20
Purchase of treasury stock -- (213) --
-------- -------- --------
Net cash used in financing activities $ (5,731) $ (4,669) $ (1,770)
-------- -------- --------
Increase (Decrease) in cash and cash equivalents 4,076 1,060 (158)
Cash and cash equivalents at beginning of year 1,641 581 739
-------- -------- --------
Cash and cash equivalents at end of year $ 5,717 $ 1,641 $ 581
======== ======== ========
Supplemental disclosure of cash flow information
Interest $ 459 $ 589 $ 650
Income tax $ 2,690 $ 2,585 $ 3,689
-20-
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ in thousands except share amounts)
TREASURY TREASURY PREFERRED PREFERRED COMMON
STOCK STOCK STOCK STOCK STOCK
SHARES AMOUNT SHARES AMOUNT SHARES
------------------------ ----------------------------------
BALANCE, DECEMBER 31, 2000,
as reported 571,491 $ (3,385) 5,000 $ 500 5,980,779
Adjustments, net of taxes
------------------------ ----------------------------------
BALANCE, DECEMBER 31, 2000, 571,491 (3,385) 5,000 500 5,980,779
as adjusted
Net income for the year
Dividends:
Common ($0.57 per share)
Preferred ($5.00 per share)
Sale of Common Stock 1,461
Purchase of Treasury Stock
------------------------ ----------------------------------
BALANCE, DECEMBER 31, 2001 571,491 $ (3,385) 5,000 $ 500 5,982,240
------------------------ ----------------------------------
Net income for the year
Minimum Pension Liability
Total Comprehensive Income (Loss)
Dividends:
Common ($0.58 per share)
Preferred ($5.00 per share)
Sale of Common Stock 570
Purchase of Treasury Stock 12,192 (213)
------------------------ ----------------------------------
BALANCE, DECEMBER 31, 2002 583,683 $ (3,598) 5,000 $ 500 5,982,810
------------------------ ----------------------------------
Net income for the year
Minimum Pension Liability
Total Comprehensive Income (Loss)
Dividends:
Common ($.70 per share)
Preferred ($5.00 per share)
Sale of Common Stock 2,073
Purchase of Treasury Stock
------------------------ ----------------------------------
BALANCE, DECEMBER 31, 2003 583,683 $ (3,598) 5,000 $ 500 5,984,883
======================== ==================================
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK PAID IN RETAINED COMPREHENSIVE
AMOUNT CAPITAL EARNINGS INCOME(LOSS) TOTAL
--------- ------- ---------- -------------- ----------
(Restated) (Restated)
BALANCE, DECEMBER 31, 2000,
as reported $ 60 $ 3,391 $ 25,828 $ 0 $ 26,394
Adjustments, net of taxes (96) (96)
------- ------- ---------- ----- ----------
BALANCE, DECEMBER 31, 2000, 60 3,391 25,732 - 26,298
as adjusted
Net income for the year 7,234 7,234
Dividends:
Common ($0.57 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 $ 60 $ 3,411 $ 29,876 $ 0 $ 30,462
------- ------- ---------- ----- ----------
Net income for the year 7,632 7,632
Minimum Pension Liability (269) (269)
----------
Total Comprehensive Income (Loss) 7,363
Dividends:
Common ($0.58 per share) (3,191) (3,191)
Preferred ($5.00 per share) (25) (25)
Sale of Common Stock - 10 10
Purchase of Treasury Stock (213)
------- ------- ---------- ----- ----------
BALANCE, DECEMBER 31, 2002 $ 60 $ 3,421 $ 34,292 $(269) $ 34,406
------- ------- ---------- ----- ----------
Net income for the year 7,730 7,730
Minimum Pension Liability (496) (496)
----------
Total Comprehensive Income (Loss) 7,234
Dividends:
Common ($.70 per share) (3,781) (3,781)
Preferred ($5.00 per share) (25) (25)
Sale of Common Stock - 52 52
Purchase of Treasury Stock -
------- ------- ---------- ----- ----------
BALANCE, DECEMBER 31, 2003 $ 60 $ 3,473 $ 38,216 $(765) $ 37,886
======= ======= ========== ===== ==========
-21-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Warwick Valley Telephone Company ("the Company") provides
communications services to customers in the Towns of Warwick, Goshen, and
Wallkill, New York and the Townships of Vernon and West Milford, New Jersey. Its
services include providing local, toll telephone service to residential and
business customers, access and billing and collection services to interexchange
carriers, Internet access and Video service.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and
its subsidiaries have been prepared in accordance with generally accepted
accounting principles in the United States of America.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in the consolidated financial
statements.
