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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
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
----------------------------- -------------------
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 [ ]
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 [ ].
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
ITEM PAGE
PART I
1 Business 3
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
7A. Quantitative and Qualitative Disclosures about Market Risk 15
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16
9A. Controls and Procedures 16
PART III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 17
12. Security Ownership of Certain Beneficial Owners and Management 17
13. Certain Relationships and Related Transactions 17
14. Principal Accountant Fees and Services 17
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
Signatures 22
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PART I.
ITEM 1. BUSINESS.
GENERAL
Warwick Valley Telephone Company (the "Company") was incorporated in
New York on January 16, 1902 and is qualified to do business as a foreign
corporation in New Jersey. The Company's executive offices are located at 47
Main Street, Warwick, New York 10990 (Tel. No. 845-986-8080). The Company's
10-K, 10-Qs, 8-Ks and amendments are available on the Company's website
HTTP://wvtc.com as soon as reasonably practical after filing with the Securities
Exchange Commission. (This web site address is for information only and is not
intended to be an active link or to incorporate any web site information into
this document.)
The Company provides telephone service to customers (29,602 access
lines) in the contiguous towns of Warwick, Goshen and Wallkill, New York, and
the townships of West Milford and Vernon, New Jersey. The Company's service area
is primarily rural and has an estimated population of 50,000.
The presentation of dollar amounts in the Company's 10-K are in
thousands.
BUSINESS OPERATIONS
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.
OPERATING SEGMENTS
TELEPHONE
The telephone segment provides landline telecommunications services
including local, network access, long distance services, messaging and directory
services.
SERVICES AND PRODUCTS
Local network services - Local network services include traditional
dial tone primarily used to make or to receive voice, fax or analog
modem calls from a residence or business. The Company's local exchange
services are regulated by the Federal Communication Commission ("FCC"),
New York State Public Service Commission ("NYSPSC") and New Jersey
Board of Public Utilities ("NJBPU"). Included under local exchange
services are custom calling services, such as Caller ID, Call Waiting,
Voice Mail and other enhanced services. These features allow users to
enable their local services with enhanced features such as displaying
the number and/or name of callers, signaling to the telephone user that
additional calls are coming and sending and receiving voice messages.
The sale of telephone and other equipment does not constitute a
material part of the Company's business and is contained within local
exchange services.
Network access services - Network access services connect a customer's
telephone or other equipment to the transmission facilities of other
carriers that provide long distance and other communications services.
Long distance services - These services result from the transport of
intraLATA telecommunications traffic that is outside of a local calling
area. We also provide wireline interLATA long distance (or commonly
known as traditional long distance service) to our customers.
Directory services - Our directory service group publishes yellow and
white page directories and sells advertising in these directories.
Other services and sales -These services relate to billing and
collections provided to other carriers, inside wire revenue, circuit
revenue and reciprocal compensation.
The Company has installed advanced digital switching equipment in all
of its exchanges and fiber optic routes between central offices and to all
neighboring telephone companies and the Company is considering the construction
of fiber optic routes in our Competitive Local Exchange Carrier ("CLEC")
locations.
Within the telephone business unit, the Company has a wholly-owned
subsidiary - Warwick Valley Long Distance, Inc. ("WVLD"). WVLD resells toll
telephone services to the Company's subscribers and has operated since 1993.
WVLD operates in an extremely competitive marketplace with other interexchange
carriers. In spite of this competition, the Company offers toll service to 41.3%
of its local exchange customers. During the past year, the
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Company has revised its long distance plans in order to keep it competitive with
the other interexchange carriers. Since offering the new plans, WVLD has added a
net of 187 new customers.
The Company began operating as a competitive local exchange carrier
("CLEC") in Middletown, New York in 1999, in Scotchtown, New York in 2001 and
Vernon, New Jersey in 2002. At the end of 2003, the customer base of our CLEC
was 1,699 customers, an increase of 17% from 2002 levels of 1,454. In addition,
broadband services are provided through the interconnection of the Company's
fiber optic network with Data Communications Group, Inc. ("DataNet"), and
Northeast Optical Networks.
ONLINE
The Warwick Online ("Online") segment provides high speed and dial-up
Internet services, help desk operations, and Video over VDSL.
SERVICES AND PRODUCTS
Internet/Video services -UltraLink (high speed DSL) and dial-up
Internet service allows customers access to the Internet. In addition,
the Company provides a digital TV ("Video") product that also falls
within this category.
During 2003 Online continued the successful sale of UltraLink. At
December 31, 2003 there were 5,119 UltraLink customers, a gain of 1,717 or 50%
over 2002. Our DSL coverage (95% availability) and penetration levels (27.5% of
establishments passed) are among the best in the nation when compared to the
regional Bell companies and other independent telephone companies. Online ended
the year with a total of 12,838 dial-up customers resulting in a reduction of
4,190 in comparison to year-end 2002. This reduction arises largely from
customer migration from dial-up to high-speed interconnections (DSL and cable
modem), primarily in areas where Online is unable to provide UltraLink.
Online's Video product, introduced in 2002, added 1,063 new customers
in 2003. Additional aggressive marketing is planned for 2004. The acceptance of
the Video product by our customers is a very important component of the
Company's overall strategic plan. It enables the Company to bundle voice, Video
and data, the "Triple Play", to its customers. The Company's Video product
offers over 140 digital channels at competitive prices; customer questions are
answered by a locally staffed help desk. Help desk services are marketed to
other small telephone companies who are interested in reducing costs through
effective outsourcing. Additional products offered by Online include banner
advertising, domain name registration, web hosting and small business network
installations.
OTHER
The Company owns a 7.5% limited partnership interest in the Orange
County - Poughkeepsie Limited Partnership ("O-P"). Verizon Wireless of the East,
L.P. ("Verizon") is the general partner and the majority owner with an 85%
interest. O-P provides wholesale cellular telephone service throughout the
Orange County-Poughkeepsie Metropolitan Service Area. Ongoing cash distributions
are made according to the needs of the business as determined by Verizon. Cash
distributions from O-P are used to fund expenditures in the Company's business
segments as well as to pay portions of the dividend on Common Shares to our
shareholders.
