-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AFUeHn9GKZWqnaSQrux0iv+5F0aG+0lq3n+kwDSpPA4SyiNKiBUF6xAiZBKsOgAY aOCPUBrrKgCVaH2RrQ0+1Q== 0000950152-01-506030.txt : 20020411 0000950152-01-506030.hdr.sgml : 20020411 ACCESSION NUMBER: 0000950152-01-506030 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20011121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARWICK VALLEY TELEPHONE CO CENTRAL INDEX KEY: 0000104777 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 141160510 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11174 FILM NUMBER: 1798291 BUSINESS ADDRESS: STREET 1: 47 49 MAIN ST CITY: WARWICK STATE: NY ZIP: 10990 BUSINESS PHONE: 9149861101 MAIL ADDRESS: STREET 1: 47 49 MAIN ST STREET 2: PO BOX 592 CITY: WARWICK STATE: NY ZIP: 10990 10-K405/A 1 l91005ae10-k405a.txt WARWICK VALLEY TELEPHONE COMPANY 10-K405/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------- FORM 10-K\A X ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF - THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____to____ Commission File No. 0-11174 WARWICK VALLEY TELEPHONE COMPANY -------------------------------- (Exact name of registrant as specified in its charter) New York 14-1160510 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 47 Main Street, Warwick, New York 10990 - -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 986-1101 --------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Without Par Value) (Title of Class) 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. X --- Aggregate market value of voting stock held by non-affiliates of the registrant as of March 23, 2001 - $73,032,921. Common stock outstanding, March 23, 2001 - 1,803,282 DOCUMENTS INCORPORATED BY REFERENCE Name Incorporated Into Annual Report to Shareholders for the fiscal year ended December 31,2000 Part II Proxy Statement for the 2001 Annual Meeting of Shareholders Part III The Exhibit Index for this Annual Report is located on page 11. The total number of pages contained in this Annual Report is 53. PART 1. ITEM 1. BUSINESS. 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 provides communications services with 19,314 access lines in New York State and 10,926 in New Jersey at December 31, 2000. The Company manages its operations as two business segments, telephone service (including local, long distance and cellular) and internet service. Financial information regarding the Company's two business segments is found in Note 16 to the Consolidated Financial Statements incorporated in Part II hereof by reference. The Company provides telephone service to customers in the contiguous towns of Warwick and Goshen, New York, and the townships of West Milford and Vernon, New Jersey. The Company operates exchanges in Warwick (12,767 access lines), Florida (4,076 access lines) Pine Island (1,725 access lines) and Middletown (746), New York and Vernon (7,614 access lines) and Upper Greenwood Lake (3,312 access lines), New Jersey. The Company's service area is primarily rural and has an estimated population of 50,000. In the fiscal year ended December 31, 2000, 12,496,591 toll calls were made on the Company's system, representing an decrease of 10.6% from 13,275,178 in 1999. Business customers represent 6,584 (or 21.8%) of total access lines, and no single customer's annual billings represent a significant portion of the Company's gross revenues. The Company has installed advanced digital switching equipment in all of its exchanges and fiber optic routes between central offices and to all neighboring telephone companies, and is currently constructing fiber optic routes in other locations. The Company sells, as well as leases, telephone equipment both within its territory and within the territories of other telephone companies. Residential telephone equipment sales are made through the Company's retail stores, which are located in the Company's main office in Warwick, New York and at Route 515 and Guthrie Drive in Vernon, New Jersey. The Company also sells and leases business telephone systems both in its own territory and elsewhere. At present, the sale of telephone and other equipment does not constitute a material part of the Company's business. The Company holds a 7.5% limited partnership interest in Bell Atlantic Orange-Poughkeepsie Limited Partnership, a cellular mobile telephone partnership which is licensed to operate as the wire-line licensee in both Orange and Dutchess Counties, New York. The general partner is New York Cellular Geographic Service Area, Inc. (an affiliate of Bell Atlantic Mobile), and the other limited partner is Taconic Telephone Corporation. In recent years the Company has received distributions from this partnership. The partnership's pre-tax income for the year ended December 31, 2000 was $43,415,680 representing an increase of $12,231,107 (or 39.2%) from 1999. The Company's share of that pre-tax income was $3,256,176. The Company has an 8.9% ownership interest in Hudson Valley DataNet ("HVDN"), L.L.C., a competitive telecommunications company that plans to offer high-speed bandwidth throughout the region in which the company competes. During 2000 the Company made a capital contribution to HVDN of $1,000,000. The Company also has a 19.5% interest in Zefcom, L.L.C., a licensed reseller of wireless services. In addition to the initial capital contribution of $1,000,000, the Company has a commitment to contribute another $500,000 to Zefcom, L.L.C. in the form of a promissory note payable on demand. The Company has two wholly-owned subsidiaries which belong to the telephone segment of its operations. Warwick Valley Mobile Telephone Company, Inc. (`WVMT'), one of the wholly-owned subsidiaries, resells cellular telephone service to the Company's subscribers as well as to others. WVMT also sells and installs cellular telephone sets. For the fiscal year ended December 31, 2000 WVMT had a pre-tax profit of $68,310 a decrease of $39,725 (or 36.8%) from 1999. Warwick Valley Long Distance Company, Inc. (`WVLD'), the Company's other wholly-owned subsidiary, resells toll telephone service to the Company's subscribers. For the fiscal year ended December 31, 2000 WVLD had a pre-tax profit of $535,082, a decrease of $113,466 (or 17.5%) from 1999. Hometown Online, Inc. (`Online'), another wholly-owned subsidiary of the Company, was established to provide connectivity to the Internet as well as local and regional information services to personal computer users. All of the activities of the Company's internet service segment are conducted through Online. Service is offered within WVTC's service area as well as in nearby areas in New York, New Jersey and Pennsylvania. Online had a pre-tax profit of $1,947,622 in the fiscal year ended December 31, 2000, an increase of $568,257 (or 41.2%) from 1999. At December 31, 2000 Online had approximately 24,000 customers. On February 9, 2001 the Company filed a Petition with the NYSPSC seeking authority to issue unsecured promissory notes (the `Notes') in the amount of $21,238,971. The proceeds of the Notes will be used to replace existing equipment, to refinance existing indebtedness and to purchase equipment to be used in connection with the Company's new video business. The Petition is currently pending and NYSPSC action, as well as action by any other relevant public utility commission, is expected, but not assured, during the third quarter of 2001. COMPETITION The Company's residential customers can purchase telephone sets (including cellular sets) and equipment compatible and operational with the Company's telephone and cellular systems at other retail outlets inside and outside the Company's territory and not affiliated with the Company. Such outlets include other telephone company telephone stores, department stores, discount stores, mail-order services and internet websites. Businesses in the Company's service area are also allowed to purchase equipment compatible and operational with the Company's system from other telephone and 'interconnect' companies. The Company's territory is surrounded by the territories of Bell Atlantic, Citizens Utilities, Sprint-United Telephone and Frontier Telephone, all of which offer residential and business telephone equipment. There are also several interconnect companies located within a 30-mile radius of Warwick, New York. WVMT competes against Bell Atlantic Mobile Communication Retail Company, Cellular One, Nextel and others offering either cellular service, the sale and installation of cellular equipment or other wireless services. The Telecommunications Act of 1996 (the `Act') created a nationwide structure in which competition is allowed and encouraged between local exchange carriers, interexchange carriers, competitive access providers, cable TV companies and other entities. The markets affected first have been the regional toll areas in both states. Regional toll competition has had the effect of reducing the Company's revenues. The reduction in regional toll revenues for the year ended December 31, 2000 was $170,470 (or 14.5%) in New York and $142,678 (or 8.9%) in New Jersey. Under the Act the Company itself can provide competitive local exchange telephone service outside its franchised territory. The Company is currently competing with Citizen's Telecommunications of New York in the Middletown, New York area for local service through access lines. The Company is reviewing plans to provide limited service in other surrounding areas in both New York and New Jersey. There can be no assurances that the Company will implore any such additional plans, or that other companies will not begin providing competitive local exchange telephone service in the Company's franchise territory. 2 The cellular partnership referred to above is in competition with two non-wire-line licensees, one of which is currently operating a cellular system in Dutchess County, New York, and the other in Orange County, New York as well as personal communication service (`PCS') providers. The Company currently provides access to the national and international calling markets as well 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, providing full toll services to its customers at discounted rates. Online competes both on the basis of service and price. There are numerous competitors throughout Online's market area whose services are available to customers. Despite the presence of such competitors, Online is experiencing rapid growth. For the year ended December 31, 2000, Online's revenues were $5,969,307 an increase of $1,329,443 (or 22.3%) from 1999. Whether growth and pricing levels can be maintained depends, in part, on the actions of existing competitors, the possible entry into the market of new competitors, the rate of technological change and the level of demand for services. STATE AND FEDERAL REGULATION The Company's New York telephone service operations are subject to the jurisdiction of the the New York State Public Service Commission (`NYSPSC'); its New Jersey telephone service operations, to the jurisdiction of the New Jersey Board of Public Utilities ( 'NJBPU'). These two bodies have regulatory authority over the Company with respect to rates, facilities, services, reports, issuance of securities and other matters. Interstate toll and access services are subject to the jurisdiction of the Federal Communications Commission (`FCC'). The Company depends heavily on its network access revenues, receiving approximately $8,057,562 (or 30.2%) of its revenues from this source. The Company receives reimbursement from carriers in the form of charges for providing carriers access to and from the Company's local network. Pursuant to FCC requirements, the Company was obligated to make contributions to a long-term support fund of the National Exchange Carrier Association. On January 1, 1998, a new funding mechanism went into effect, pursuant to which all carriers contribute to a Universal Service Fund established by the FCC to cover high cost areas, low income customers, schools, libraries and rural health care providers. The Company's obligation to this fund for the year ended December 31, 2000 was $144,839 and for 2001 will be approximately $160,000. Quarterly updates modify the amounts contributed. Management does not currently expect that the amount contributed by the Company will change significantly. Also as of January 1, 1998, the Company began receiving substantial funds from the Universal Service Fund. As a result of the FCC order establishing the Universal Service Fund, all local exchange carriers were required to reduce access charges billed to toll carriers. To offset this revenue reduction, the high cost portion of the Universal Service Fund provides payments monthly to carriers satisfying the characteristics set forth in the order. At the current level of support, the Company received $2,300,000 during the fiscal year ended December 31, 2000 and expects to receive $2,500,000 in the fiscal year ending December 31, 2001. The Company also receives access charges from toll carriers for all intrastate toll usage. The Company is obligated to make contributions to the New York State Access Settlement Pool (`NYSASP'), a non-profit corporation that serves New York State telecommunication providers as a clearing house for inter-company payments, but does not pool its toll or access revenues therein. The NYSASP began operations on October 1, 1992 and supports the operations of certain telephone companies other than the Company. The Company contributed approximately $191,000 to the NYSASP during the fiscal year ending December 31, 2000 and is expected to contribute approximately $153,000 in the fiscal year ending December 31, 2001. 