Our investments in the Orange County-Poughkeepsie Limited Partnership
and Zefcom are accounted for under the equity method of accounting. (See Note 9)
Our other investment Data Communications Group, Inc. is accounted for under the
cost method of accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts previously reported for prior periods have been
reclassified to conform to the current year presentation in the accompanying
consolidated financial statements. Such reclassifications had no effect on the
results of operations or shareholders' equity as previously recorded.
REGULATED ACCOUNTING
The Company's rates are regulated by the FCC, the New York Public
Service Commission ("NYPSC") and the New Jersey Board of Public Utilities
("NJBPU") and therefore the Company reflects the effects of the ratemaking
actions of these regulatory bodies in its financial statements. Accordingly, the
Company follows the accounting prescribed by Statement of Financial Accounting
Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of
Regulation." The Company periodically reviews the continued applicability of
SFAS No. 71 based on the current regulatory and competitive environment.
The rates that the Company charges to its customers for regulated
services were established in its 1993 rate case with the NYPSC. The Company has
not filed a rate case since that time. If the Company should submit a rate case
with the NYPSC in the future, it is uncertain as to what the outcome of the rate
case would be and how it would affect the Company's results of operations and
financial position.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") 104 "Revenue Recognition in Financial Statements". Telephone
revenues are primarily derived from usage of the Company's network and
facilities. Telephone access revenues are recognized over the period that the
corresponding services are rendered to customers. Network access revenues are
recognized over the period that the corresponding services are rendered to the
customer. Long distance revenue is recognized monthly as services are provided.
Directory advertising revenue is recorded rateably over the life of the
directory. Online services, which include DSL and Video, are recorded when
rendered. Other services and sales revenue is recognized when monthly services
are provided.
-22-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred. Advertising
and promotional expenses were $261, $344 and $207 for 2003, 2002 and 2001,
respectively.
INCOME TAXES
The Company records deferred taxes that arise from temporary
differences resulting from differences between the financial statement and tax
basis of assets and liabilities. Deferred taxes are classified as current or
non-current, depending on the classification of the assets and liabilities to
which they relate. The Company's deferred taxes result principally from
differences in depreciation and in the accounting for pensions and other
postretirement benefits. Investment tax credits are amortized as a reduction to
the provision for income taxes over the useful lives of the assets that produced
the credits.
PROPERTY, PLANT AND EQUIPMENT
The Company records property, plant and equipment at cost. Construction
costs, labor and applicable overhead related to installations and interest
during construction are capitalized. Costs of maintenance and repairs of
property, plant and equipment are charged to operating expense. The estimated
useful life of support equipment (buildings, vehicles, computers, etc.) ranges
from 2.6 to 19 years. The estimated useful lives of communication and network
equipment range from 10.5 to 15 years. The estimated useful lives of buildings
and other equipment range from 13.7 to 50 years. The calculation of depreciation
expense is computed using the straight line method. In accordance with
regulatory accounting guidelines when units of property are retired, sold or
otherwise disposed of in the ordinary course of business, the gross book value
is charged to accumulated depreciation with no gain or loss recognized.
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software
are capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects.
DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITIES
As of December 31, 2003 and 2002, the Company had no derivative
financial instrument and hedging activities.
NOTE 2: RESTATEMENT
On December 4, 1998, the NYPSC issued Cases 94-C-0095 and 28425
("Order"), which required the Company to reduce traffic sensitive access charges
to inter-exchange carriers. This Order was effective from January 1, 1999 to
present and consequently had no impact on periods prior to that date. The
Company has determined that it did not reduce traffic sensitive charges to
inter-exchange carriers during the period January 1, 1999 to March 31, 2004, as
stipulated by the Order. As a result, the Company recorded additional revenues
from inter-exchange carriers in the amount equal to the incremental difference
between the rate charged and the rate that would comply with the Order.
Accordingly, the Company has restated its financial statements for all prior
periods affected as the cumulative impact for periods prior to fiscal 2004 would
have been material if recorded in the second quarter of 2004. The Company has
restated the prior periods to reduce revenue, accrue interest, and record the
related tax impact. The following tables present the impact of the restatement.
The NYPSC has not made a final determination regarding the amount of
the Company's obligation and whether the Company will be required to make a
refund, the way any refund would be calculated or of the amount or timing of any
payments. Therefore, the ultimate amount of repayment may differ from the
current liability and such difference, if any, would be reflected in earnings in
the period of settlement.