The Company owns an 8.9% share of Data Communications Group, Inc.
DataNet was formed in 2000 to build, market, and provide affordable, high speed,
broadband fiber optic data communication services throughout New York State.
DataNet provides world class data communication technologies to small markets.
It offers services to educational, commercial, non-profit, and government
entities. Companies improve their data communication services, increase access
capabilities to the Internet and reduce costs by using DataNet's
state-of-the-art fiber optic networks. DataNet engineers, builds, owns and
operates its network. The Company exercised all of its granted options to
purchase 25,000 additional shares of DataNet on December 30, 2003. DataNet is on
track with its business plan and experienced strong growth both in revenues and
profits during 2003.
The Company also owns 17% of Zefcom, LLC, d.b.a. Telispire, a
consortium of small telephone companies that resells Sprint PCS under private
label. Zefcom is currently redesigning its business strategy by aggressively
marketing to large and small local exchange carriers. Recently, Zefcom has
received additional funding and has signed two new contracts which will
accelerate the addition of new customers. In addition, Zefcom is pursuing
another major wireless provider to resell its products in areas that Sprint PCS
does not have wireless coverage. The Company is closely monitoring the business
progress that is being made by Zefcom and has recently taken an active role in
managing Zefcom's affairs through participation on an Executive Operating
Committee.
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MAJOR CUSTOMERS
No customer accounted for more than 10% of our consolidated revenues in
2003, 2002, and 2001.
COMPETITION
The Telecommunications Act of 1996 (the "Act") created a nationwide
structure in which competition is allowed and encouraged between local exchange
carriers, interexchange carriers, competitive access providers, cable TV
companies and other entities. The first markets of the Company that were
affected were those in which regional toll service is provided in both states.
Regional toll competition reduced the Company's revenues. The Company itself can
provide competitive local exchange telephone service outside its franchised
territory.
The Company currently provides access to the national and international
calling markets as well as intrastate calling markets through all interested
inter-exchange carriers, including WVLD. Equal access ("one-plus") service to
all toll carriers has been available to the Company's customers since August 1,
1991. Access to the remainder of the intrastate calling markets is provided by
the Company as well as other exchange carriers. WVLD, as an inter-exchange
carrier, competes against all such other carriers, including accelerating
wireless competition, providing full toll services to its customers at
discounted rates.
The Company's territory is surrounded by the territories of Verizon
Communications, Inc., Frontier - A Citizen's Communications Company - and
Sprint-United Telephone, all of which offer residential and business telephone
equipment. There are also several competitive telephone companies located within
a 30-mile radius of Warwick, New York and Voice Over Internet Protocol ("VOIP")
providers are beginning to offer limited service. The Company's residential
customers can purchase telephone sets (including cellular sets) and equipment at
other retail outlets inside and outside the Company's territory and not
affiliated with the Company.
The Company is currently competing with Frontier - A Citizen's
Communications Company - in the Middletown, New York area as well as
Sprint-United Telephone in the Vernon, New Jersey area for local service through
access lines. The Company is reviewing plans to provide limited service in other
surrounding areas in both New York and New Jersey. There can be no assurances
that the Company will affect any such additional plans, or that other companies
will not begin providing competitive local exchange telephone service in the
Company's franchise territory. Cablevision is currently rolling out a VOIP in
Bethpage, New York and has launched a VOIP product in New Jersey.
Online competes both on the basis of service and price. There are
numerous competitors throughout Online's market area whose services are
available to customers. During 2003, UltraLink has increased its penetration
level to 27.5% of establishments passed. Conversely, the number of customers for
Online's dial-up product decreased 24.6% due to the migration of customers to
high speed Internet provided not only by the Company itself but also by the
competition primarily outside of our service territory. Whether customer and
pricing levels can be maintained depends, in part, on the actions of existing
competitors, the possible entry into the market of new competitors, the rate of
technological change and the level of demand for services.
In addition, our Video product was launched in April of 2002 and is
competing against entrenched cable companies including Service Electric Company
("SEC"), Cablevision and satellite TV companies such as Direct TV and Dish
Network.
On November 10, 2003 the FCC issued an order requiring intermodal
portability (wireline to wireless) in the top one hundred Metropolitan Service
Areas ("MSA") by November 23, 2004 where the requesting wireless carrier's
"coverage area" overlaps that of the local exchange carrier. The Company must
provide intermodal Local Number Portability ("LNP") by May 24, 2004. LNP may
assist a competitor in obtaining our customers because customers can keep their
current telephone number, even when they switch their telephone service from the
Company to another carrier. As of the end of the year, LNP had not posed a
significant competitive risk within the Company's service territory.
REGULATION
The Company's New York telephone service operations are subject to the
jurisdiction of the NYSPSC, and the Company's New Jersey telephone service
operations to the jurisdiction of the NJBPU. These two bodies have regulatory
authority over the Company with respect to rates, facilities, services, reports,
issuance of securities and other matters such as corporate restructuring. As a
result, the Company's ability to respond quickly to changing market conditions
or to implement a new business organization can be limited by the necessity of
obtaining regulatory reviews or responding to interrogatories which can slow
down or even prevent the desired transaction. Interstate toll and access
services are subject to the jurisdiction of the FCC. The Company receives
reimbursement from carriers in the form of
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charges for providing carriers access to and from the Company's local network.
Video operations are also under the jurisdiction of the NYSPSC, the NJBPU, and
the FCC as well as the municipalities where the Company provides services.
Pursuant to FCC requirements, the Company was obligated to make
contributions to a long-term support fund of the National Exchange Carrier
Association. On January 1, 1998, a new funding mechanism went into effect,
pursuant to which all carriers contribute to a Universal Service Fund ("USF")
established by the FCC to cover high cost areas, low income customers, schools,
libraries and rural health care providers. The Company's obligation to this fund
for the year ended December 31, 2003 was $246. Management does not currently
expect that the amount contributed by the Company will change significantly.