3 In October 1998, the NYSPSC implemented the Targeted Accessibility Fund (`TAF') of New York to provide universal service in rural, high costs areas of the state. The Company's contribution to the TAF during the fiscal year ended December 31, 2000 was $16,615 and is expected to be approximately $20,000 in the fiscal year ended December 31, 2001. In the Company's two New Jersey exchanges, intrastate toll revenues are retained by toll carriers, of which the Company is one. The associated access charges are retained by the Company. Revenues resulting from traffic between the Company and Bell Atlantic and United Telephone are adjusted by charges payable to each company for terminating traffic. In addition to charging for access to and from the Company's local network, the Company bills and collects charges for most interstate and intrastate toll messages carried on its facilities. Interstate billing and collection services provided by the Company are not regulated. They are provided under contract by the Company. Intrastate billing and collection remain partly regulated in New York and fully regulated in New Jersey. The regulated services are provided under tariff. Some carriers provide their own billing and collection services. EMPLOYEES As of March 26, 2001, the Company had 112 full-time and 23 part-time employees, including 105 non-management employees. Seventy of the non-management-employees (primarily the office staff and operators) are represented by the Warwick Valley Telephone Company Employees' Association ('WVTEA'). The current three-year contract between the Company and WVTEA expires November 4, 2001. Thirty-two non-management employees (primarily plant employees) are represented by Local 503 of the International Brotherhood of Electrical Workers (IBEW). The current five-year agreement between the Company and IBEW Local 503 expires April 30, 2003. The Company considers its relations with its employees to be good. EXECUTIVE OFFICERS NAME AGE POSITION AND PERIOD SERVED M. Lynn Pike 53 President since January 2000 Fred M. Knipp 70 President 1988 - January 2000 Herbert Gareiss, Jr. 55 Vice President since 1989; Assistant Treasurer 1989-1997; Assistant Secretary 1980-1997; Larry D. Drake 57 Vice President since August 1998; Brenda Schadt 56 Vice President since September 1999 Barbara Barber 58 Secretary since April 1998 Assistant Secretary 1997-1998; Robert A. Sieczek 57 Treasurer since April 1998 Assistant Treasurer 1997-1998; 4 Bonnie A. Jackowitz 54 Assistant Secretary since 1998; Colleen Shannon 44 Assistant Secretary since 1998; Dorinda M. Masker 49 Assistant Treasurer since 1998; There are no arrangements between any officer and any other person pursuant to which he or she was selected an officer. ITEM 2. PROPERTIES. The Company owns an approximately 22,000 square-foot building in Warwick, New York, which houses its general offices, operators, 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. During 1999, the Company purchased a building at 24 John Street in Middletown, New York in order to support its expanded dial tone operations in its Middletown exchange. The Company rents store space located at Route 515 and Guthrie Drive in Vernon, New Jersey. Of the Company's investment in telephone plant in service, central office equipment represents approximately 41.6%; connecting lines and related equipment, 34.9%; telephone instruments and related equipment; 3.1%; land and buildings; 5.0%; internet equipment 7.9%;; and other plant equipment, 7.5%. A substantial portion of the Company's properties is subject to the lien of the Company's Indenture of Mortgage. ITEM 3. LEGAL PROCEEDINGS Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (1) ITEM 6. SELECTED FINANCIAL DATA.(1) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(1) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not hold or issue derivatives instruments for any purposes or other financial instruments for trading purposes. The Company's only assets exposed to market risk are its interest bearing bank accounts, into which the Company deposits its excess operating funds on a daily basis. The Company's mortgage liabilities currently bear interest at a fixed rates. If the Company refinances its liabilities when they mature the nature and amount of the applicable interest rate or rates will be determined at that time. The Company also has a line of credit which accrues interest at 0.75% below the prime rate. On May 1, 2000 the 5 Company repaid its $3,000,000 Series I bond with short-term borrowing. The Company has the option of renewing such short-term borrowing every thirty, sixty or ninety days at prime rate or LIBOR rate plus 1.75%. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (1) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.(2) ITEM 11. EXECUTIVE COMPENSATION.(2) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.(2) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.(2) 1 The material called for by Items 5, 6, 7, and 8 is included on the Company's Annual Report to its Shareholders for the year ended December 31, 2001, the relevant pages of which are incorporated by reference herein. 2 With the exception of the identification of executive officers as listed on pages 4 and 5, the material called for by Items 10-13 is included in the Company's definitive proxy statement, incorporated by reference herein, for its 2001 Annual Meeting of Shareholders, to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934. PART IV. ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: The following financial statements of the Company, included in the Annual Report of the Company to its Shareholders for the year ended December 31, 2000, are included in Exhibit Number 3, filed herewith: 6 Reference Pages Annual Report On Form 10-K Consolidated Statement of Income - Years Ended December 31, 2000, 1999 and 1998 21 Consolidated Balance Sheet - December 31, 2000 and 1999 20 Consolidated Statement of Stockholders' Equity - Years Ended December 31, 2000, 1999 and 1998 22 Consolidated Statement of Cash Flows - Years 23 Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 24-33 2. Financial Statement Schedules: Report of Independent Certified 35 Public Accountants on Financial Statement Schedules Orange County-Poughkeepsie Limited Partnership 41-52 Financial Statement Schedules Schedules: VIII. Valuation and Qualifying Accounts 10 3. Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE 3(a) Articles of Incorporation, Incorporated by reference to as amended Exhibit 3(a) to the Company's Annual Report on Form 10-K for 1997 3(b) By-Laws Incorporated by reference to as amended Exhibit 3(b) to the Company's Annual Report on Form 10-K for 1997 4(a) Form of Common Stock Incorporated by reference to Certificate, as amended Exhibit 4(a) to the Company's Annual Report on Form 10-K for 1997
7 4(b) Indenture of Mortgage, dated Incorporated by reference to November 1, 1952, and all Exhibit 4(d) to the Company's indentures supplemental Registration Statement on thereto, except the Eighth Form 10 (File No. 0-11174), Supplemental Indenture dated April 29, 1983 4(c) Eighth Supplemental Incorporated by reference to Indenture, dated as of Exhibit 4(d) to the Company's May 1, 1990, to the Annual Report on Form 10-K Indenture of Mortgage, for 1995 dated November 1, 1952, including form of 9.05% First Mortgage Bond, Series I, Due May 1, 2000 4(d) Ninth Supplemental Incorporated by reference to Indenture, dated as of Exhibit 4(e) to the Company's October 1, 1993, to the Annual Report on Form 10-K Indenture of Mortgage, for 1997 dated November 1, 1952, including form of 7.05% First Mortgage Bond, Series J, Due October 1, 2003 13 Annual Report to Share- Filed herewith holders for the year ended December 31, 2000, together with separate manually executed Independent Auditor's Report. 23 Consent of Independent Filed herewith Auditor
(b) No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 2000. (d) Orange County-Poughkeepsie Filed herwith Limited Partnership Financial Statements for the years ended December 31, 2000 and 1999
8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARWICK VALLEY TELEPHONE COMPANY Dated: November 14, 2001 By /s/ M. Lynn Pike --------------------------------------------- M. Lynn Pike President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated and on the 14 day of November, 2001. SIGNATURE TITLE /s/ Herbert Gareiss, Jr Vice President and Director - -------------------------------- Herbert Gareiss, Jr. /s/ Philip A. Grybas Vice President, Chief Financial Officer - -------------------------------- (Principal Financial and Accounting Officer) Philip A. Grybas 9 WARWICK VALLEY TELEPHONE COMPANY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Column A Column B Column C Column D Column E Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period (Note a) (Note b) (Note c) Allowance for Uncollectibles: Year 2000 $65,155 $40,274 $66,249 $106,523 $65,155 Year 1999 $65,155 $35,712 $74,325 $110,037 $65,155 Year 1998 $65,155 $44,309 $58,780 $103,089 $65,155
(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. 10 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE 13 Annual Report to Shareholders for the fiscal year 12 ended December 31, 2000 (d) Annual Report of Orange Poughkeepsie Limited 39 Partnership 23 Consent of Independent Auditors 53 Exhibits 3(a), 3(b), 4(a) and 4(d) are incorporated by reference to Exhibits 3(a), 3(b), 4(a) and 4(e), respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Exhibit 4(b) is incorporated by reference to Exhibit 4(d) to the Company's Registration Statement on Form 10 (File No. 0-11174), dated April 29, 1983. Exhibit 4(c) is incorporated by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-k for the years ended December 31, 1995. 11 TABLE OF CONTENTS Highlights 1 President's Summary 2 Message from the Chairman 5 Management's Discussion 6 Consolidated Balance Sheet 8 Consolidated Statement Of Income 9 Consolidated Statement of Stockholders' Equity 10 Consolidated Statement of Cash Flows 11 Notes to Financial Statements 12 Report of Independent Certified Public Accountants 22 Concerning the Company's Common Stock 23 Board of Directors and Officers 24 Performance Highlights 25 (WVT Logo) 12 HIGHLIGHTS 2000 1999 Total Revenues $26,691,398 $23,185,929 Net Income $7,017,499 $5,581,616 Earnings per Share $3.88 $3.06 Book Value $14.29 $12.23 Cash Dividend per Common Share $1.56 $1.34 Access Lines in Service 30,601 28,935 Cellular Subscribers 478 719 Online Subscribers 24,379 21,535 WVLD Subscribers 11,253 9,642 WHERE THE DOLLAR COMES FROM WHERE THE DOLLAR GOES LONG DISTANCE ACCESS - - WAGES & BENEFITS (graph (graph LOCAL SERVICE - goes goes - COST OF GOODS SOLD - OTHER OPERATING EXPENSES WV LONG DISTANCE - here) here) - TAXES CELLULAR - - DEPRECIATION WARWICK ONLINE - - DIVIDENDS - RETAINED EARNINGS OTHER REVENUES - 13 PRESIDENT'S SUMMARY PHOTO Just as 2000 was a transitional year from the old millennium to the new, so was it a transitional year for Warwick Valley Telephone Company. The year began with my installation as its 6th President and ended with the name change from Warwick Valley Telephone Company to WVT Communications, a name that GOES realistically states who we are and what we do. In between these two milestones the year was packed with many exciting events. It was also a very successful year financially. CORE BUSINESSES HERE Significantly, our traditional core businesses (local telephone service, Warwick Valley Long Distances (WVLD) and Network Access Services) continued to prosper in 2000. The access line base grew from 29,000 to 31,000, a 6.9% growth rate. WVLD, the most popular choice for long distance service among WVT customers, gained 1,600 customers growing