-23-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
The impact of the restatement on the consolidated statement of income for the
years ended December 31, 2003, 2002 and 2001 was as follows:
2003 2002
--------------------------------------- ---------------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
--------------------------------------- ---------------------------------------
Operating revenues $ 28,843 $ (194) $ 28,649 $ 27,703 $ (156) $ 27,547
Operating income $ 3,371 $ (194) $ 3,177 $ 5,267 $ (156) $ 5,111
Interest expense $ (380) $ (34) $ (414) $ (318) $ (26) $ (344)
Total other income (expense) $ 8,460 $ (34) $ 8,426 $ 6,335 $ (26) $ 6,309
Income before income taxes $ 11,831 $ (228) $ 11,603 $ 11,602 $ (182) $ 11,420
Income taxes $ 3,952 $ (79) $ 3,873 $ 3,851 $ (63) $ 3,788
Net income $ 7,879 $ (149) $ 7,730 $ 7,751 $ (119) $ 7,632
Basic & diluted earnings per share $ 1.45 $ (0.02) $ 1.43 $ 1.43 $ (0.02) $ 1.41
2001
--------------------------------------
As
Previously As
Reported Adjustment Restated
--------------------------------------
Operating revenues $ 27,538 $ (120) $ 27,418
Operating income $ 6,746 $ (120) $ 6,626
Interest expense $ (355) $ (17) $ (372)
Total other income (expense) $ 4,243 $ (17) $ 4,226
Income before income taxes $ 10,989 $ (137) $ 10,852
Income taxes $ 3,665 $ (47) $ 3,618
Net income $ 7,324 $ (90) $ 7,234
Basic & diluted earnings per share $ 1.34 $ (0.01) $ 1.33
The impact of the restatement on the consolidated balance sheet for the years
ended December 31, 2003 and 2002 was as follows:
2003 2002
---------------------------------- ----------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
---------------------------------- ----------------------------------
Total current assets $11,499 $ 240 $11,739 $ 7,454 $ 161 $ 7,615
Total assets $59,493 $ 240 $59,733 $54,809 $ 161 $54,970
Total current liabilities $ 4,838 $ 917 $ 5,755 $13,124 $ 466 $13,590
Total liabilities $21,153 $ 694 $21,847 $20,098 $ 466 $20,564
Retained earnings $38,670 $ (454) $38,216 $34,597 $ (305) $34,292
Total shareholders' equity $38,340 $ (454) $37,886 $34,711 $ (305) $34,406
Total liabilities and shareholders' equity $59,493 $ 240 $59,733 $54,809 $ 161 $54,970
The impact of the restatement on the consolidated statement of cash flows for
the years ended December 31, 2003, 2002 and 2001 was as follows:
2003 2002 2001
------------------------------------ ---------------------------------- -----------------------------------
As As As
Previously As Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated Reported Adjustment Restated
----------------------------------- ---------------------------------- -----------------------------------
Net income $ 7,879 $ (149) $ 7,730 $ 7,751 $ (119) $ 7,632 $ 7,324 $ (90) $ 7,234
Deferred income tax $ 304 $ (79) $ 225 $ 1,348 $ (63) $ 1,285 $ 4 $ (47) $ (43)
Increase in accrued
access billing $ -- $ 228 $ 228 $ -- $ 182 $ 182 $ -- $ 137 $ 137
NOTE 3: IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS"
Effective January 1, 2003, the Company adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
or normal use of the assets. SFAS No. 143 requires that a liability for an asset
retirement obligation be recognized when incurred and reasonably estimable,
recorded at fair value, and classified as a liability in the balance sheet. When
the liability is initially recorded, the entity capitalizes the cost and
increases the carrying value of the related long-lived asset. The liability is
then accreted to its present value each period, and the capitalized cost is
depreciated over the estimated useful life of the related asset. At the
settlement date, the entity will settle the obligation for its recorded amount
and recognize a gain or loss upon settlement.
-24-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
The Company's rates are regulated by the FCC, NYPSC, and the NJBPU and
therefore, the Company reflects the effects of the rate making actions of these
regulatory bodies in its financial statements. On December 20, 2003, the FCC
notified by order that it would not adopt SFAS No. 143 since the FCC concluded
that SFAS No.143 conflicted with the FCC's current accounting rules that require
telephone companies to accrue for asset retirement obligations through
prescribed depreciation rates.
The Company has concluded that it does not have an asset retirement
obligation as defined by SFAS No.143. The Company historically recorded cost of
removals through depreciation rates and accumulated depreciation. In conjunction
with the adoption of SFAS No.143, the Company has reclassified $505 and $442 as
of December 31, 2003 and 2002, respectively, from accumulated depreciation to a
regulatory liability for the cost of removal that the Company has recorded
through its historical depreciation rates.