Also as of January 1, 1998, the Company began receiving substantial
funds from the Universal Service Administration Corporation ("USAC"). As a
result of the FCC order establishing the USF, all local exchange carriers were
required to reduce access charges billed to toll carriers. To offset this
revenue reduction, the high cost portion of the USF provides payments monthly to
carriers satisfying the characteristics set forth in the order. The Company
meets those characteristics and received $2,337 during 2003.
In the Company's two New Jersey exchanges, intrastate toll revenues are
retained by toll carriers, of which the Company is one. The associated access
charges are retained by the Company. Revenues resulting from traffic between the
Company, Verizon and Sprint are adjusted by charges payable to each company for
terminating traffic.
In addition to charging for access to and from the Company's local
network, the Company bills and collects charges for most interstate and
intrastate toll messages carried on its facilities. Interstate billing and
collection services provided by the Company are not regulated. They are provided
under contract by the Company. Intrastate billing and collection remain partly
regulated in New York and fully regulated in New Jersey. The regulated services
are provided under tariff. Some carriers provide their own billing and
collection services.
The Company has filed a petition with the NYSPSC seeking approval to
reorganize its corporate structure in order to create a holding company that
would separate its regulated local exchange operations from its deregulated
operations. Under this reorganization plan, corporate management and
administrative functions would remain at Warwick Valley Telephone Company,
proposed to be renamed WVT Communications Inc., which would become the
unregulated holding company of a regulated local exchange subsidiary (proposed
to be named Warwick Valley Telephone Company) and other, unregulated
subsidiaries. Before the Company may complete this proposed reorganization plan,
it must first obtain the approval of the NYSPSC, the NJBPU and its shareholders.
The Company is actively pursuing the resolution of this petition before the two
public service commissions.
On February 19, 2003 the Company's Board of Directors resolved to
restate and amend the Company's Certificate of Incorporation. All restatements
and amendments were approved by required percentages of the Company's
outstanding Common and Preferred Shares at the Annual Meeting of the Company's
shareholders held on April 25, 2003, including the split of the Company's Common
Shares in a ratio of three for one. Petitions filed with the NYSPSC and the
NJBPU regarding the issuance of additional shares for the stock split were
approved. The new Certificate of Incorporation was filed with the Secretary of
State of the State of New York and the split took place on October 6, 2003.
Certificates for the new shares were made available on October 13, 2003.
The FCC has pending decisions regarding the USF and inter-carrier
compensation issues. The sustainability of the USF and the requirement that VOIP
providers participate in funding Rural Carriers will affect and influence
decisions to invest in new facilities. The same considerations apply to the
continuation of inter-carrier compensation, or access charges, which is another
element in the financial health of rural telephone companies. The FCC will be
acting on these issues in 2004.
IMPACT OF INFLATION
Although inflation has slowed in recent years, it is still a factor in
our economy and the Company continues to seek ways to mitigate its impact. To
the extent permitted by competition or regulation, the Company passes increased
costs on to its customers by increasing sales prices over time.
EMPLOYEES
As of March 5, 2004 the Company had 109 full-time and 13 part-time
employees, including 82 non-management employees. 78 (68 full-time and 10
part-time) employees are represented by Local 503 of the International
Brotherhood of Electrical Workers ("IBEW"). The Company negotiated a new 5 year
agreement with its union members on May 1, 2003. Key provisions of the new
contract were: annual wage increases of 3.0% which began on May 1, 2003 and will
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increase to 3.5% as of May 1, 2007; the capping of pension benefits; and
increasing the Company's 401(k) match to 9% of gross wages for all employees
hired prior to May 1, 2003.
During the first quarter of 2003, the Company offered an early
retirement package to certain eligible employees. Acceptance of this package by
six employees resulted in $2,028 being disbursed to these individuals.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others the
following: general economic and business conditions, both nationally and in the
geographic regions in which the Company operates; industry capacity; demographic
changes; existing governmental regulations and changes in or the failure to
comply with, governmental regulations; legislative proposals relating to the
businesses in which the Company operates; competition; or the loss of any
significant ability to attract and retain qualified personnel. Given these
uncertainties, current and prospective investors should be cautioned in their
reliance on such forward-looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce the results of
any revision to any of the forward-looking statements contained herein to
reflect future events or developments.
ITEM 2. PROPERTIES.
The Company owns an approximately 22,000 square-foot building in
Warwick, New York, which houses its general offices, data processing equipment
and the central office switch for the Warwick exchange. In addition, the Company
owns several smaller buildings which serve as workshops, storage space or
garages or which house switching equipment at the Company's other exchanges. The
Company also owns a building at 24 John Street in Middletown, New York in order
to support its expanded dial tone operations in its Middletown exchange. The
Company rents store space located at 16 West Street in Warwick, New York and
Guthrie Drive on Route 515 in Vernon, New Jersey. Both business segments share
space in the Company's various properties. Of the Company's investment in
telephone plant in service, central office equipment represents approximately
37.5%; connecting lines and related equipment 35.0%; telephone instruments and
related equipment 2.6%; land and buildings 4.4%; Internet equipment 7.4%; video
equipment 6.5%; and other plant equipment 6.6%.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently party to, nor is any of its property
subject to, any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of shareholders in the fourth quarter
of 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following is a list of names, ages and background of our current
executive officers:
M. Lynn Pike, 57, is President, Chief Executive Officer and Director of
Warwick Valley Telephone Company. Pike joined the Company in January 2000 and
has over 35 years experience in the telephone industry, including previous
positions in California, Maine, Alaska and Hungary. Mr. Pike serves as president
of the Albert Wisner Public Library Board of Trustees, Warwick, NY and he serves
on the Warwick Valley Rotary International Board. He is also on the board of
Zefcom LLC, a wireless resale consortium located in Wichita Falls, Texas. In
November 2003 he was elected to the Board of the United States Telecom
Association (USTA). He is a graduate of the University of Redlands, in Redlands,
California. Mr. Pike was previously Vice President and General Manager of
Geneseo Telephone Co. and Chief Operating Officer of Illinois PCS, a regional
Sprint PCS affiliate operating in Illinois and Iowa.