from 9,700 to 11,300. Revenues from Network Access Services increased by $1,000,000 over 1999, a 15% growth rate. Warwick Online, our Internet subsidiary, realized a significant 15% growth, adding 2,800 dial-up customers and 500 DSL (Digital Subscriber Line) customers, while increasing net income 41% to $1.3 million. DSL (a broadband service that provides 10 to 20 times more capacity than 56k dial-up modem service) was deployed throughout our regulated service territory and selected areas in Middltown, NY during 2000. This deployment will enable WVT to retain bandwidth-hungry dial-up customers and to gain new ones who might otherwise choose the competition. RECENTLY ESTABLISHED VENTURES In 1999 Warwick Valley Telephone Company launched two new ventures, the Middletown, NY CLEC (Competitive Local Exchange Carrier) and the directory "takeback". To date, both efforts have proven to be successful. WVT's CLEC operation in Middletown, NY increased revenue from $682,000 to $2.4 million. The CLEC contributed $1.9 million in net revenues. Late in 2000, favorable rulings by state regulators allowed us to begin more aggressive customer acquisition, and we ended the year with 800 access lines, an increase of almost 600. Revenue from the provision of port connections to Internet Service Providers continues to be an important aspect of the Middletown CLEC. Our 2001 Strategic Plan calls for continued expansion of the Middletown operations and the launch of CLEC operations in the Vernon, NJ area. The decision to publish the WVT directory in-house has proven to be a good one. Under company control, the quality of the directory is much higher. Directory advertising sales produced $1 million in gross revenues and contributed $500,000 in net revenues. The directory management team introduced electronic Yellow Pages during the 2000-2001 sales campaign. Projections are that the 2001 directory will produce even better results. OPERATING RESULTS Strong company growth requires that we must also grow our resources. In 2000 operating expenditures increased by 11% and 2 employees were added to bring the total to 135. Financial results remained strong in 2000. Revenues increased by 15.1% and earnings increased 26.8% over 1999. Shareholder dividends increased 15.2% annually to $1.56 per share. 14 (WVT LOGO) STRATEGIC INVESTMENTS During 2000 the WVT management team recommended and the Board of Directors approved investments in two strategic partnerships, one with a broadband provider and the other a provider of PCS wireless telephone service. Both of these ventures, I believe, will enable the company to provide a full array of services and develop new revenue streams to insure continued financial success in the face of competition. (HUDSON VALLEY DATANET WVT COMMUNICATIONS SERVICE ARE LOGO) The first of these investments was a 9% ownership position in Hudson Valley DataNet, L.L.C., (HVDN). This new (MAP company provides broadband services over fiber optic cable to secondary and tertiary markets in the lower Hudson GOES Valley. Partnership with HVDN makes it possible for WVT to obtain reasonably priced bandwidth with self-healing fault HERE) capability for our use and for resale to other customers in our markets. The HVDN fiber facility became operational in February 2001. (TELISPIRE PCS LOGO) FIBER OPTIC NETWORK AREA WVT also became a founding investor in ZefCom, L.L.C., a consortium of (MAP independent telephone companies that will resell Sprint PCS nationally under the private label "Telispire PCS." WVT GOES Communications will also be able to resell locally under its own brand name. WVT Communications holds a 19.5% HERE) interest in ZefCom. 15 BOARD CHANGES Regretfully, Mr. Howard Conklin, Jr. announced his decision to relinquish his position as Chairman of the Board in December. Mr. Conklin, who gave the company over 12 years of dedicated service as chairman, will remain a director. Thank you, Mr. Conklin. Mr. Wisner Buckbee, who has served 8 years as a director, was elected to replace Mr. Conklin. WHERE WE GO FROM HERE In 2000 the WVT Communications management team developed a Strategic Plan and five specific action plans, which is our road map for the future. Our aim is to upgrade our infrastructure so that it will support competitive state-of-the-art services that include video over copper plant. This will enable WVT Communications to control the "last mile" of facilities to our customers. The company will be uniquely positioned to offer a bundle of voice, data, video and wireless products with the convenience of a single bill. This mix of products, coupled with our reputation for quality customer service and the efforts of our capable workforce, is a surefire formula which will enable WVT Communications to continue to be the premier communications services provider in its chosen markets. It's also a formula that will provide future rewards for the customers, employees and shareholders of WVT Communications. BOOK VALUE ONLINE SUBCRIBERS /s/ M. Lynn Pike (graph (graph M. Lynn Pike President and C.E.O. goes goes here) here) INCOME PER SHARE ACCESS LINES DIVIDENDS PER SHARE (graph (graph (graph goes goes goes here) here) here) 16 FROM THE CHAIRMAN OF THE BOARD President Pike and his management team have made the Year 2000 again a year of profitable growth and expansion. They continue to identify areas in our industry that we can use for future profitability to benefit shareholders. Your Board of Directors works closely with management to provide the necessary capital resources that are needed for growth and to supply the services that our customers demand. With our well trained employees, capable management and ongoing shareholder support, your Board expects a very bright future as we approach our 100th year of operation at WVT Communications. /s/ Wisner H. Buckbee Wisner H. Buckbee Chairman 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS - 2000 VS. 1999 The Company's net income from all sources increased $1,435,883 (or 25.7%) to $7,017,499 for the twelve-month period ended December 31, 2000, as compared to the same period in 1999. Operating revenues increased $3,505,469 (or 15.1%) to $26,691,398 for the year ended December 31, 2000, as compared to $23,185,929 for 1999, primarily as a result of an increase of $1,368,927 (or 407.5%) for reciprocal compensation for the Company's Competitive Local Exchange Carrier (CLEC) in Middletown and a $1,329,443 (or 28.7%) increase in Online revenues. Reciprocal compensation began in June of 1999. In August of 2000 the reciprocal compensation rate was increased by the New York State Public Service Commission with payments retroactive to November of 1999. The increase in Online revenues is due to customer growth and the Company continually offering customers new services. Network Access Service revenues increased $529,154 (or 6.1%) primarily due to the sale of dedicated trunks. Local service revenues increased $422,061 (or 11.9%) as a result of a continuous increase in access lines and increased use of newly marketed services. Total operating expenses increased $1,927,147 (or 11.3 %) to $19,054,452 for the year ended December 31, 2000, as compared to $17,127,305 for the previous year. An increase in wages and benefits of $725,281 (or 11.2%), an increase in both telecommunication and internet facilities of $651,650 (or 46.8%) and an increase in payroll, revenue and property taxes of $216,185 (or 14.8%) were the main factors in the increase. Other income (expenses) increased to $2,810,638 in 2000 from $1,891,367 in 1999. This increase resulted from an increase in income of Bell Atlantic Orange County/Poughkeepsie Limited Partnership, a cellular partnership in which the Company has a 7.5% interest, which earned $3,255,217 in 2000 compared to $2,338,843 in 1999. RESULTS OF OPERATIONS - 1999 VS. 1998 The Company's net income from all sources increased $1,539,119 (or 38.1%) to $5,581,616 for the twelve-month period ended December 31, 1999, as compared to the same period in 1998. Operating revenues increased $1,823,829 (or 8.5%) to $23,185,929 for the year ended December 31, 1999, as compared to $21,362,100 for 1998, primarily as a result of a $1,486,844 (or 47.2%) increase in online revenues. This increase was primarily due to customers interest in and use of the internet. Local service revenues increased $578,332 (or 19.5%), primarily as a result of an increase in the number of access lines and increased use of newly marketed services. This was offset by a decrease of $786,734 (or 6.9%) in network access service revenues due to a more competitive market. Total operating expenses increased $1,248,057 (or 7.9 %) to $17,127,305 for the year ended December 31, 1999, as compared to $15,879,248 for the previous year. An increase in wages and benefits of $770,267 (or 10.9%), an increase in internet facilities of $209,343 (or 25.0%) and an increase in depreciation expense of $412,453 (or14.2%) were the main factors in the increase. Other income (expenses) increased to $1,891,367 in 1999 from $516,294 in 1998. This increase resulted from an increase in income of Bell Atlantic Orange County/Poughkeepsie Limited Partnership, a cellular partnership in which the Company has a 7.5% interest, which earned $1,937,538 in 1999 compared to $1,085,499 in 1998 and the gain on partnership assets amounting to $401,305 during 1999. 18 LIQUIDITY AND CAPITAL RESOURCES We had $738,495 of cash and cash equivalents available at December 31, 2000. The company has lines of credit with two banks totaling $8,500,000 of which $3,550,000 remains unused. $2,500,000 of the total line of credit is at a variable lending rate and borrowings are on a demand basis without restrictions. CASH FROM OPERATING ACTIVITIES During 2000, 1999, and 1998 our primary source of funds continued to be cash generated from operations, as shown in the consolidated statements of cash flows. Net cash provided by operating activities exceeded our capital expenditures during 2000, 1999 and 1998; this excess is referred to as free cash flow, a supplemental measure of liquidity. We generated free cash flow of $1,466,487, $268,712, and $2,493,425 in 2000, 1999, and 1998. CASH FROM INVESTING ACTIVITIES In order to provide the high-quality communications services expected from our customers, the company continued to invest in and upgrade its property, plant and equipment. The amount of investment is influenced by demand for services and products, ongoing growth as well as regulatory commitments. Our capital expenditures totaled $5,068,161, $6,449,273 and $3,828,418 in 2000, 1999, and 1998. The majority of our 2000 and 1999 expenditures can be attributed to the expansion of our local exchange service into new markets, DSL and digital and broadband network upgrades. In 2001, management expects total capital spending to be between $6,000,000 and $7,500,000. These capital expenditures will relate primarily to the continued upgrade of our network and expansion of our DSL service. Bell Atlantic Orange County/Poughkeepsie Limited Partnership is licensed to operate as the wire line licensee in both Orange and Dutchess Counties, New York. The company received distributions from the Partnership amounting to $2,625,000, $1,791,305 and $450,000 in 2000, 1999 and 1998. It is expected that these significant distributions from the Partnership will continue in the near future. A copy of the Orange Poughkeepsie Limited Partnership financial statement is included with this filing. On July 28, 2000 the Company purchased an 8.9% ownership interest in Hudson Valley DataNet ("HVDN"), L.L.C., for $1,000,000. HVDN is a competitive telecommunications company that will offer high-speed bandwidth throughout the region. The Company purchased a 19.5% interest in Zefcom, L.L.C., a licensed reseller of wireless services, during 2000. In addition to the initial capital contribution of $1,000,000, the Company has a commitment to contribute another $500,000 to Zefcom, L.L.C. in the form of a promissory note payable on demand. CASH FROM FINANCING ACTIVITIES Common stock dividends declared by the Board of Directors of WVT Communications were $1.56 per share in 2000, $1.34 per share in 1999 and $1.12 per share in 1998. The total dividends paid for common stock by WVT Communications were $2,806,623 in 2000, $2,435,571 in 1999 and $2,031,140 in 1998. WVT Communication's dividend policy considers both the expectations and requirements of shareowners and the internal requirements of the company. During the year, the company refinanced the $3,000,000 Series I bond due May 1, 2000 to a notes payable with the Bank of New York. 19 SEGMENTED OPERATIONS In 1998 the Company began business segment reporting to reflect the predominance of its two major operating segments, telephone operations and internet service provider. The Company currently reports its operating results in two segments: Warwick Valley Telephone and Warwick Online. Each of the Company's segment results is reviewed below. The telephone operations revenue increase of $2,422,012 (or 12.4%) for the year ended December 31, 2000 as compared to $964,496 (or 5.2%) for 1999 was due to reciprocal compensation for the Company's CLEC in Middletown, New York and an increase in customer growth. Internet revenues increased $1,329,443 (or 28.7%) for the year ended December 31, 2000 as compared to $1,486,844 (or 47.2%) for 1999 largely due to a continuous increase in customer growth and new services. The telephone operations expenses increased $1,952,526 (or 12.3%) for the year ended December 31, 2000 as compared to $669,684 (or 4.4%) for 1999 due to normal increases in expenses.. Internet expenses increased $957,605 (or 25.6%) for the year ended December 31, 2000 as compared to $1,189,571 (or 46.7%) for 1999 largely due to an increase in wages and benefits. Comparative financial information regarding the operation of the Company's two business segments for the period from 1998 through 2000 can be found in Note 16 of the consolidated financial statements. 20 CONSOLIDATED BALANCE SHEET