NOTE 4: EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of actual weighted shares outstanding of 5,400,873, 5,408,484 and
5,411,808 (as adjusted for the 3-for-1 stock split that occurred in October 2003
as discussed in Note 13) for the years ended December 31, 2003, 2002 and 2001.
The Company did not have any Common Share equivalents as of December
31, 2003, 2002 and 2001.
NOTE 5: COMPREHENSIVE INCOME
The Company's only component of accumulated other comprehensive income
(loss) consisted of a minimum pension liability for the years ended December 31:
2003 2002
------------------------------------
Minimum pension liability $ (767) $ (408)
Related deferred income tax 271 139
------------------------------------
Total comprehensive income $ (496) $ (269)
====================================
NOTE 6: SEGMENT INFORMATION - (RESTATED)
Warwick Valley Telephone Company's segments are strategic business
units that offer different products and services and are managed as telephone
and online services. We evaluate the performance of the segments based upon
factors such as revenue growth, expense containment, market share and operating
income.
The telephone segment provides landline telecommunications services,
including local, network access, long distance services and messaging, 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.
-25-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
Segment information for the years ended December 31:
2003 2002 2001
--------------------------------------------------
(Restated) (Restated) (Restated)
Revenues
Telephone $ 23,892 $ 23,601 $ 22,914
Online 6,699 6,330 6,389
Eliminations (1,942) (2,384) (1,885)
--------------------------------------------------
Total revenues $ 28,649 $ 27,547 $ 27,418
Operating income
Telephone 3,845 5,115 5,405
Online (668) (4) 1,221
--------------------------------------------------
Total operating income $ 3,177 $ 5,111 $ 6,626
Interest expense and income (414) (344) (372)
Income from equity method investments 8,846 6,733 4,606
Other income (expense) (6) (80) (8)
--------------------------------------------------
Income before taxes $ 11,603 $ 11,420 $ 10,852
==================================================
Segment balance sheet information for the years ended December 31:
2003 2002
-----------------------------------------
Assets (Restated) (Restated)
Telephone $ 62,825 $ 57,327
Online 9,883 7,914
Eliminations (12,975) (10,271)
-----------------------------------------
Total assets $ 59,733 $ 54,970
=========================================
No single customer accounts for 10% or more of the Company's total
revenues.
NOTE 7: MATERIAL AND SUPPLIES
Material and supplies are carried at average cost. As of December 31,
2003 and 2002, material and supplies consisted of the following:
2003 2002
------------------------------------
Inventory for outside plant $ 231 $ 330
Inventory for inside plant 472 650
Inventory for online plant 90 257
Inventory of video equipment 283 56
Inventory of equipment held for sale or lease 77 175
------------------------------------
$ 1,153 $ 1,468
====================================
-26-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following for
the years ended December 31:
2003 2002
-------------------------------------
Land, buildings and other support equipment $ 7,518 $ 7,714
Network and communications plant 27,273 26,115
Telephone plant 23,747 21,671
Online plant 9,513 7,858
-------------------------------------
Plant in service $ 68,051 $ 63,358
Plant under construction 1,467 1,974
-------------------------------------
69,518 65,332
Less: Accumulated depreciation 28,196 25,385
-------------------------------------
Property, plant and equipment, net $ 41,322 $ 39,947
=====================================
NOTE 9: INVESTMENTS
Investments consisted of the following as of December 31:
2003 2002
----------------------------------
Investment in O-P Partnership $ 3,729 $ 4,775
Investment in Data Communications Group, Inc. 1,038 1,000
Investment in Zefcom 536 770
-------------- -----------------
$ 5,303 $ 6,545
============== =================
The Company is a limited partner in Orange County-Poughkeepsie Limited
Partnership (O-P) and has a 7.5% investment interest which is accounted for
under the equity method of accounting. The majority owner and general partner is
Verizon Wireless of the East L.P.
The following summarizes O-P's income statement for the years ended
December 31:
<Table>
<Caption>
2003 2002
-------------------------------------
Net sales $ 144,643 $ 114,591
Cellular service cost 17,248 11,652
Operating expenses 7,302 7,125
-------------------------------------
Operating income 120,093 95,814
Other income 1,475 1,555
-------------------------------------
Net income $ 121,568 $ 97,369
Company share of 7.5% 9,117 7,303
====================================
</Table>
-27-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
The following summarizes O-P's balance sheet for the years ended
December 31:
2003 2002
--------------------------------------
Current assets $ 20,753 $ 35,157
Property, plant and equipment, net 29,622 29,473
Deferred charges and other assets, net 1 2
--------------------------------------
Total assets $ 50,376 $ 64,632
--------------------------------------
Current liabilities 658 1,482
Partners' capital 49,718 63,150
--------------------------------------
Total liabilities and partners' capital $ 50,376 $ 64,632
======================================
The Company has an 8.9% ownership interest in Data Communications
Group, Inc. Data Communications Group, Inc. is a competitive telecommunications
company that offers high-speed bandwidth throughout the region of Orange,
Dutchess and Ulster counties.