Philip Grybas, 56, is Vice President, Treasurer, and Chief Financial
Officer of Warwick Valley Telephone Company and has over 20 years of experience
in telecommunications. Before joining the Company in August 2001, he was an
associate consultant at TEG, a performance management analyst firm, whose
corporate headquarters are in Indianapolis, IN. Prior to that position, he was a
senior manager, finance expert and advisor at SBC Communications,
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for the Hungarian National Telephone Company (MATAV). Prior to MATAV, he held
various Directorship positions in Taxes, Accounting Operations and Accounting
Standards over a 16 year period with Ameritech Corp. A member of the Illinois
Society of CPAs, Mr. Grybas holds a B.A. from the University of St. Thomas, an
M.B.A. from DePaul University, and an M.S. in International Relations from
Creighton University.
Herbert Gareiss Jr., 58, is Vice President of Regulatory Compliance and
Planning, Corporate Secretary and Director of Warwick Valley Telephone Company.
Mr. Gareiss joined the Company in June 1980 as assistant secretary/assistant
treasurer, and became vice president in 1990. He was elected to the Board of
Directors in 1999. Past president of the Warwick Valley Chamber of Commerce, he
serves as the Chairman of The Board of Trustees of SUNY Orange and as financial
secretary of the Sugar Loaf United Methodist Church. He holds a B.A. from
Gettysburg College and an M.B.A. in Management and Finance from Fairleigh
Dickinson University.
Larry D. Drake, 60, is Vice President of Operations and Technology of
Warwick Valley Telephone Company. Mr. Drake joined the Company in August 1998.
He was previously the Vice President Network Service, Shenandoah Telephone
Company, Edinburg, Virginia. Former positions include Direct-Technical Liaison,
United States Telephone Association, Washington, DC and technical positions at
AT&T, Bellcore and BellSouth. He is Vice President of the Board of the Chamber
of Commerce in Warwick, New York ,and President of the Vernon, New Jersey
Rotary. Mr. Drake also serves on the Board of the Orange County United Way,
southern division in New York and the Board of the Sussex County Community
College Foundation in New Jersey. A graduate of Midland Technical College and
the University of South Carolina, Drake holds an M.B.A from Fairleigh Dickinson
University.
Brenda A. Schadt, 59, is Vice President of Customer Service and
Directory of Warwick Valley Telephone Company. Mrs. Schadt began her career at
the Company in June 1962 as an operator and has worked throughout the Company,
serving as data processing manager, customer service manager, marketing manager
and directory services manager. She was selected as vice president in September
1999.
Executive officers are elected by the Company's Board of Directors and
their terms of office continue until the next annual meeting of the Board. There
are no family relationships among the Company's executive officers.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Shares trade on the NASDAQ national market under
the symbol WWVY. As of March 5, 2004 there were 654 Common shareholders on
record and 191 Preferred shareholders on record. The Company does not know the
number of street-name shareholders.
The Company has paid quarterly cash dividends on its Common Shares
since April 1931 and paid cash dividends semi-annually from July 1907 until
December 1930. Quarterly cash dividends are usually declared in February, May,
August and November and are paid March 31, June 30, September 30 and December
20.
No equity securities of the Company were sold during 2003 that were not
registered under the Securities Act of 1933.
Cash dividends paid per share for December 30 (in cents):
Quarter 2003 * 2002 *
- ---------------------------------------------------
First (March 31) $0.16 $0.14
Second (June 30) $0.17 $0.14
Third (September 30) $0.18 $0.14
Fourth (December 20) $0.19 $0.16
----- -----
TOTAL $0.70 $0.58
*THESE NUMBERS REFLECT THE THREE-FOR-ONE STOCK SPLIT WHICH TOOK PLACE IN OCTOBER
2003.
The high and low bid prices for the Company's Common Shares on NASDAQ for the
first, second, third and fourth quarters of 2003 and 2002 were as follows:
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QUARTER ENDED
March 31, June 30, September 30, December 31,
2003 2003 2003 2003 *
- -----------------------------------------------------------------------
High $81.16 $84.01 $87.90 $34.02
Low $65.00 $70.00 $75.00 $23.52
QUARTER ENDED
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
- ---------------------------------------------------------------------
High $57.98 $64.20 $61.12 $69.50
Low $52.75 $57.00 $47.50 $50.51
*THESE NUMBERS REFLECT THE THREE-FOR-ONE STOCK SPLIT WHICH TOOK PLACE IN OCTOBER
2003.
ITEM 6. SELECTED FINANCIAL DATA.
($ in thousands except per share amounts)
For year ended December 31, 2003 2002 2001 2000 1999
- --------------------------- ------- ------- ------- ------- -------
Selected financial data:
Total revenues $28,843 $27,703 $27,538 $26,691 $23,186
Total expenses $25,472 $22,436 $20,792 $19,054 $17,127
Net income* $ 7,879 $ 7,751 $ 7,324 $ 7,018 $ 5,582
Total assets* $59,493 $54,809 $48,058 $42,423 $37,349
Long term obligations $ 7,149 $ 0 $ 4,000 $ 4,000 $ 4,000
Common Share data:
Income per Common Share* $ 1.45 $ 1.43 $ 1.34 $ 1.29 $ 1.02
Cash dividend 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.
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.
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.
- 9 -
In 2002 our year over year revenue performance was essentially flat due
to significant reciprocal compensation income reductions as a result of 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 which can adapt to changing
technologies and competition. 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. The result of this commitment will,
of course, be improved customer service, satisfaction and retention.
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
and Zefcom are accounted for under the equity method of accounting. Our other
investment (DataNet) 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.
The Company's rates are regulated by the FCC, the NYSPSC and the NJBPU
and therefore the Company reflects the effects of the ratemaking actions of
these regulatory bodies in its financial statements. Accordingly, the Company
follows the accounting prescribed by Statement of Financial Accounting Standards
(SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation." The
Company periodically reviews the continued applicability of SFAS No. 71 based on
the current regulatory and competitive environment.