ASSETS 2000 1999 - ------ ------------ ------------ Current Assets: Cash $ 738,495 $ 865,521 Accounts receivable -net of reserve for uncollectibles (Note 1) 4,090,401 4,015,673 Materials and supplies 1,665,679 983,222 Prepaid expenses 487,805 401,090 ------------ ------------ Total Current Assets 6,982,380 6,265,506 ------------ ------------ Noncurrent Assets: Unamortized debt issuance expense 15,630 23,374 Other deferred charges 93,613 224,845 Investments (Note 4) 5,488,603 2,858,301 ------------ ------------ Total Noncurrent Assets 5,597,846 3,106,520 ------------ ------------ Property Plant & Equipment: (Notes 1, 2 and 5) Plant in service 49,338,440 45,049,356 Plant under construction 2,454,882 1,718,296 ------------ ------------ 51,793,322 46,767,652 Less: Depreciation reserve (Notes 1 and 3) 22,360,624 19,163,148 ------------ ------------ Total Property, Plant & Equipment 29,432,698 27,604,504 ------------ ------------ TOTAL ASSETS $ 42,012,924 $ 36,976,530 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Current maturities of long term debt $ 0 $ 3,000,000 Notes payable (Note 6) 4,950,000 900,000 Accounts payable 2,799,229 2,716,428 Advance billing and payments 193,862 0 Customer deposits 130,990 129,660 Accrued taxes 26,432 22,168 Accrued interest 28,563 73,067 Other accrued liabilities 381,023 356,990 ------------ ------------ Total Current Liabilities 8,510,099 7,198,313 ------------ ------------ ------------ ------------ Long-term Debt (Note 5) 4,000,000 4,000,000 ------------ ------------ Deferred Credits and Other Long Term Liabilities (Notes 1, 7 and 8) Accumulated deferred federal income taxes 2,207,871 2,079,063 Unamortized investment tax credits 81,047 118,247 Other deferred credits 47,218 65,040 Post retirement benefit obligations 772,756 786,159 ------------ ------------ Total Deferred Credits and Other Long Term Liabilities 3,108,892 3,048,509 ------------ ------------ Stockholders Equity (Notes 5, 10, 11 and 12) Preferred stock 5% cumulative, $100 par value; 500,000 500,000 Authorized 7,500 shares; Issued and outstanding 5,000 shares Common stock - no par value; Authorized shares 2,160,000 3,450,465 3,367,607 Issued 1,993,593 (2000) and 1,991,462 (1999) Treasury stock at cost, 190,497 shares for 2000 and 173,352 for 1999 (3,384,800) (2,780,290) Retained earnings 25,828,268 21,642,391 ------------ ------------ Total Shareholders Equity 26,393,933 22,729,708 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,012,924 $ 36,976,530 ============ ============
Please see the accompanying notes, which are an integral part of the financial statements. 21 CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998 ------------ ------------ ------------ OPERATING REVENUES: Local network service $ 3,968,037 $ 3,545,976 $ 2,967,644 Network access services 6,796,518 5,999,920 6,554,736 Long distance network service 2,357,125 2,624,569 2,904,040 Directory advertising 1,060,398 972,739 941,714 Long distance sales 2,016,057 1,884,557 1,932,111 Internet services 5,969,307 4,639,864 3,153,020 Other services and sales (Note 1) 4,523,956 3,518,304 2,908,835 ------------ ------------ ------------ Total operating revenues 26,691,398 23,185,929 21,362,100 ------------ ------------ ------------ OPERATING EXPENSES: Plant specific 3,195,789 2,670,835 2,347,814 Plant non-specific: Depreciation and amortization 3,247,711 3,324,079 2,911,626 Other 1,506,607 1,330,865 1,237,270 Customer operations 4,279,191 4,122,826 3,759,920 Corporate operations 3,051,221 2,414,961 2,181,653 Cost of services and sales 2,101,218 1,807,209 2,028,126 Property, revenue and payroll taxes 1,672,715 1,456,530 1,412,839 ------------ ------------ ------------ Total operating expenses 19,054,452 17,127,305 15,879,248 OPERATING INCOME 7,636,946 6,058,624 5,482,852 OTHER INCOME (EXPENSE): Interest expense (612,263) (611,625) (622,157) Interest income 24,753 17,330 22,401 Income from cellular partnership 3,255,218 2,338,843 1,085,499 Other income (expense) 142,930 146,819 30,551 ------------ ------------ ------------ Total other income (expenses) - net 2,810,638 1,891,367 516,294 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 10,447,584 7,949,991 5,999,146 FEDERAL INCOME TAXES (Note 7) 3,430,085 2,368,375 1,956,649 NET INCOME 7,017,499 5,581,616 4,042,497 PREFERRED DIVIDENDS 25,000 25,000 25,000 ------------ ------------ ------------ INCOME APPLICABLE TO COMMON STOCK $ 6,992,499 $ 5,556,616 $ 4,017,497 ============ ============ ============ NET INCOME PER AVERAGE SHARE OF OUTSTANDING COMMON STOCK (NOTE 10) $ 3.88 $ 3.06 $ 2.21 ============ ============ ============ AVERAGE SHARES OF COMMON STOCK OUTSTANDING (Note 10) 1,811,653 1,817,531 1,813,792 ============ ============ ============
Please see the accompanying notes, which are an integral part of the financial statements. 22 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TREASURY PREFERRED COMMON RETAINED STOCK STOCK STOCK EARNINGS TOTAL ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 ($2,780,290) $500,000 $2,948,438 $16,534,991 $17,203,139 Net income for the year - - - 4,042,497 4,042,497 Dividends: Common ($1.12 per share) - - - (2,031,140) (2,031,140) Preferred ($5.00 per share) - - - (25,000) (25,000) Sale of Common Stock - - 382,423 - 382,423 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 ($2,780,290) $500,000 $3,330,861 $18,521,348 $19,571,919 Net income for the year - - - 5,581,615 5,581,615 Dividends: Common ($.1.34 per share) - - - (2,435,571) (2,435,571) Preferred ($5.00 per share) - - - (25,000) (25,000) Sale of Common Stock - - 36,746 - 36,746 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 ($2,780,290) $500,000 $3,367,607 $21,642,391 $22,729,709 Net income for the year - - - 7,017,499 7,017,499 Dividends: Common ($1.56 per share) - - - (2,806,623) (2,806,623) Preferred ($5.00 per share) - - - (25,000) (25,000) Sale of Common Stock - - 82,858 - 82,858 Purchase of Treasury Stock (604,510) - - - (604,510) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2000 ($3,384,800) $500,000 $3,450,465 $25,828,268 $26,393,933 ============ ============ ============ ============ ============
Please see the accompanying notes, which are an integral part of the financial statements. 23 CONSOLIDATED STATEMENT OF CASH FLOWS
2000 1999 1998 ----------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 7,017,499 $ 5,581,616 $ 4,042,497 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 3,247,711 3,324,078 2,911,626 Deferred income tax and investment tax credit 73,786 (264,352) (80,967) Interest charged to construction (84,746) (143,480) (44,292) Income from partnership (3,255,217) (2,338,843) (1,085,499) Change in assets and liabilities: (Increase) Decrease in accounts receivable (74,728) (306,226) 255,913 (Increase) Decrease in materials and supplies (682,457) 615,221 (464,806) (Increase) Decrease in prepaid expenses (86,715) (47,492) (15,181) (Increase) Decrease in deferred charges 131,232 (44,239) 36,969 Increase (Decrease) in accounts payable 82,801 95,571 869,119 Increase (Decrease) in customers' deposits 1,330 (3,773) (35,032) Increase (Decrease) in advance billing and payment 193,862 (100,146) (63,736) Increase (Decrease) in accrued expenses (40,240) (66,033) (41,424) Increase (Decrease) in post retirement benefit obligations (13,403) 401,522 30,737 Increase (Decrease) in other liabilities 24,033 14,561 5,919 ----------- ----------- ----------- Net cash provided by operating activities 6,534,748 6,717,985 6,321,843 ----------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (5,068,161) (6,449,273) (3,828,418) Interest charged to construction 84,746 143,480 44,292 Distribution from partnership 2,625,000 1,791,305 450,000 Changes in other investments (2,000,084) (8,016) (2,668) ----------- ----------- ----------- Net cash used in investing activities (4,358,499) (4,522,504) (3,336,794) ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Increase (Decrease) in notes payable 4,050,000 500,000 (1,200,000) Repayment of long-term debt (3,000,000) - - Dividends (2,831,623) (2,460,573) (2,056,140) Sale of common stock 82,858 36,746 382,423 Purchase of treasury stock (604,510) - - ----------- ----------- ----------- Net cash provided by (used in) financing activities (2,303,275) (1,923,827) (2,873,717) ----------- ----------- ----------- Increase (Decrease) in cash and cash equivalents (127,026) 271,654 111,332 Cash and cash equivalents at beginning of year 865,521 593,867 482,535 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 738,495 $ 865,521 $ 593,867 =========== =========== ===========
Please see the accompanying notes, which are an integral part of the financial statements. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company provides communications services to customers in the Towns of Warwick, Goshen, and Wallkill, New York and the Townships of Vernon and West Milford, New Jersey. Its services include providing local, toll and cellular telephone service to residential and business customers, access and billing and collection services to interexchange carriers, the sale and leasing of telecommunications equipment, paging and internet access. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CONSOLIDATION The consolidated financial information includes the accounts of Warwick Valley Telephone Company and its wholly-owned subsidiaries (the "Company") after elimination of all significant intercompany transactions. Certain prior year amounts have been reclassified to conform with the 2000 financial statement presentation. REVENUE RECOGNITION The Company earns revenue principally by providing communication related services to its customers, which include end users who purchase local service, toll service, internet access and interexchange carriers who resell network access services. These revenues are recognized when the services are provided. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. We were required to adopt the provisions of SAB 101 in the fourth quarter of 2000, retroactive to January 1, 2000. Based upon a review of our revenue recognition policies, we concluded that the adoption of SAB 101 did not require a change in those policies nor did it materially affect the timing or amount of revenue recognition. DEPRECIATION Depreciation is based on the cost of depreciable plant in service and is calculated on the straight-line method using estimated service lives of the various classes of telephone plant. Depreciation as a percent of average depreciable telephone plant was 6.86%, 7.80%, and 7.51%, for the years 2000, 1999 and 1998, respectively. CAPITALIZATION OF CERTAIN COSTS AND EXPENSES The Company has consistently followed the practice of capitalizing certain costs related to construction, including payroll and payroll related costs and significant costs of capital incurred during construction. The income which results from capitalizing interest during construction is not currently realized but, under the regulatory rate-making process, is recovered by revenues ADVERTISING COSTS Advertising costs are expensed as incurred. FEDERAL INCOME TAXES The Company records deferred taxes that arise from temporary differences resulting from differences between the financial statement and tax basis of assets and liabilities. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. The Company's deferred taxes result principally from differences in depreciation methods for financial reporting and tax reporting. 25 Investment tax credits have been normalized and are being amortized to income over the average life of the related telephone plant and other equipment. RESERVE FOR UNCOLLECTIBLES The Company uses the reserve method to record uncollectible accounts. The reserve for uncollectibles was $65,155 as of December 31, 2000 and 1999, respectively. CASH FLOW STATEMENT Cash and cash equivalents consists principally of demand deposits and are in accounts which are insured by the Federal Deposit Insurance Corporation (F.D.I.C.) up to $100,000 at each financial institution. As of December 31, 2000 the amount of cash in excess of these F.D.I.C. insured limits was approximately $468,000. The following is a list of interest and federal income tax payments for each of the three years in the period ending December 31:
2000 1999 1998 ---------------- ---------------- ---------------- Interest $ 656,767 $ 612,643 $ 623,902 Federal income taxes $ 3,360,000 $ 2,787,991 $ 2,064,867
MATERIAL AND SUPPLIES New material and reusable materials are carried at average original cost, except that specific costs are used in the case of large individual items. As of December 31, 2000 and 1999 the Material and Supplies inventory consisted of the following:
2000 1999 ---------------- ---------------- Inventory for outside plant $ 488,113 $ 215,710 Inventory for inside plant 678,186 567,325 Inventory for online plant 95,195 0 Inventory of equipment held for sale or lease 404,185 200,187 ---------------- ---------------- $ 1,665,679 $ 983,222 ================ ================
RETIREMENT AND/OR DISPOSITION OF PROPERTY When depreciable property is retired, the amount at which it is carried plus the cost of removal is charged to the depreciation reserve and any salvage is credited thereto. Expenditures for maintenance and repairs are charged against income; renewals and betterments are capitalized. OTHER SERVICES AND SALES REVENUES Other services and sales revenues consisted of the following for each of the three years in the period ended December 31:
2000 1999 1998 ---------------- ---------------- ---------------- Rent revenue 343,180 296,498 208,179 Billing and collection revenue 966,288 1,096,779 1,154,150 Other 3,214,488 2,125,027 1,546,506 ---------------- ---------------- ---------------- $4,523,956 $3,518,304 $ 2,908,835 ================ ================ ================
2. PROPERTY, PLANT AND EQUIPMENT Plant in service, at cost, consisted of the following at December 31:
2000 1999 ---------------- ---------------- Land, buildings, furniture and office equipment $ 4,512,991 $ 4,249,179 Vehicles and work equipment 1,661,980 1,265,185 Central office equipment 20,521,852 19,391,013 Customer premise equipment 1,526,923 1,318,299 Outside plant equipment 17,222,690 15,909,015 Internet equipment 3,892,004 2,916,664 ---------------- ---------------- 49,338,440 $45,049,355 ================ ================
26 3. DEPRECIATION RESERVE Depreciation reserve consisted of the following at December 31:
2000 1999 ---------------- ---------------- Buildings, furniture and office equipment $ 2,304,022 $ 2,267,264 Vehicles and work equipment 895,616 798,865 Central office equipment 11,041,581 9,386,103 Customer premise equipment 899,008 728,467 Outside plant equipment 4,991,031 4,525,404 Internet equipment 2,229,366 1,457,045 ---------------- ---------------- $22,360,624 $19,163,148 ================ ================
4. INVESTMENTS Investments consisted of the following at December 31:
2000 1999 ----------------- ----------------- Investment in cellular partnership $ 3,461,099 $ 2,829,923 Investment in Hudson Valley DataNet 1,000,000 0 Investment in wireless company 1,000,000 0 Other investments 27,504 $ 28,378 ----------------- ----------------- $ 5,488,603 $ 2,858,301 ================= =================
The cellular partnership investment represents the Company's 7.5% interest as a limited partner in the Orange-Poughkeepsie Limited Partnership, a cellular telephone operation which is recorded on the equity method. Income from this investment amounted to $3,255,218 and $2,338,843 for the years ended December 31, 2000 and 1999, respectively. Distributions received from the partnership amounted to $2,625,000 and $1,791,305 for 2000 and 1999, respectively. The following is a summary of financial position and results of operations of the Orange-Poughkeepsie Limited Partnership as of and for the years ending December 31, 2000 and 1999:
2000 1999 ----------------- ------------------ Current assets $25,748,075 $17,055,000 Property, plant and equipment, net 24,752,768 23,406,000 Total assets 50,507,623 40,469,000 Current liabilities 2,153,473 1,810,000 Partners capital 48,354,150 38,659,000 Revenues 57,677,561 35,512,000 Net income 44,695,100 26,417,000
The Company has an 8.9% ownership interest in Hudson Valley DataNet ("HVDN"), L.L.C., a competitive telecommunications company that will offer high-speed bandwidth throughout the region. The wireless investment represents the Company's 19.5% interest in Zefcom, L.L.C., a licensed reseller of wireless services. In addition to the initial capital contribution of $1,000,000, the Company has a commitment to contribute another $500,000 to Zefcom, L.L.C. in the form of a promissory note payable on demand. Both of these companies are in the beginning stages of operations and both are recorded on the cost method. Other investments are also recorded at cost. 27 5. LONG-TERM DEBT Long-term debt consisted of the following at December 31:
2000 1999 First Mortgage Bonds AMOUNT AMOUNT -------------------- ----------------- ------------------ 9.05% Series "I" (due 05/01/2000) $ 0 $ 3,000,000 7.05% Series "J" (due 12/01/2003) 4,000,000 4,000,000 ----------------- ------------------ 4,000,000 7,000,000 Less: Current maturities of long-term debt 0 3,000,000 Total Long-term debt $ 4,000,000 $ 4,000,000 ================= ==================
Telephone properties have been pledged as collateral on the first mortgage bonds. Under provisions of the bond indentures, as amended, the payment of dividends or a distribution of assets to stockholders to the extent of 75% of the Company's net income earned during the calendar year will be allowed, providing "net operating income" exceeds interest expense 1.5 times. Maturities for the five years subsequent to 2000 for long-term debt outstanding as of December 31, 2000, are as follows: 2001 --- 2004 --- 2002 --- 2005 --- 2003 $ 4,000,000 The first mortgage bonds, Series "J" bond, may not be redeemed prior to the maturity date. 6. NOTES PAYABLE The Company has an unsecured line of credit in the amount of $2,500,000 with the Warwick Savings Bank, which expires in June 2001. 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, 2000 was $550,000. The balances outstanding as of December 31, 2000 and 1999 were $1,950,000 and $900,000 respectively, bearing interest at rates of 8.75% and 8.0%, respectively. The Company has an outstanding line of credit in the amount of $3,000,000 with the Bank of New York, which expires on March 31, 2001. This is an unsecured note that is renewable solely at the Bank's option. Interest is paid monthly calculated on the unpaid balance using either the Bank's Alternate Base Rate or the LIBOR based rate. The interest rate on the outstanding balance of $3,000,000 as of December 31, 2000 was 8.44%. 7. FEDERAL INCOME TAXES The following tabulation is a reconciliation of the federal income tax expense as reported in these financial statements with the tax expense computed by applying the statutory federal income tax rate of 34% to pre-tax income.
2000 1999 1998 ----------- ----------- ----------- Operating federal income taxes: Current portion $ 2,231,650 $ 1,837,842 $ 1,670,896 ----------- ----------- ----------- Deferrals, net of reversals: Depreciation 162,178 25,367 (17,736) Cost of removal 2,655 (5,946) (2,813) Other (55,189) (245,042) (19,034) Investment tax credit, net of amortization (37,200) (40,200) (42,980) ----------- ----------- ----------- 72,444 (265,821) (82,563) ----------- ----------- ----------- Operating F.I.T. expense $ 2,304,094 $ 1,572,021 $ 1,588,333 ----------- ----------- ----------- Nonoperating federal income taxes $ 1,125,991 $ 796,354 $ 368,316 ----------- ----------- ----------- Total F.I.T. expense, as reported 3,430,085 2,368,375 1,956,649 Reversals of deferred taxes 58,411 167,374 67,485 Other 63,683 167,248 15,576 ----------- ----------- ----------- FEDERAL INCOME TAX AT STATUTORY RATE $ 3,552,179 $ 2,702,997 $ 2,039,710 =========== =========== ===========
28 The following components comprise the net deferred tax liability reported as of December 31:
2000 1999 ----------------- ---------------- Deferred tax liabilities $2,583,096 $ 2,418,263 Deferred tax assets 375,225 339,199 ----------------- ---------------- Net deferred tax liability $2,207,871 $ 2,079,064 ================= ================
The deferred tax liability consists principally of temporary differences due to differences in depreciation methods for financial reporting and tax reporting. The deferred tax asset consists principally of temporary differences due to the reporting of pension and deferred compensation obligations. 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has two defined benefit pension plans covering all management and non-management employees who are at least 21 years of age and have completed one year of service. Benefits are based on years of service and the average of the employee's three highest consecutive years' base compensation. The Company's policy is to fund the minimum required contribution disregarding any credit balance arising from excess amounts contributed in the past. 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. Due to regulatory requirements the Company is allowed to expense the amount actually funded, with any difference between the funding amount and the SFAS 106 expense amount being deferred as a regulatory asset or liability. Assets of the plan are invested in common stocks and a money market fund. The components of the pension and postretirement expense (credit) were as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS 2000 1999 1998 2000 1999 1998 --------------------------------------------- ------------------------------------------ Service cost $ 252,952 $ 267,535 $ 238,977 $ 62,963 $ 71,446 $ 42,117 Interest cost on benefit Obligation 679,920 642,092 601,153 136,697 129,247 58,618 Amortization of transition Obligation 53,263 53,263 53,263 51,496 51,496 51,496 Amortization of prior service (credit) cost 40,637 48,282 50,611 (19,964) (19,964) (21,494) Recognized net actuarial (gain) loss (309,700) (35,719) (98,490) 12,729 39,817 (40,835) Expected return on plan assets (873,300) (705,469) (692,142) (94,664) (78,071) (61,313) --------------------------------------------- ------------------------------------------ Net periodic (credit) Expense ($156,228) $ 269,984 $ 153,372 $ 149,257 $ 193,971 $ 28,589 ============================================= ==========================================
29 The following table presents a summary of plan assets, projected benefit obligation and funded status of the plans at December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS 2000 1999 2000 1999 ------------------------------- ------------------------------- Fair value of plan assets at beginning of year $ 10,376,258 $ 8,966,950 $ 1,173,563 $ 962,257 Employer contributions 58,074 87,934 89,372 89,372 Actual return on plan assets 1,556,698 1,640,940 48,678 155,986 Benefits paid (335,810) (319,566) (41,793) (34,052) ------------------------------- ------------------------------- Fair value of plan assets at end of year $ 11,655,220 $ 10,376,258 $ 1,269,820 $ 1,173,563 ------------------------------- ------------------------------- Projected benefit obligation at beginning of year 8,453,470 9,320,457 1,737,385 831,259 Benefits earned 252,952 267,535 62,963 71,446 Interest cost on projected benefit obligation 679,920 642,092 136,697 129,247 Actuarial (gain) loss 1,080,796 (1,457,048) 182,148 739,485 Benefits paid (335,810) (319,566) (41,793) (34,052) ------------------------------- ------------------------------- Projected benefit obligation at year end 10,131,328 8,453,470 2,077,400 1,737,385 ------------------------------- ------------------------------- Plan assets in excess of (less than) projected benefit obligation 1,523,892 1,922,788 (807,580) (563,822) Unrecognized actuarial (gain) loss (2,228,348) (2,669,652) 582,190 366,784 Unrecognized prior service (credit) cost 373,209 148,052 (364,855) (384,819) Unrecognized net transition obligation 53,267 106,530 617,948 669,444 ------------------------------- ------------------------------- Prepaid (accrued) benefit cost $ (277,980) $ (492,282) $ 27,703 $ 87,587 =============================== ===============================