The Company has a 17% ownership interest in Zefcom. This investment has
historically been recorded on the cost method of accounting. Zefcom formed an
Executive Operating Committee (the "Operating Committee") consisting of
representatives from three of the investors in Zefcom. The Operating Committee's
responsibilities are to assist management, as necessary, in relations with
consultants and prospective investors and in matters of finance. As such, the
Operating Committee exerts significant influence over the financial and
operating decisions of Zefcom.
The Company's Chief Executive Officer was elected to this committee.
Accordingly, the Company, through its representation on this Operating
Committee, began exerting significant influence over the financial and operating
decisions of Zefcom in the fourth quarter of 2003. As a result of this change,
the Company changed its accounting for the Zefcom investment from the cost
method to the equity method of accounting.
In accordance with generally accepted accounting principles, the
Company has adjusted its prior period financial results to record its 17%
investment in Zefcom as if it had been accounted for under the equity method of
accounting. For the fiscal years ended December 31, 2002 and 2001 the net effect
of the change was to decrease net income by $546 or $0.10 per basic and diluted
share and $248 or $0.05 per basic and diluted share, respectively. The effect of
the change on the December 31, 2002 balance sheet was to reduce investments by
$1,231.
NOTE 10: DEBT OBLIGATIONS
Debt obligations consisted of the following at December 31:
2003 2002
--------------------------------
Notes payable $ 0 $ 5,000
Current maturing long-term debt -7.05%
Series "J" First Mortgage Bond 4,000
Current maturing long-term debt - CoBank 223 0
CoBank, ACB unsecured credit facility 6,926 0
--------------------------------
Total debt obligation $ 7,149 $ 9,000
================================
The Company has an unsecured line of credit in the amount of $4,000
with the Warwick Savings Bank, which expires in June 2004. 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,
2003 and 2002, respectively, was $4,000 of which the Company had no outstanding
balance at December 31, 2003. At December 31, 2002 the Company also had an
outstanding line of credit with the Bank of New York in the amount of $5,000, as
noted below, this debt was paid in full in February 2003.
-28-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
On February 18, 2003, the Company closed a commitment with CoBank, ACB
with respect to an $18,475 unsecured term credit facility at a variable rate.
The commitment commenced on February 18, 2003 and continues in effect until all
indebtedness and obligations of the Company ("Borrower"), including all
supplements, notes and other loan documents shall have been paid or satisfied,
or until CoBank has no further commitment to extend credit to or for the account
of the Borrower, or until either party sends written notice to the other
terminating the agreement. The unpaid principal balance accrues interest at an
interest rate determined or selected by the Borrower. The Borrower may select a
variable rate option, a long-term fixed rate option or a LIBOR option. The
average interest rate on borrowings for the period February 18 through December
31, 2003 was approximately 3%. Interest is paid quarterly each January, April,
June and October. The Company also pays a commitment fee each quarter,
calculated as 0.375% per annum on the average daily unused portion of the
commitment. The outstanding principal is repaid in 32 consecutive quarterly
installments starting in October 2004, with the last such installment due in
July 2012, the (Maturity Date). On the Maturity Date, the amount of then unpaid
principal plus accrued interest and fees is due in full. Under conditions set by
the New York State Public Service Commission, the Company was allowed to use a
portion of the proceeds from this loan to refinance $4,000 of existing long-term
debt and repay $3,000 under an existing line of credit. The Company may use the
remaining amount available under the facility - $11,475 - to finance capital
expenditures and pay expenses and fees associated with borrowings made under the
facility. The Company may also re-borrow amounts repaid under the facility which
will remain available to the Company until September 30, 2004. In February 2003,
the Company used $3,149 of the credit facility funds to pay off an existing
$3,000 line of credit, plus accrued interest, and closing costs associated with
the facility. The Company made an additional draw to repay $4,000 in long-term
debt that matured in December 2003.
NOTE 11: INCOME TAXES - (RESTATED)
The federal and state components of the provision for income taxes are presented
in the following table:
For the Years Ended December 31,
2003 2002 2001
----------------------------------------
(Restated) (Restated) (Restated)
Provision for income tax:
Current:
Federal $ 3,342 $ 3,001 $ 3,713
State and local 156 0 0
----------------------------------------
3,498 3,001 3,713
Deferred:
Federal $ 358 $ 787 $ (95)
State 17 0 0
----------------------------------------
375 787 (95)
----------------------------------------
Provision for income taxes $ 3,873 $ 3,788 $ 3,618
========================================
Deferred income tax liabilities are taxes the Company expects to pay in
future periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax basis of certain assets and
liabilities.