The rates that the Company charges to its customers for regulated
services were established in its 1993 rate case with the NYSPSC. The Company
has not filed a rate case since that time. If the Company should submit a rate
case with the NYSPSC in the future, it is uncertain as to what the outcome of
the rate case would be and how it would affect 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.
- 10 -
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
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 "Trends of the Business" section.
OPERATING REVENUES
The Company's operating revenues increased $1,140, or 4%, in 2003 and
$165, 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.
For 2002, operating revenues increased $165, or 1%, over 2001 as a
result of a $1,347 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 $2,125, or 34%, in 2003 as compared
to a $2,092 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
- 11 -
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 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 of trunkline requirements and expect 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.
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
9% 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).
- 12 -
Other income (expenses) rose $2,125, 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.
INVESTMENT IN ZEFCOM
The Company has a 17% ownership interest in Zefcom, LLC ("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 NYSPSC, 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, net cash from
operating activities was less than our capital expenditures due to the Company's
continued growth in the Video
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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 $3,065 in 2001.
In 2003, 2002 and 2001, respectively, the Company had short-term lines
of credit arrangements with two banks which were utilized to assist in the
funding of working capital requirements and capital expenditures. These
borrowings were short-term in nature and normally repaid from operating cash
within a year. As noted above, borrowings from one line of credit were paid in
full in February 2003 out of the proceeds from the CoBank transaction.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2003 the Company did not have any material
off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Below is a summary of the Company's material contractual obligations
and commitments as of December 31:
Payments Due by Period
($ 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
- 14 -
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 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
NYSPSC. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not hold or issue derivative instruments for any
purposes or other financial instruments for trading purposes. The Company's only
assets exposed to market risk are its interest bearing bank accounts, into which
- 15 -
the Company deposits its excess operating funds on a daily basis. The Company
has the option of choosing the following rate options from CoBank: Weekly Quoted
Variable Rate, Long-Term Fixed Quote and a Libor Option. The Company does not
believe that its exposure to interest rate risk is material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15(a)(1) on page 18 for Index to Financial Information.
Selected supplementary quarterly financial data can be found in Note 16
of Notes to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company engaged PricewaterhouseCoopers LLP as its independent
auditor in the second quarter of 2003. The Company's previous auditor Bush &
Germain, decided that it no longer wanted to audit public companies. The report
by Bush & Germain on the Company's financial statements for the years 2002 and
2001 did not contain any adverse opinion, disclaimer of opinion or qualification
or modification as to uncertainty, audit scope or accounting principles. For the
years 2002 and 2001, there were no disagreements between the Company and Bush &
Germain regarding accounting principles or practices, financial statement
disclosures or auditing scope or procedures.
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 Chief
Financial 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 procedures were
effective at ensuring that required information will be disclosed on a
timely basis in our reports filed under the Exchange Act.
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.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and background of each of the Company's Board of
Directors and nominees for Board of Directors are incorporated by reference to
the material under the caption "Information about Directors and Nominees for
Election of Directors" in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders.
Philip S. Demarest, 67 is a Director and Chairman of the Audit
Committee of Warwick Valley Telephone Company and is an "audit committee
financial expert". During his tenure with the Company, which ended in 1998,
Mr. Demarest served as Vice President, Treasurer and Chief Financial Officer.
ETHICS AND VALUES
The Company has a code of ethics that applies to all employees
(including its principal executive officer and principal financial officer) and
members of the Board of Directors
- 16 -
and is based upon the philosophy that each director and each executive officer
will lead by example and foster a culture that emphasizes trust, integrity,
honesty, judgment, respect, managerial courage and responsibility. It is
expected that each director and every employee will act ethically at all times
and adhere to the policies, as well as the spirit of the code.
The Company has filed a copy of its code of ethics with the Securities
and Exchange Commission as an exhibit to this Report on Form 10-K and will
provide to any shareholder a copy of the code, without charge, upon written
request to Herbert Gareiss, Jr., Secretary, at Warwick Valley Telephone Company,
P.O. Box 592, Warwick, New York 10990.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely and in reliance upon a review of the Forms 3, 4 and 5
submitted to the Company during or with respect to calendar year 2003, copies of
reports filed with the Securities and Exchange Commission and written
representations that no Form 5 were required, the Company believes that all such
reports were filed on time.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the information under the caption
"Executive Compensation" in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Incorporated by reference to the information under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 2004 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
For professional services rendered in connection with the audit of the
Company's annual financial statements for 2003, and reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q for the
second and third quarters of 2003, PricewaterhouseCoopers LLP billed the Company
fees in an aggregate amount of $192. There were no other fees paid to
PricewaterhouseCoopers LLP. The Audit Committee has concluded that the provision
of these services is compatible with maintaining the independence of
PricewaterhouseCoopers LLP.
Billing for professional services rendered in connection with the
review of the Company's quarterly statement for March 31, 2003 on Form 10-Q,
Bush & Germain, the Company's previous auditor, was included in 2002 fees. Audit
fees paid to Bush & Germain in 2002 amounted to $36.
Tax Fees
For professional services rendered in connection with the Company's tax
preparation for December 31, 2002 Bush & Germain, the Company's previous
auditors billed the Company $15.
- 17 -
All Other Fees
Bush & Germain billed the Company aggregate fees in the amount of $10
for professional services rendered in connection with the 2002 Annual Report on
Form 11-K of the Company's 401(k) plan.
The Audit Committee pre-approves all non-audit work performed for the
Company by its independent auditors. It considers each item of work individually
and in advance of its performance and does not currently have a pre-established
set of criteria that could be applied to such work without requiring separate
consideration by the Audit Committee. In determining whether to approve a
particular item of non-audit work, the Audit Committee considers all ways in
which such work could compromise or appear to compromise the independence of the
Company's independent auditors.