Actuarial assumptions used to calculate the projected benefit obligation were as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS 2000 1999 2000 1999 ---------------------------------- ------------------------------------ Discount rate 7.50% 8.00% 7.50% 8.00% 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% 9.00%
30 The health care cost trend rate was expected to decrease gradually (.5% per year) to an ultimate rate of 5% in 2007. 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, 2000 approximately $356,000 and the aggregate of the service and interest cost components of postretirement expense for the year then ended by approximately $44,000. A 1.0% decrease in the health care cost trend rate would decrease these components by approximately $288,000 and $36,000, 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 15% of compensation, subject to certain legal limitations. In 2000 the Company made a matching contribution up to 8.0% of an eligible participant's compensation for management, clerical and traffic employees and up to 6.0% for plant employees. The Company contributed and expensed $388,636, $320,795, and $236,597 for the years ended December 31, 2000, 1999 and 1998 respectively. The Company has deferred compensation agreements in place for certain officers which become effective upon retirement. These non-qualified plans are not currently funded and a liability representing the present value of future payments has been established, with balances of $367,260 and $189,950 as of December 31, 2000 and 1999, respectively. 9. RELATED PARTY TRANSACTIONS The Company expended approximately $255,860, $225,031, and $221,880 during 2000, 1999, and 1998, respectively, in insurance premiums for required insurance coverage. These expenditures were made to an insurance agency in which a member of the Board of Directors has a financial interest. Two Board of Director members are also trustees of the Warwick Savings Bank, at which the Company has its principal bank accounts and temporary investments. 10. COMMON STOCK Earnings per share are based on the weighted average number of shares outstanding of 1,811,653, 1,817,531, and 1,813,792 for the years ended December 31, 2000, 1999 and 1998, respectively. The following schedule summarizes the changes in the number of shares issued of capital stock for the year ended December 31, 2000:
Treasury Preferred Common Stock Stock Stock --------------- --------------- ----------------- Balance, January 1, 2000 173,352 5,000 1,991,462 Additional shares issued 17,145 0 2,131 Shares redeemed 0 0 0 --------------- --------------- ----------------- Balance, December 31, 2000 190,497 5,000 1,993,593 =============== =============== =================
31 11. TREASURY STOCK The Company accounts for treasury stock using the cost method of accounting. 12. PREFERRED STOCK The preferred stock may be redeemed by the Company on any dividend payment date at par plus accumulated dividends. Preferred stock ranks prior to the common stock both as to dividends and on liquidation, but has no general voting rights. However, if preferred stock dividends are in default in an amount equal to six quarterly dividends, the holder of preferred stock shall have the right to elect a majority of the Board of Directors and such voting rights would continue until all dividends in arrears have been paid. 13. COMMITMENTS The Company is required to make certain contributions to national and state associations as part of the industry practice of pooling revenues and redistributing to members based on cost to provide services or some other method. Due to recent changes in the structure of these pools, the Company's responsibility is to contribute certain fixed amounts during a transition period, after which time the amounts may change. The Company's contribution to the New York State Access Settlement Pool was $190,943 for 2000 and is expected to be $153,000 for 2001. In October of 1998 the New York State Public Service Commission implemented the Targeted Accessibility Fund (TAF) of New York to provide support of universal service in rural, high costs areas of the state. The amount the Company contributed to TAF for 2000 was $16,615 and the expected contribution for 2001 is approximately $20,000. The Company also contributes to the Universal Service Administration Co. (USAC). For 2000 the Company's contribution to USAC was $144,839 and for 2001 it will be approximately $160,000. Quarterly updates modify the amounts contributed. The amounts paid to these pools are considered part of the cost of providing access service to interexchange carriers and are included in the rates charged to them. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of the instruments. The fair value of the Company's long-term debt approximates the carrying value of $4,000,000 due to the short maturity of the debt. The fair value of other financial instruments is estimated by management to approximate the carrying value. 15. BUSINESS SEGMENTS The Company reports segmented information according to Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"), which requires reporting segment information consistent with the way management internally disaggregates an entity's operations to assess performance and to allocate resources. The Company's segments consist of a local telephone operation and an internet access provider. The telephone operation offers local, long distance and cellular telephone service to customers in the Towns of Warwick, Goshen, and Wallkill, New York and the Townships of Vernon and West Milford, New Jersey, as well as providing access services to interexchange carriers and the selling and leasing of equipment. Hometown Online, Inc. ("Online"), the internet access segment offers connectivity to the Internet as well as local and regional information services to personal computer users. Service is offered within the Company's service area as well as in New York, New Jersey and Pennsylvania. The accounting policies used in measuring segment assets and operating results are the same as those described in Note 1. The Company evaluates performance of the segments based on segment operating income. The Company accounts for intersegment sales at current market prices or in accordance with regulatory requirements. 32 The following information summarizes the Company's business segments for the years 2000, 1999 and 1998:
2000 Intercompany Consolidated Revenues from: Telephone Internet Elimination Total ----------------- --------------------- ------------------ ----------------- Unaffiliated customers $ 20,681,817 $5,969,307 $ 26,651,124 Intersegment revenues 1,261,043 (1,261,043) ----------------- --------------------- ------------------ ----------------- Total revenues 21,942,860 5,969,307 (1,261,043) 26,651,124 ----------------- --------------------- ------------------ ----------------- Operating expenses 13,668,191 3,359,319 (1,261,043) 15,766,467 Depreciation 2,566,348 673,619 0 3,239,967 Federal income taxes 1,641,902 662,192 0 2,304,094 Other income (expenses) 1,665,649 11,254 0 1,676,903 ----------------- --------------------- ------------------ ----------------- Net income $ 5,732,068 $ 1,285,431 0 $ 7,017,499 ================= ===================== ================== ================= Assets $38,275,125 $ 3,737,799 0 $42,012,924 Capital expenditures $ 4,079,229 $ 988,932 0 $ 5,068,161
1999 Intercompany Consolidated Revenues from: Telephone Internet Elimination Total ---------------- ------------------ ------------------ ----------------- Unaffiliated customers $18,510,353 $4,639,864 $ 0 $ 23,150,217 Intersegment revenues 1,010,495 0 (1,010,495) 0 ---------------- ------------------ ------------------ ----------------- Total revenues 19,520,848 4,639,864 (1,010,495) 23,150,217 ---------------- ------------------ ------------------ ----------------- Operating expenses 12,125,754 2,652,255 (1,010,495) 13,767,514 Depreciation 2,695,124 616,286 0 3,311,410 Federal income taxes 1,103,037 468,984 0 1,572,021 Other income (expenses) 1,074,302 8,042 0 1,082,344 ---------------- ------------------ ------------------ ----------------- Net income $ 4,671,235 $ 910,381 $ 0 $ 5,581,616 ================ ================== ================== ================= Assets $34,638,100 $2,338,430 $ 0 $ 36,976,530 Capital expenditures $ 5,412,642 $1,036,631 $ 0 $ 6,449,273
33
1998 Intercompany Consolidated Telephone Internet Elimination Total ------------ ------------ ------------ ------------ Revenues from: Unaffiliated customers $ 18,164,771 $ 3,153,020 $ 0 $ 21,317,791 Intersegment revenues 391,581 0 (391,581) 0 ------------ ------------ ------------ ------------ Total revenues 18,556,352 3,153,020 (391,581) 21,317,791 ------------ ------------ ------------ ------------ Operating expenses 11,501,820 1,813,073 (391,581) 12,923,312 Depreciation 2,477,980 420,979 0 2,898,959 Federal income taxes 1,274,431 313,902 0 1,588,333 Other income (expenses) 131,037 4,273 0 135,310 ------------ ------------ ------------ ------------ Net income $ 3,433,158 $ 609,339 $ 0 $ 4,042,497 ============ ============ ============ ============ Assets $ 31,591,340 $ 1,650,052 $ 0 $ 33,241,392 Capital expenditures $ 3,059,117 $ 769,301 $ 0 $ 3,828,418
34 Report of Independent Certified Public Accounts BUSH & GERMAIN, PC Certified Public Accountants 901 Lodi Street Syracuse, New York 13203 phone: (315) 424-145 fax: (315) 424-1457 February 8, 2001 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles. /s/ Bush & Germain, P.C. Bush & Germain, P.C. 35 CONCERNNG THE COMPANY'S COMMON STOCK On April 28, 1998 Warwick Valley Telephone Company's common stock began trading on the NASDAQ National Market under the symbol WWVY. Private sales are also made by holders of the Company's common stock from time to time. At March 1, 2001 there were 642 holders of the Company's common stock. The Company has paid consecutive cash dividends on its common stock quarterly since April 1, 1931 and semi-annually from July 1, 1907 until December 31, 1930. The practice of the Company has been to reinvest a substantial portion of its earnings in its capital plant. While the present intention of the Board of Directors is to continue declaring cash dividends, future dividends will necessarily depend on the Company's earnings, capital requirements, developments in the telephone industry and general economic conditions, among other factors. In 1999, the Company paid a dividend on its common stock of $1.34 per share. In 2000, the common stock dividend was $1.56 per share. The NASDAQ high and low bid prices for the Company's common stock for the first, second, third and fourth quarters of 2000 and 1999 were as follows: - ------------------------------------------------------------------------------- PRICE OF THE COMPANY'S COMMON STOCK - ------------------------------------------------------------------------------- QUARTER ENDED - ------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 - ------------------------------------------------------------------------------- High $ 48.25 $ 42.00 $ 47.00 $ 55.00 - ------------------------------------------------------------------------------- Low $ 38.00 $ 37.00 $ 36.625 $ 34.50 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PRICE OF THE COMPANY'S COMMON STOCK - ------------------------------------------------------------------------------- QUARTER ENDED - ------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 - ------------------------------------------------------------------------------- High $ 46.75 $ 45.00 $ 45.00 $ 47.00 - ------------------------------------------------------------------------------- Low $ 36.50 $ 38.75 $ 39.75 $ 42.00 - ------------------------------------------------------------------------------- 36 BOARD OF DIRECTORS AND OFFICERS OF THE COMPANY (Photo Page)
Wisner H. Buckbee Henry L. Nielsen, Jr. Howard Conklin, Jr. Fred M. Knipp Chairman of the Board Vice Chairman of the Board Director, Retired, Board Director, of the Company, Board of the Company, Former President of Conklin Retired, Former President, Wisner Farms, President, Nielsen and Strong, Inc., Warwick, President & CEO Inc., Warwick, N.Y. Construction Co., Inc., N.Y. of the Company Warwick, N.Y. Philip S. Demarest Joseph E. DeLuca, M.D. Corinna S. Lewis Robert J. DeValentino Board Director, Board Director, Board Director, Board Director, Retired, Former Physician, Vernon Urgent Retired Public Relations Executive Director Vice President, Care Center, Vernon, N.J. Consultant Horton Healthcare Secretary & Treasurer Foundation, of the Company Middletown, N.Y. M. Lynn Pike Herbert Gareiss, Jr. Larry Drake Brenda A. Schadt Board Director, Board Director, Vice President of Vice President of President & C.E.O. Vice President of the Company the Company of the Company the Company Barbara Barber Colleen Shannon Bonnie Jackowitz Robert A. Sieczek Dorinda Masker Secretary of Assistant Secretary Assistant Secretary Treasurer of Assistant Treasurer the Company of the Company of the Company the Company of the Company