-29-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
Deferred income tax liabilities and assets consist of the following:
At December 31,
2003 2002
--------------------------------------
(Restated) (Restated)
Deferred income tax assets:
Employee pensions and other benefits $ 1,654 $ 900
Other 452 424
--------------------------------------
Total deferred income tax assets 2,106 1,324
Deferred income tax liabilities:
Property, plant and equipment 5,579 4,723
Other 151 0
--------------------------------------
Total deferred income tax liabilities 5,730 4,723
--------------------------------------
Net deferred income tax liability $ 3,624 $ 3,399
======================================
The deferred tax asset related to employee pension includes amounts
recorded for the years ended December 31, 2003 and 2002 of $271 and $139,
respectively, to reflect the tax impact of the minimum pension liability
recorded in other comprehensive income.
NOTE 12: PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has two defined benefit pension plans covering all management and
non-management employees who are at least 21 years of age have completed one
year of service and, for the non-management plan, have been hired before May 1,
2003. Benefits are based on years of service and the average of the employee's
three highest consecutive years' base compensation. The Company's policy is to
fund the minimum required contribution disregarding any credit balance arising
from excess amounts contributed in the past. Per regulatory requirements, the
company deferred $483, $128 and $75 for 2003, 2002 and 2001, respectively. The
amounts expensed were $1,154, $435 and $370 for the years ended December 31,
2003, 2002, and 2001, 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 the stock market and
a money market fund. The Company uses an annual measurement date of December 31
for all of its benefit plans.
The components of the pension and postretirement expense (credit) were
as follows for the years ended December 31:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
2003 2002 2001 2003 2002 2001
-------------------------------------------------------------------------
Components of Net
Periodic Costs
Service cost $ 420 $ 397 $ 334 $ 161 $ 136 $ 77
Interest cost 862 878 788 278 255 154
Expected return on plan assets (612) (810) (915) (85) (101) 0
Amortization of transition asset 0 0 53 51 52 52
Amortization of prior service cost 127 132 69 (20) (20) (20)
Recognized actuarial (gain) loss 142 (34) (205) 179 155 28
Special termination benefits 675 0 321 0 0 (102)
Net curtailment loss (gain) 23 0 0 0 0 0
-------------------------------------------------------------------------
Net periodic (income) cost $ 1,637 $ 563 $ 445 $ 564 $ 477 $ 189
=========================================================================
-30-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
The following table presents a summary of the projected benefit
obligation and plan assets of the plans at December 31:
<Table>
<Caption>
Postretirement
Pension Benefits Benefits
Change In Benefit Obligations 2003 2002 2003 2002
---------------------------------------------------
Benefit obligation, beginning of year $ 13,704 $ 12,688 $ 4,166 $ 2,344
Benefits earned 420 392 160 136
Interest cost 862 877 278 255
Actuarial losses 658 1,044 478 1,515
Benefit payments (2,514) (1,297) (71) (84)
Special termination (credits) benefits 675 0 0 0
Curtailment losses (548) 0 0 0
---------------------------------------------------
Benefit obligation, end of year $ 13,257 $ 13,704 $ 5,011 $ 4,166
===================================================
Changes In Fair Value of Plan Assets
Fair value of plan assets, beginning
of year $ 8,896 $ 10,853 $ 1,204 $ 1,259
Actual return on plan 1,086 (661) 123 (60)
Employer contributions 370 0 222 89
Benefits payments (2,514) (1,296) (71) (84)
---------------------------------------------------
Fair value of plan assets, end of year $ 7,838 $ 8,896 $ 1,478 $ 1,204
===================================================
At December 31,
Funded (unfunded benefit obligation) $ (5,419) $ (4,810) $ (3,533) $ (2,962)
Unrecognized net loss (gain) 2,123 2,630 2,573 2,312
Unrecognized transition asset 0 0 463 516
Unrecognized prior service cost (credits) 744 894 (305) (326)
---------------------------------------------------
Prepaid (accrued) benefit cost $ (2,552) $ (1,286) $ (802) $ (460)
===================================================
</Table>
The following table provides the amounts recorded in our Consolidated Balance
Sheets:
<Table>
<Caption>
Postretirement
Pension Benefits Benefits
At December 31, 2003 2002 2003 2002
---------------------------------------------------
Accrued benefit cost $(4,471) $(2,525) $ (802) $ (460)
Intangible asset 744 831 0 0
Accumulated other comprehensive loss 1,175 408 0 0
---------------------------------------------------
Net amount recognized $(2,552) $(1,286) $ (802) $ (460)
===================================================
</Table>
-31-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
Actuarial assumptions used to calculate the projected benefit obligation were as
follows for the years ended December 31:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
2003 2002 2003 2002
--------------------------------------------------------------------------
Discount rate 6.25% 6.75% 6.25% 6.75%
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% 9.00 - 11.00%
</Table>
Actuarial assumptions used to calculate net periodic benefit cost were
as follows for the years ended December 31:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
2003 2002 2003 2002
--------------------------------------------------------------------------
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increase 5.50% 5.50% --- ---
</Table>
The rate of return assumption, currently 8%, estimates the portion of
plan benefits that will be derived from investment return and the portion that
will come directly from Company contributions. Accordingly, the Company,
utilizing the investment strategy described below, strives to maintain an
investment portfolio that generates annual returns from funds invested
consistent with achieving the projected long-term rate of return required for
plan assets.