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:
Page
1. Financial Statements
Report of Independent Auditors PricewaterhouseCoopers LLP - December 31, 2003 23
Report of Independent Auditors-Bush & Germain - December 31, 2002 and 2001 24
Consolidated Statements of Income-Years Ended December 31, 2003, 2002 and 2001 25
Consolidated Balance Sheets-December 31, 2003 and 2002 26
Consolidated Statements of Cash Flows-Years Ended December 31, 2003, 2002 and 2001 27
Consolidated Statements of Shareholders' Equity-Years Ended December 31, 2003, 2002
and 2001 28
Notes to Consolidated Financial Statements 29-40
2. Financial Statement Schedules
Report of Independent Auditors - PricewaterhouseCoopers LLP 20
Schedule II. Valuation and Qualifying Accounts 21
3. Exhibits
Index to Exhibits on page 41.
(b) Reports on Form 8-K:
Not applicable.
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
- 18 -
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 Filed herewith
Code of Ethics
21 Significant Subsidiaries of Filed herewith
Registrant
23.1 Consent of Independent Accountants Filed herewith
-Bush & Germain
23.2 Consent of Independent Accountants Filed herewith
-Deloitte & Touche LLP
23.3 Consent of Independent Accountants
-PricewaterhouseCoopers LLP Filed herewith
24 Orange County-Poughkeepsie Filed herewith
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 M. Lynn Filed herewith
Pike-Chief Executive Officer
31.2 Certification signed by Philip A. Filed herewith
Grybas-Chief Financial Officer
32.1 Certification pursuant to 18 Filed herewith
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed
by M. Lynn Pike-Chief
Executive Officer.
32.2 Certification pursuant to 18 Filed herewith
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed
by Philip A. Grybas-Chief
Financial Officer.
- 19 -
REPORT OF INDEPENDENT AUDITORS 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 appearing in the 2003 Annual Report to Shareholders of
Warwick Valley Telephone Company (which report and consolidated financial
statements are included in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. 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.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 24, 2004
- 20 -
WARWICK VALLEY TELEPHONE COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
($ in thousands)
Column C
Column A Column B Additions Column D Column E
- ----------------------------------------------------------------------------
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
(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.
- 21 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WARWICK VALLEY TELEPHONE COMPANY
Dated: March 25, 2004 By /s/ M. Lynn Pike
------------------------------
M. Lynn Pike
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated and on the 25 day of March, 2004.
SIGNATURE TITLE
/s/ Herbert Gareiss, Jr. Vice President ,Secretary and Director
- ----------------------------
Herbert Gareiss, Jr.
/s/ Philip A. Grybas Vice President and Treasurer
- ---------------------------- (Principal Financial and Accounting Officer)
Philip A. Grybas
/s/ Fred M. Knipp Director
- ----------------------------
Fred M. Knipp
/s/ Wisner H. Buckbee Director
- ----------------------------
Wisner H. Buckbee
/s/ Rafael Collado Director
- ----------------------------
Rafael Collado
/s/ Joseph E. DeLuca Director
- ----------------------------
Joseph E. DeLuca
/s/ Philip S. Demarest Director
- ----------------------------
Philip S. Demarest
Director
- ----------------------------
Robert J. DeValentino
Director
- ----------------------------
Corinna S. Lewis
- 22 -
REPORT OF INDEPENDENT AUDITORS
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 represents 6.3%
of total assets as of December 31, 2003 and 77% 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 auditing standards generally accepted in the United States of America,
which 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 to the financial statements, WVTC changed its accounting
for asset retirement costs as of January 1, 2003.
PricewaterhouseCoopers LLP
New York, New York
March 24, 2004
- 23 -
BUSH & GERMAIN, PC
Certified Public Accountants
901 Lodi Street
Syracuse, New York 13203
phone: (315) 424-1145
fax: (315) 424-1457
January 30, 2003
To the Board of Directors
Warwick Valley Telephone Company
P.O. Box 592
Warwick, New York 10990
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance
sheets of Warwick Valley Telephone Company as of December 31, 2002 and 2001, and
the related consolidated statements of income, stockholders' equity and cash
flows for 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 disclosed in Note 8 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.
Bush & Germain, P.C.
- 24 -
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands except per share amounts)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
----------- ----------- -----------
Operating Revenues:
Local network service $ 4,075 $ 4,140 $ 4,249
Network access service 9,550 8,792 7,445
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 $ 28,843 $ 27,703 $ 27,538
----------- ----------- -----------
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 $ 3,371 $ 5,267 $ 6,746
Other Income (Expenses)
Interest income (expense), net of capitalized interest $ (380) $ (318) $ (355)
Income from equity method investments 8,846 6,733 4,606
Other income (expense) (6) (80) (8)
----------- ----------- -----------
Total other income (expense) - net $ 8,460 $ 6,335 $ 4,243
----------- ----------- -----------
INCOME BEFORE INCOME TAXES $ 11,831 $ 11,602 $ 10,989
Income Taxes $ 3,952 $ 3,851 $ 3,665
NET INCOME $ 7,879 $ 7,751 $ 7,324
Preferred Dividends $ 25 $ 25 $ 25
----------- ----------- -----------
INCOME APPLICABLE TO COMMON STOCK $ 7,854 $ 7,726 $ 7,299
=========== =========== ===========
Basic & Diluted Earnings per Share of
Outstanding Common Stock $ 1.45 $ 1.43 $ 1.34
=========== =========== ===========
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.