37 PERFORMANCE HIGHLIGHTS
For years ended or at December 31, 2000 1999 1998 1997 1996 SELECTED FINANCIAL DATA Total revenues $ 26,619,398 $ 23,185,929 $ 21,362,100 $ 19,796,696 $ 17,874,115 Telephone operating revenues 19,680,683 17,240,321 16,189,377 15,590,455 15,161,873 Total expenses 19,054,452 17,127,305 15,879,248 14,723,128 13,622,412 Telephone operating expenses 15,022,420 13,603,601 12,549,160 11,408,624 10,977,283 Net income 7,017,499 5,581,616 4,042,497 3,683,709 3,095,481 Total assets 42,012,924 36,976,530 33,241,392 31,387,996 30,243,580 Current assets 6,982,380 6,265,507 6,255,355 5,919,948 5,777,625 Current liabilities 8,510,099 7,198,313 3,758,134 4,502,782 3,723,691 Long-term obligations 4,000,000 4,000,000 7,000,000 7,000,000 7,000,000 Percentage of debt to total capital 25.3 25.8 27.4 33.3 31.96 Shareholders' equity 26,393,933 22,729,708 19,571,919 17,203,139 16,710,548 COMMON STOCK DATA Income applicable to common stock 6,992,499 5,556,616 4,017,497 3,658,709 3,070,481 Income per share* 3.88 3.06 2.21 1.97 1.65 Book value* 14.29 12.23 10.51 9.01 8.69 Cash dividends per common share* 1.56 1.34 1.12 0.93 0.65 Shareholders of record 642 655 648 616 612 Shares outstanding* 1,811,653 1,817,531 1,813,792 1,853,298 1,865,091 GENERAL Access lines in service 30,601 28,935 26,786 25,154 23,719 Carrier access minutes 185,006,652 174,174,099 151,797,771 138,984,054 150,708,737
*Adjusted for 3-for-1 common stock split in 1997. 38 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP FINANCIAL STATEMENTS for the years ended December 31, 2000 and 1999 PRIVATE The information contained herein is confidential and should not be disclosed to unauthorized persons. It is intended solely for use by authorized Orange County-Poughkeepsie Limited Partnership personnel. 39 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP CONTENTS PAGE(S) Report of Independent Accountants 1 Balance Sheets 2 Statements of Operations 3 Statements of Changes in Partners' Capital 4 Statements of Cash Flows 5 Notes to Financial Statements 6 - 11 40 [PRICEWATERHOUSE COOPERS LOGO] REPORT OF INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 1301 Avenue of the Americas New York NY 10019-6013 Telephone (646) 471 4000 Facsimile (646) 394 1301 To the Partners of the Orange County-Poughkeepsie Limited Partnership: In our opinion, the accompanying balance sheets and the related statements of operations, partners' capital, and cash flows present fairly, in all material respects, the financial position of the Orange County-Poughkeepsie Limited Partnership (the "Partnership") as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these 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 audits provide a reasonable basis for our opinion. Pricewaterhouse Coopers LLP April 20, 2001 41 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Balance Sheets December 31, 2000 and 1999 (in thousands)
ASSETS 2000 1999 ------- ------- CURRENT ASSETS: Accounts receivable, net of $31 and $24 in 2000 and 1999, respectively $ 2,259 $ 1,281 Unbilled revenue 1,112 648 Due from General Partner 22,475 15,009 Prepaid expenses 107 117 ------- ------- Total current assets 25,953 17,055 Plant and equipment, net 24,753 23,406 Deferred charges and other assets, net 7 9 ------- ------- TOTAL ASSETS $50,713 $40,470 ======= ======= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accounts payable $ 21 $ 129 Accrued expenses and taxes 1,959 1,609 Advance billings 172 72 ------- ------- Total current liabilities 2,152 1,810 ------- ------- Commitments and contingencies (Notes 5 and 6) Partners' capital 48,561 38,660 ------- ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $50,713 $40,470 ======= =======
See Notes to Financial Statements 42 ORANGE COUNTY -POUGHKEEPSIE LIMITED PARTNERSHIP Statements of Operations For the Years Ended December 31, 2000 and 1999 (in thousands) 2000 1999 ------- ------- OPERATING REVENUES: Cellular service $57,678 $35,512 ------- ------- Total operating revenues 57,678 35,512 ------- ------- OPERATING EXPENSES: Cost of cellular service 6,509 4,004 General and administrative 4,455 3,226 Depreciation and amortization 3,077 2,529 ------- ------- Total operating expenses 14,041 9,759 ------- ------- INCOME FROM OPERATIONS 43,637 25,753 Other income, net 1,264 664 ------- ------- NET INCOME $44,901 $26,417 ======= ======= See Notes to Financial Statements 43 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Statements of Changes in Partners' Capital For the Years Ended December 31, 2000 and 1999 (in thousands)
NYNEX Mobile Frontier Warwick Limited Communications Frontier Taconic Valley Total Partnership of New York, Communications Telephone Telephone Partners' 2 Inc. of Sylvan Lake Corporation Company Capital ------------------------------------------------------------------------------------- Balance, $ 21,550 $ 2,307 $ 2,307 $ 2,307 $ 2,307 $ 30,778 December 31, 1998 Net Income 18,937 1,758 1,758 1,982 1,982 26,417 Debt assumed by Cellco 2,372 254 254 254 254 3,388 Cash distributions to partners for transfer of towers (2,372) (254) (254) (254) (254) (3,388) Distribution of towers to Cellco (375) (40) (40) (40) (40) (535) Distribution to partners (14,100) (600) (600) (1,350) (1,350) (18,000) Sale of Partnership interest 6,850 (3,425) (3,425) - - - ----------------------------------------------------------------------------------- Balance, 32,862 - - 2,899 2,899 38,660 December 31, 1999 Net Income 38,165 - - 3,368 3,368 44,901 Distributions to partners (29,750) - - (2,625) (2,625) (35,000) ----------------------------------------------------------------------------------- Balance, December 31, 2000 $ 41,277 $ - $ - $ 3,642 $ 3,642 $ 48,561 ===================================================================================
See Notes to Financial Statements 44 ORANGE COUNTY -POUGHKEEPSIE LIMITED PARTNERSHIP Statements of Cash Flows For the Years Ended December 31, 2000 and 1999 (in thousands)
2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 44,901 $ 26,417 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,077 2,529 Provision for losses on trade accounts receivable 6 2 Loss on disposition of plant and equipment - (1) Changes in certain assets and liabilities: Accounts receivable (984) (544) Unbilled revenue (464) (251) Prepaid expenses 10 (31) Accounts payable (108) 55 Accrued expenses and taxes 307 594 Advanced billings 100 (68) -------- -------- Net cash provided by operating activities 46,845 28,702 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to plant and equipment (4,654) (6,269) Distribution to towers to Cellco - (535) Proceeds from disposition of plant and equipment 275 1,277 -------- -------- Net cash used in investing activities (4,379) (5,527) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners (35,000) (18,000) Increase in Due from General Partner, net (7,466) (5,175) Debt assumed by Cellco - 3,388 Cash distributions to partners for transfer of towers - (3,388) -------- -------- Net cash provided by financing activities (42,466) (23,175) -------- -------- INCREASE (DECREASE) IN CASH - - CASH, BEGINNING OF YEAR - - -------- -------- CASH, END OF YEAR $ - $ - ======== ========
See Notes to Financial Statements 45 ORANGE COUNTY -POUGHKEEPSIE LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2000 and 1999 (in thousands) 1. ORGANIZATION AND BUSINESS OPERATIONS On April 3, 2000, Bell Atlantic and Vodafone AirTouch P1c ("Vodafone") consummated their previously announced agreement to combine their U. S. wireless operations. In accordance with the terms of the U.S. Wireless Alliance Agreement (the "Alliance Agreement") dated September 21, 1999 between the two companies, Vodafone contributed its U.S. wireless operations, its 50% ownership interest in PrimeCo Personal Communications L.P ("PrimeCo") and debt to the Cellco Partnership ("Cellco"), in exchange for a 65.1% interest in Cellco. Bell Atlantic also contributed its 50% ownership interest in PrimeCo, and retained a 34.9% interest in Cellco. As of April 3, 2000, Cellco began conducting business as Verizon Wireless ("Verizon"). On June 30, 2000, Bell Atlantic and GTE Corporation ("GTE Corp.") completed a merger of equals under a definitive merger agreement entered into on July 27, 1998. On June 30, 2000, the newly merged entity changed its name to Verizon Communications ("Verizon Corp."). Under the Alliance Agreement, Verizon Corp. contributed GTE Corp.'s wireless net assets and operations increasing its interest in Cellco to 55% and decreasing Vodafone's interest in Cellco to 45%. The Orange County-Poughkeepsie Limited Partnership (the "Partnership") operates as a limited partnership between NYNEX Mobile Limited Partnership 2 ("NYNEX Mobile LP 2"), Taconic Telephone Corporation ("Taconic"), and Warwick Valley Telephone Company ("Warwick"). NYNEX Mobile LP 2 is effectively owned by Cellco. NYNEX Mobile LP 2 holds an 85% general partnership interest in the Partnership. Taconic and Warwick each hold limited partnership interests of 7.5%. On December 1, 1999, Frontier Communications of New York, Inc. and Frontier Communications of Sylvan Lake, each holding 7.5% interests in the Partnership, sold their interests to NYNEX Mobile LP 2. The Partnership provides cellular mobile telephone service to resellers who operate principally in the Orange County and Poughkeepsie, New York metropolitan areas. The Orange County-Poughkeepsie cellular system became operational in 1987. The partners make capital contributions, share in the operating results and receive distributions from the Partnership in accordance with their respective ownership percentages. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Plant and Equipment ------------------- Plant and equipment are stated at cost and primarily represent costs incurred to construct and enhance Mobile Telephone Switching Offices (MTSOs) and cell sites. The cost of plant and equipment is depreciated over its estimated useful life, using the straight-line method of accounting. Major improvements to existing plant and equipment are capitalized. Routine maintenance and Repairs that do not extend the life of the plant and equipment are charged to expense as incurred. 46 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2000 and 1999 (in thousands) 2. Summary of Significant Accounting Policies (continued) Plant and Equipment (continued) ------------------------------- Upon the sale or retirement of plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the Statement of Operations. The Partnership periodically exchanges (trades-in) certain assets for similar productive assets and generally receives trade-in allowances from its vendors. The cost of the new asset is generally the monetary consideration paid plus the net book value of the asset surrendered. If the trade-in allowance is less than the net book value of the asset surrendered, a loss is reflected in the Statement of Operations. Interest expense, if any, and certain network engineering costs incurred during the construction phase of the Partnership's cellular network and real estate properties under development are capitalized as part of plant and equipment and amortized over the estimated useful lives of the related assets. The Partnership's network construction expenditures are recorded as construction in progress until the projects are completed and placed into service. The assets are then transferred to the appropriate plant and equipment account and depreciated on a straight-line basis over the assets' estimated useful lives. Revenue Recognition ------------------- The Partnership earns revenue by providing access to the cellular network (access revenue) and for usage of the cellular network (airtime/usage revenue), which includes roaming and cellular long distance revenue. Cellular long distance represents calls placed by the Partnership's reseller customers and those of other carriers within the Partnership's service area. In general, access revenue is billed one month in advance of the service being provided and is recognized, as revenue, when earned; the unearned portion is classified in advanced billings. Airtime/usage revenue, roaming revenue and long distance revenue are recognized when service is rendered and included in unbilled revenue until billed. Cellular service revenues resulting from a cellsite agreement are recognized based upon an allocation of airtime minutes [See Note 4]. Operating Expenses ------------------ Operating expenses include all direct costs related to the Partnership, the Partnership's share of all indirect distribution costs in the service area, and an allocation of administrative and operating costs from the managing general partner [See Note 4]. The services performed on behalf of the Partnership are provided by the employees of Verizon. These employees are not employees of the Partnership; therefore, operating expenses include direct and allocable charges of salary and employee benefit costs for the services provided to the Partnership. 