The Company's pension plans had an unfunded accumulated benefit
obligation of $4,471 as of December 31, 2003. The accumulated benefit obligation
of $12,309 at December 31, 2003 was in excess of the fair value of plan assets
of $7,838.
The Company's postretirement plans had an unfunded accumulated benefit
obligation of $3,533 as of December 31, 2003. The accumulated benefit obligation
of $5,011 at December 31, 2003 was in excess of plan assets by $1,478.
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, 2003. The effect of this
adjustment was a decrease in intangible assets of $87, an increase in the
pension liability of $679 and a charge to comprehensive income (loss) for
$767(as discussed in Note 2). 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. 2003 pension expense was also impacted by
special termination benefits totaling $596 provided under an early retirement
program as well as the $79 associated with the freezing of the non-management
pension plan in 2003.
The large increase in expense in 2003 for the postretirement health
benefits was due to the continued increase in the health care trend rate and
also due to a lower discount rate. These changes reflect current market
conditions regarding current market interest rates.
The health care cost trend rate remained the same at 9.0% in 2003 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. The Company's most recent actuarial
calculation anticipates that this trend will continue on into 2004. 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,
2003 approximately to $894 and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by approximately
$88. A 1.0% decrease in the health care cost trend rate would decrease these
components to approximately $721 and by approximately $70, respectively.
-32-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
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 2003 the Company made a matching contribution up to 9.0%
of an eligible participant's compensation for management, clerical and plant
employees. The Company contributed and expensed $466, $403 and $433 for the
years ended December 31, 2003, 2002, and 2001, respectively.
The Company has deferred compensation agreements in place for certain
former 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 $346 and $345 as of
December 31, 2003 and 2002, respectively.
PLAN ASSETS
The pension plan weighted average asset allocations at December 31, 2003
and 2002 by assets category are as follows:
<Table>
<Caption>
Plan Assets
at December 31,
2003 2002
---------------------------
Equity securities 71% 60%
Debt securities 24% 29%
Short term investments 5% 11%
---------------------------
Total 100% 100%
===========================
</Table>
The postretirement benefit plan weighted average asset allocations at
December 31, 2003 and 2002, by assets category are as follows:
<Table>
<Caption>
Plan Assets
at December 31,
2003 2002
---------------------------
Equity securities 72% 70%
Short term investments 28% 30%
---------------------------
Total 100% 100%
===========================
</Table>
In accordance with its contribution policy, the Company expects to
contribute $918 to its pension plan and $222 to its postretirement plan in 2004.
The investment policy followed by the Pension Plan Manager can be
described as an "Adaptive" approach that is essentially structured towards
achieving a compromise between the static long-term approach and the short-term
opportunism of the dynamic or tactical approaches. The objective is to modify
asset allocations based on changing economic and financial market conditions so
as to capture the major position of excess returns and then shift the priority
to risk containment after valuations become stretched.
NOTE 13. SHAREHOLDERS' EQUITY
The Company has 10,000,000 authorized Common shares at $0.01 Par value;
5,000 authorized Preferred shares at $100 Par value authorized; and 10,000,000
authorized Preferred shares at $0.01 Par value.