- 25 -
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
($ in thousands except per share amounts)
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash $ 5,717 $ 1,641
Accounts receivable - net of reserve for uncollectibles - $508 and $428, respectively 3,420 3,126
Other accounts receivable 273 615
Materials and supplies 1,153 1,468
Prepaid expenses 681 544
Deferred income taxes 255 60
------------ ------------
Total current assets $ 11,499 $ 7,454
------------ ------------
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 $ 59,493 $ 54,809
------------ ------------
LIABILITIES
Current liabilities:
Accounts payable $ 1,559 $ 2,082
Notes payable 0 5,000
Current maturities of long term debt 0 4,000
Advance billing and payments 247 230
Customer deposits 135 125
Accrued taxes 506 48
Pension and postretirement benefit obligation 1,139 516
Other accrued expenses 1,252 1,123
------------ ------------
Total Current Liabilities $ 4,838 $ 13,124
------------ ------------
Long-term debt 7,149 0
Deferred income taxes 4,119 3,620
Other liabilities and deferred credits 536 483
Pension and postretirement benefit obligation 4,511 2,871
------------ ------------
TOTAL LIABILITIES $ 21,153 $ 20,098
------------ ------------
Shareholders' Equity
Preferred stock - $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
Issued 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 38,670 34,597
------------ ------------
Total Shareholders' Equity $ 38,340 $ 34,711
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,493 $ 54,809
============ ============
Please see the accompanying notes, which are an integral part of the
consolidated financial statements.
- 26 -
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands )
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 7,879 $ 7,751 $ 7,324
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,901 3,991 3,764
Deferred income taxes 304 1,348 4
Interest charged to construction (42) (238) (283)
Income from equity method investments (8,846) (6,733) (4,608)
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
benefits obligations 1,856 1,014 498
Increase (Decrease) in other accrued expenses 129 802 (90)
Increase (Decrease) in other liabilities and deferred credits 53 (89) 33
-------- -------- --------
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 - -
Unamoritized 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
======== ======== ========
Interest $ 459 $ 589 $ 650
Income tax $ 2,690 $ 2,585 $ 3,689
Please see accompanying notes, which are an integral part of the consolidated
financial statements.
- 27 -
WARWICK VALLEY TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ in thousands except share amounts)
TREASURY TREASURY PREFERRED PREFERRED
STOCK STOCK STOCK STOCK COMMON
SHARES AMOUNT SHARES AMOUNT STOCK SHARES
---------- -------- --------- --------- -------------
BALANCE, DECEMBER 31, 2000 571,491 $ (3,385) 5,000 $ 500 5,980,779
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
------- ---------- -------- ------------- ---------
BALANCE, DECEMBER 31, 2000 $ 60 $ 3,391 $ 25,828 $ 0 $ 26,394
Net income for the year Dividends: 7,324 7,324
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 $ 30,062 $ 0 $ 30,648
------- --------- -------- ------------ ---------
Net income for the year 7,751 7,751
Minimum Pension Liability (269) (269)
---------
Total Comprehensive Income (Loss) 7,482
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 $ 34,597 $ (269) $ 34,711
------- ---------- -------- ------------ ---------
Net income for the year 7,879 7,879
Minimum Pension Liability (496) (496)
---------
Total Comprehensive Income (Loss) 7,383
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 $ 38,670 $ (765) $ 38,340
======= ========== ======== ============ =========
Please see the accompanying notes, which are an integral part of the
consolidated financial statements.
- 28 -
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,LLC ("Zefcom") are accounted for under the equity method of
accounting. (See Note 8) Our other investment (DataNet) 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 Federal Communications
Commission ("FCC"), the New York State Public Service Commission ("NYSPSC") 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 NYSPSC. The Company
has not filed a rate case since that time. If the Company should submit a rate
case with the NYSPSC 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.
- 29 -
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: IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
- 30 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
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.
The Company's rates are regulated by the FCC, NYSPSC, 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 3: 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 12) 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 4: 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 5: SEGMENT INFORMATION
Warwick Valley Telephone Company's segments are strategic business
units that offer different products and services and are managed as telephone
and online services. We evaluate the performance of the segments based upon
factors such as revenue growth, expense containment, market share and operating
income.
The telephone segment provides landline telecommunications services,
including local, network access, 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.
- 31 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
Segment information for the years ended December 31 ($ in thousands):
2003 2002 2001
----------------------------------
Revenues
Telephone $ 24,086 $ 23,757 $ 23,034
Online 6,699 6,330 6,389
Eliminations (1,942) (2,384) (1,885)
----------------------------------
Total revenues $ 28,843 $ 27,703 $ 27,538
Operating income
Telephone 4,039 5,271 5,525
Online (668) (4) 1,221
----------------------------------
Total operating income $ 3,371 $ 5,267 $ 6,746
Interest expense and income (380) (318) (355)
Income from equity method investments 8,846 6,733 4,606
Other income (expense) (6) (80) (8)
----------------------------------
Income before taxes $ 11,831 $ 11,602 $ 10,989
Segment balance sheet information for the years ended December 31($ in
thousands):
2003 2002
----------------------
Assets
Telephone $ 62,585 $ 57,166
Online 9,883 7,914
Eliminations (12,975) (10,271)
----------------------
Total assets $ 59,493 $ 54,809
======================
No single customer accounts for 10% or more of the Company's total
revenues.
NOTE 6: 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:
($ in thousands)
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
=================
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following for
the years ended December 31:
($ in thousands)
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
====================
- 32 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 8: INVESTMENTS
Investments consisted of the following as of December 31:
($ in thousands)
2003 2002
-----------------
Investment in O-P Partnership $ 3,729 $ 4,775
Investment in DataNet Communications 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:
($ in thousands)
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
The following summarizes O-P's balance sheet for the years ended
December 31:
($ in thousands)
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. (DataNet). DataNet 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 $1,231.
- 33 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 9: DEBT OBLIGATIONS
Debt obligations consisted of the following at December 31:
($ in thousands)
2003 2002
------------------
Notes payable $ 0 $ 5,000
Current maturing long-term debt -7.05%
Series "J" First Mortgage Bond 0 4,000
CoBank, ACB unsecured credit facility 7,149 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.
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 $4,000 in long-term
debt that matured in December 2003.
- 34 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 10: INCOME TAXES
The federal and state components of the provision for income taxes are presented
in the following table:
For the Years Ended December 31,
($ in thousands)
2003 2002 2001
--------------------------------
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 436 850 (48)
State 18 0 0
--------------------------------
454 850 (48)
--------------------------------
Provision for income taxes $ 3,952 $ 3,851 $ 3,665
================================
Deferred income tax liabilities are taxes the Company expects to pay in
future periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax basis of certain assets and
liabilities.