47 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2000 and 1999 (in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes ------------ The Partnership is not a taxable entity for federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually. Due From General Partner ------------------------ Due from General Partner principally represents the Partnership's cash position. The general partner manages all cash and financing activities for the Partnership. As such, the Due from General Partner is reflected as a financing activity in the Statements of Cash Flows. Additionally, administrative and operating costs incurred by the general partner on behalf of the Partnership are charged to the Partnership through this account. Interest income on the balance in this account is based on the average monthly outstanding balance and is calculated by applying Verizon's average borrowing rate which was approximately 6.7% and 6.1% at December 31, 2000 and 1999, respectively. Included in other income, net is net interest income related to the Due from General Partner of $1,264 and $664 for 2000 and 1999, respectively. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used for, but not limited to, the accounting for: allowance for uncollectible accounts receivable, unbilled revenue, depreciation and amortization and accrued expenses. FCC Licenses ------------ The Federal Communications Commission ("FCC") issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas ("CGSAs"). The FCC grants licenses for terms of up to ten years. In 1993, the FCC adopted specific standards to apply to cellular renewals, concluding it will award a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely. The current term of the Partnership's FCC license expires on January 22, 2008. The general partner believes it will be able to meet all requirements necessary to secure renewal of its cellular license. Concentrations -------------- To the extent the Partnership's resellers become delinquent, collection activities commence. The managing general partner accounts for 93% and 95% of the accounts receivable balance at December 31, 2000 and 1999, respectively. The Partnership maintains an allowance for losses based on the expected collectibility of accounts receivable. The general partner relies on a limited number of local and long-distance telephone companies and other companies to provide certain communication services. Certain of these communication services are in turn utilized by the Partnership. Although the general partner feels alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership's operating results. 48 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2000 and 1999 (in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentrations (continued) -------------------------- Although the general partner attempts to maintain multiple vendors for each of its required products and network equipment, certain of these items are acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership's operations. If the general partner's suppliers are unable to meet its needs for required products and equipment, delays and increased costs in the expansion of the Partnership's network infrastructure or losses of potential customers could result, which would adversely affect operating results. Financial Instruments --------------------- The Partnership's financial instruments, which include trade payables and receivables and intercompany advances, are short-term in nature. Accordingly, the general partner believes the balance sheet amounts approximate the fair value of the Partnership's financial instruments. Reclassifications ----------------- Certain reclassifications have been made to the 1999 financial statements to conform to the current year presentation. 3. PLANT AND EQUIPMENT Plant and equipment consist of the following at December 31:
2000 1999 ---- ---- Buildings (10-40 years) $ 7,649 $ 6,787 Cellular plant equipment (3-15 years) 28,899 25,341 Furniture, fixtures and equipment (2-7years) 380 380 Construction-in-progress 1,819 2,034 ---------- ----------- 38,747 34,542 Less: accumulated depreciation 13,994 11,136 ---------- ----------- Plant and equipment, net $24,753 $23,406 ========== ===========
Capitalized network engineering costs of $176 and $347 were recorded during the years ended December 31, 2000 and 1999, respectively. Included in plant and equipment is $108 and $65 of accrued items as of December 31, 2000 and 1999, respectively. 49 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2000 and 1999 (in thousands) 3. PLANT AND EQUIPMENT (CONTINUED) Depreciation expense for the year ended December 31, 2000 and 1999 was $3,075 and $2,527, respectively. Tower Transaction ----------------- On March 31, 1999. Cellco finalized an agreement with Crown Castle International Corporation ("Crown") to form a joint venture (the "JV") in which Cellco, together with certain partnerships in which it is the managing partner (the "Managed Entities"), which included the Partnership, contributed network towers to the JV in exchange for $380,000 in cash and an equity interest in the JV of 38.5%. The Partnership elected to participate in this transaction and contributed 13 towers to the JV. As a result of the continuing involvement by the managing partner in the JV, this transaction was accounted for as a financing arrangement on the books of the Partnership; accordingly, the Partnership recorded the receipt of $3,388 in cash as a loan. Pursuant to a separate agreement between the managing partner and the minority partner, the minority partner received a cash payment of $1,765 and Cellco assumed the debt and transferred the towers from the Partnership books to Cellco at their book value. Upon receipt of the cash from the JV, the minority partners received their cash and the Partnership immediately transferred the towers to Cellco along with the related debt, the equity interest in the JV, and $1,623 in cash. Since the Partnership is under common control with the managing partner, the gain on the transfer of such towers to the JV is not reflected in the Statement of Operations of the Partnership. However, the Partners' Capital accounts reflect the cash transactions, and the transfer of the towers and debt to Cellco. 4. Transactions with Affiliates ---------------------------- For the years ended December 31, 2000 and 1999, operating revenues included $48,955 and $29,092, respectively, relating to partners and affiliated entities. These operating revenues have been included in cellular service on the Statements of Operations. The Partnership was charged $2,674 and $1,982 for the years ended December 31, 2000 and 1999, respectively, for its share of the managing general partner's administrative and operating costs. Additionally, the Partnership incurred direct telecommunication and data processing expenses of $555 and $503 in 2000 and 1999, respectively, for services provided by its affiliates. The managing general partner, on behalf of the Partnership, has purchased plant and equipment in the amounts of $4,697 and $6,269 for the years ended December 31, 2000 and 1999, respectively. Included in plant and equipment [See Note 3], are purchases from and sales to other affiliated entities, which are recorded at cost. There were no purchases or sales in 2000 and $510 of purchases and $1,044 of sales in 1999. An affiliated entity provides the Partnership with access to its switch. The cost for use of the switch is allocated to the Partnership primarily upon the number of switched minutes. These costs were $3,540 and $1,937 in 2000 and 1999, respectively. The Partnership has a co-located cell site with Cellco. The costs related to the construction of the cellsite were shared between the two entities and revenues and costs resulting from the operations of the cellsite are being allocated in accordance with the cellsite sharing agreement. During 2000 and 1999, the Partnership earned $1,312 and $1,108 of cellular service revenues and was reimbursed for $39 and $39 of costs, respectively. 50 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2000 and 1999 (in thousands) 5. Commitments ------------ The managing general partner, on behalf of the Partnership, and the Partnership have entered into operating leases for facilities and equipment used in its operations. Some lease contracts include renewal options which include rent expense adjustments based on the Consumer Price Index. The Partnership also leases towers from the JV [See Note 3]. The tower lease commenced on April 1, 1999 and is for a 10 year initial term. During the years ended December 31, 2000 and 1999, the Partnership recognized a total of $914 and $744, respectively, as rent expense related to payments under these operating leases. At December 31, 2000, the aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options which the Partnership intends to exercise, for the periods shown are as follows: Years ----- 2001 $822 2002 674 2003 498 2004 412 2005 392 Thereafter 1,473 --------- Total $4,271 ========= 6. Contingencies -------------- Cellco is subject to several lawsuits and other claims including, class actions, product liability, patent infringement, partnership disputes, and claims involving relations with resellers and agents. Various consumer class actions lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Cellco is also subject to various other legal actions and claims in the normal course of business. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve insurance coverage and/or indemnification obligations by third parties covering all or part of any potential damage awards against Cellco and the Partnership. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance. The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 2000 cannot be ascertained. The potential effect, if any, on the financial position and results of operations of the Partnership, in the period in which these matters are resolved, may be material. 51 11 ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP Balance Sheets December 31, 2000 and 1999 (in thousands)
ASSETS 2000 1999 ------- ------- CURRENT ASSETS: Accounts receivable, net of $31 and $24 in 2000 and 1999, respectively $ 2,259 $ 1,281 Unbilled revenue 1,112 648 Due from General Partner 22,475 15,009 Prepaid expenses 107 117 ------- ------- Total current assets 25,953 17,055 Plant and equipment, net 24,753 23,406 Deferred charges and other assets, net 7 9 ------- ------- TOTAL ASSETS $50,713 $40,470 ======= ======= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accounts payable $ 21 $ 129 Accrued expenses and taxes 1,959 1,609 Advance billings 172 72 ------- ------- Total current liabilities 2,152 1,810 ------- ------- Commitments and contingencies (Notes 5 and 6) Partners' capital 48,561 38,660 ------- ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $50,713 $40,470 ======= =======
See Notes to Financial Statements 52 BUSH & GERMAIN, PC CERTIFIED PUBLIC ACCOUNTANTS 901 LODI STREET SYRACUSE, NEW YORK 13203 PHONE: (315) 424-1145 FAX: (315) 424-1457 CONSENT OF INDEPENDENT AUDITORS November 14, 2001 We consent to the incorporation by reference in this Annual Report (Form 10-K\A) of Warwick Valley Telephone Company of our report dated February 8, 2001, included in the 2000 Annual Report to Shareholders of Warwick Valley Telephone Company. Our audit also included the financial statement schedules of Warwick Valley Telephone Company listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-46836) pertaining to the Warwick Valley Telephone Company of our report dated February 8, 2001 with respect to the consolidated financial statements of Warwick Valley Telephone Company incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedules of Warwick Valley Telephone Company included in this Annual Report (form 10-K\A) for the year ended December 31, 2000. /s/ Bush & Germain, P.C. Bush & Germain, P.C. Syracuse, New York 53 -----END PRIVACY-ENHANCED MESSAGE-----