On April 25, 2003, the Company announced a three-for-one stock split of
the Company's Common shares. Approval for the stock split was received by both
the New York State Public Service Commission and the New Jersey Board of Public
Utilities on October 6, 2003, and the shares were made available on October 13,
2003. Also, the Common shares were changed from no par value to par value, $0.01
per share. As a result, the Common share amounts in Shareholders' Equity for the
years ended December 31, 2003, 2002 and 2001 have been restated to reflect the
stock split. Also, additional paid-in capital, in the amounts of $3,473, $3,421
and $3,411 for the years ended
-33-
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
December 31, 2003, 2002 and 2001, respectively, was recorded as a result of
these events. In addition, earnings per share amounts for the years ended
December 31, 2003, 2002 and 2001 have been restated for the stock split.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company currently has an operating lease to rent space on a tower to
transmit video content from its head end facility. In addition the Company
leases vehicles for operations as well as office space in Vernon, New Jersey.
Total rent expenses associated with these leases was $118 in 2003 and $77 in
2002.
The future aggregate commitment for minimum rentals as of December 31,
2003 is as follows:
<Table>
2004 $159
2005 $163
2006 $155
------
Total $477
======
</Table>
NOTE 15. RELATED PARTY TRANSACTIONS
The Company paid approximately $294, $494 and $323 during 2003, 2002,
and 2001 to John W. Sanford & Son, Inc., whose President and Chief Operating
Officer is the brother of Corinna S. Lewis, a Director of the Company. These
amounts were paid as premiums on various insurance policies maintained by the
Company. The portion of these amounts that represents a commission to John W.
Sanford & Son, Inc. was less than $200. The Company believes that the
transactions with John W. Sanford & Son, Inc. are on as favorable terms as those
available from unaffiliated third parties.
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.
NOTE 16. QUARTERLY INFORMATION (UNAUDITED) - (RESTATED)
<Table>
<Caption>
Fiscal Year Quarters
First Second Third Fourth Total
Year ended December 31, 2003
Revenue $ 7,096 $ 7,142 $ 7,372 $ 7,039 $ 28,649
Operating income 1,194 639 1,103 241 3,177
Net income 1,958 1,926 2,285 1,710 7,879
Adjustment for Zefcom (31) (41) (36) (41) (149)
Net income 1,927 1,885 2,249 1,669 7,730
Earnings per share .36 .35 .41 .31 1.43
Year ended December 31, 2002
Revenue $ 6,546 $ 6,599 $ 6,956 $ 7,446 $ 27,547
Operating income 1,292 1,173 1,497 1,149 5,111
Net income 1,767 2,157 2,171 2,083 8,178
Adjustment for Zefcom (126) (189) (135) (96) (546)
Net income 1,641 1,968 2,036 1,987 7,632
Earnings per share .30 .36 .38 .37 1.41
</Table>
As discussed in Note 13 earnings per share amounts have been restated
for the Company stock split. Additionally these amounts have been restated as
discussed in Note 2 and have been adjusted for the Company's change from the
cost to equity method of accounting for its investment in Zefcom as discussed in
Note 9.
-34-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
on Consolidated Financial Statement Schedule
To the Board of Directors
of Warwick Valley Telephone Company
Our audit of the consolidated financial statements referred to in our report
dated March 24, 2004 except for Note 2 as to which the date is July 1, 2004,
also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K/A. In our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 24, 2004, except for Note 2 as to which the date is July 1, 2004
-35-
WARWICK VALLEY TELEPHONE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
($ 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 2003 $ 428 $ 146 $ 102 $ 168 $ 508
Year 2002 $ 65 $ 465 $ 42 $ 144 $ 428
Year 2001 $ 65 $ 98 $ 106 $ 204 $ 65
</Table>
(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.
-36-
WARWICK VALLEY TELEPHONE COMPANY
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
3(a) Articles of Incorporation, as amended *
3(b) By-Laws *
4(a) Form of Common Shares Certificate, as amended *
4(b) CoBank Loan Agreement *
14 Warwick Valley Telephone Company Code *
Of Ethics
21 Significant Subsidiaries of Registrant *
23.1 Consent of Independent Auditors 38
Bush & Germain, PC
23.2 Consent of Independent Registered Public Accounting Firm 39
Deloitte & Touche LLP
23.3 Consent of Independent Registered Public Accounting Firm 40
PricewaterhouseCoopers LLP
24 Orange County-Poughkeepsie Limited Partnership *
Financial Statements as of December 31, 2003
and 2002 and for the years ended December 31,
2003, 2002 and 2001
31.1 Certification signed by Herbert Gariess, Jr. 41
Chief Executive Officer
31.2 Certification signed by Kevin J. Kerr 42
Principal Accounting Officer
32.1 Certification pursuant to 18 U.S.C. Section 43
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 signed
by Herbert Gareiss, Jr.-Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 44
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 signed
by Kevin J. Kerr-Principal Accounting Officer.
* As previously filed
-37-