Deferred income tax liabilities and assets consist of the following:
At December 31,
($ in thousands)
2003 2002
--------------------
Deferred income tax assets:
Employee pensions and other benefits $ 1,654 $ 900
Other 212 263
--------------------
Total deferred income tax assets 1,866 1,163
--------------------
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 $ 3,864 $ 3,560
====================
The deferred tax asset related to employee pension includes amounts
recorded for the years ended December 31, 2003 and 2002 of $271 and $139,
respectively, to reflect the tax impact of the minimum pension liability
recorded in other comprehensive income.
NOTE 11: PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has two defined benefit pension plans covering all
management and non-management employees who are at least 21 years of age have
completed one year of service and, for the non-management plan, have been hired
before May 1, 2003. Benefits are based on years of service and the average of
the employee's three highest consecutive years' base compensation. The Company's
policy is to fund the minimum required contribution disregarding any credit
balance arising from excess amounts contributed in the past. Per regulatory
- 35 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
requirements, the company deferred $483, $128 and $75 for 2003, 2002 and 2001,
respectively. The amounts expensed were $1,154, $435 and $370 for the years
ended December 31, 2003, 2002, and 2001, respectively.
The Company sponsors a non-contributory, defined benefit postretirement
medical benefit plan that covers all employees that retire directly from active
service on or after age 55 with at least 10 years of service or after age 65
with at least 5 years of service. The projected unit credit actuarial method was
used in determining the cost of future benefits. The Company's funding policy is
to contribute the maximum allowed under current Internal Revenue Service
regulations. Assets of the plan are principally invested in the stock market and
a money market fund. The Company uses an annual measurement date of December 31
for all of its benefit plans.
The components of the pension and postretirement expense (credit) were
as follows for the years ended December 31:
($ in thousands)
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
======== ======== ======== ======== ======== ========
The following table presents a summary of the projected benefit
obligation and plan assets of the plans at December 31:
($ in thousands)
Postretirement
Pension Benefits Benefits
2003 2002 2003 2002
-------- -------- -------- --------
Change In Benefit Obligations
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
======== ======== ======== ========
- 36 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
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)
======== ======== ======== ========
The following table provides the amounts recorded in our Consolidated Balance
Sheets:
($ in thousands)
Postretirement
Pension Benefits Benefits
2003 2002 2003 2002
-------- -------- -------- --------
At December 31,
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)
======== ======== ======== ========
Actuarial assumptions used to calculate the projected benefit
obligation were as follows for the years ended December 31:
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%
Actuarial assumptions used to calculate net periodic benefit cost were
as follows for the years ended December 31:
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% - -
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 of $1,478.
- 37 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
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.
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 $345 as of
December 31, 2003 and 2002, respectively.
PLAN ASSETS
The pension plan weighted average asset allocations at December 31,
2003 and 2002 by assets category are as follows:
Plan Assets
at December 31,
-----------------------
2003 2002
Equity securities 71% 60%
Debt securities 24% 29%
Short term investments 5% 11%
----------- --------
Total 100% 100%
=========== ========
The postretirement benefit plan weighted average asset allocations at
December 31, 2003 and 2002, by assets category are as follows:
Plan Assets
at December 31,
-----------------------
2003 2002
Equity securities 72% 70%
Short term investments 28% 30%
----------- --------
Total 100% 100%
=========== ========
- 38 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
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 12. 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 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 13. 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:
2004 $ 159
2005 $ 163
2006 $ 155
-----
Total $ 477
NOTE 14. 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 $200. The Company believes that the
transactions with John W. Sanford & Son, Inc. are on as favorable terms as those
available from unaffiliated third parties.
Board of Director member, Fred M. Knipp, is a trustee of the Warwick
Savings Bank, at which the Company has its principal bank accounts and temporary
investments.
- 39 -
WARWICK VALLEY TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
NOTE 15. QUARTERLY INFORMATION (UNAUDITED)
Fiscal Year Quarters
($ in thousands)
First Second Third Fourth Total
Year ended December 31, 2003
Revenue $ 7,145 $ 7,191 $ 7,420 $ 7,087 $ 28,843
Operating income 1,243 688 1,151 289 3,371
Net income as previously
reported 1,995 1,963 2,322 1,748 8,028
Adjustment for Zefcom (31) (41) (36) (41) (149)
Net income 1,964 1,922 2,286 1,707 7,879
Earnings per share .36 .35 .42 .32 1.45
Year ended December 31, 2002
Revenue $ 6,585 $ 6,638 $ 6,995 $ 7,485 $ 27,703
Operating income 1,331 1,212 1,536 1,188 5,267
Net income as previously
reported 1,797 2,187 2,201 2,112 8,297
Adjustment for Zefcom (126) (189) (135) (96) (546)
Net income 1,671 1,998 2,066 2,016 7,751
Earnings per share .31 .37 .38 .37 1.43
As discussed in Note 12, the per share amounts have been restated for
the Company stock split. Additionally these amounts 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 8.
- 40 -
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
14 Warwick Valley Telephone Company Code 42
Of Ethics
21 Significant Subsidiaries of Registrant 50
23.1 Consent of Independent Accountants-Bush & Germain 51
23.2 Consent of Independent Accountants-Deloitte & Touche LLP 52
23.3 Consent of Independent Accountants
-PricewaterhouseCoopers LLP 53
24 Orange County-Poughkeepsie Limited Partnership 54
Financial Statements as of December 2003 and 2002
and for the years ended December 31, 2003,
2002 and 2001
31.1 Certification signed by M. Lynn Pike- 67
Chief Executive Officer
31.2 Certification signed by Philip A. Grybas- 68
Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 69
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 signed
by M. Lynn Pike-Chief Executive
Officer.
32.2 Certification pursuant to 18 U.S.C. Section 70
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 signed
by Philip A. Grybas-Chief Financial
Officer.
- 41 -